Restrictive covenants or noncompetes in employment are a contentious topic (ASA Monitor 2020;84:1-18). If a proposed rule issued in January 2023 by the Federal Trade Commission (FTC) is adopted, most employers in the United States will be foreclosed from requiring employees to agree to post-termination noncompete agreements (Fed Reg 2023;88:3482-3546). This article will explore the key provisions of the proposed rule, the next steps in the regulatory process, and the implications for anesthesiologists and anesthesiology practices.
What led the FTC to issue its proposed rule?
Federal and state antitrust laws are aimed at promoting competition, and the FTC’s concern with the effect of noncompetes in employment is not new. The preamble to the proposed FTC rule explains that the FTC began to focus on noncompete clauses in the mid-2010s and that it held hearings and workshops from 2018-2021 addressing, among other topics, the use of noncompetes and the conditions under which their use may be inconsistent with antitrust laws.
In July 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy, directing the Chair of the FTC “to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility” (asamonitor.pub/3pzp5HL). In early January 2023, the FTC voted 3-1 to issue the proposed rule.
In its press release, the FTC said that the use of noncompetes “suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses” (asamonitor.pub/44HMJ4F). The FTC determined that noncompete clauses constitute an unfair method of competition and it preliminarily concluded that noncompetes negatively affect competition regardless of the worker’s income or job function (though the FTC requested comments on modifying aspects of its analysis with respect to highly paid or highly skilled workers who are not senior executives, a category that would cover anesthesiologists).
What exactly would the proposed ban on noncompetes mean?
If the proposed rule is adopted in its current form, it would make it illegal for an employer to:
- Enter into a new noncompete agreement with a worker
- Maintain an existing noncompete with a worker.
Employers would be obligated to rescind existing noncompetes and to inform workers that the noncompetes no longer are in effect. Importantly, the proposed rule applies not only to employees but to independent contractors as well. Unpaid workers also would be protected by the proposed rule.
Does the proposed ban cover all noncompetes in employment?
No. The proposed rule would not preclude employers from imposing a noncompete on a worker during the term of employment. The focus of the proposed rule is on the post-termination period.
In addition, some employers may not be subject to the rule. In particular, the FTC Act does not apply to an entity that is not “organized to carry on business for its own profit or that of its members” (i.e., nonprofits) or to state and local government entities. Some employers in the health care industry, including nonprofit hospitals and health systems in particular, may not be subject to the rule. Importantly, the analysis is more nuanced than simply whether an employer is a nonprofit entity; certain nonprofits have been found to fall within the FTC’s jurisdiction, depending on how they operate (asamonitor.pub/3HVlOZj).
What about other agreements that restrict workers?
The FTC notes that certain other types of contractual provisions may restrict workers after their employment terminates. These other types of agreements include nondisclosure agreements (or confidentiality agreements); client or customer nonsolicitation agreements; bans on doing business with former clients or customers of the employer; no-recruit agreements that bar a worker from recruiting or hiring the employer’s workers; liquidated damages provisions, which require payment of a designated amount if the worker engages in certain conduct; and training repayment agreements in which the worker agrees to repay the employer for the employer’s training expenses if the worker leaves before a designated date. The proposed rule would reach these types of agreements, although the FTC requests comments on its description of these types of agreements.
What about sales of businesses? Would noncompetes be allowed in that context?
Noncompetes would be allowed for sales of businesses if the individual is a “substantial owner,” which is defined as an owner of at least a 25% ownership interest. In the case of owners with a smaller ownership interest, a noncompete would not be permissible.
Is the rule in effect now? If not, what is the timeline for it to become effective?
The proposed rule is just that – proposed. The FTC extended the original 60-day comment period to April 19, 2023. The FTC will consider the comments filed and issue a final rule. As discussed, the FTC has solicited comments on several important areas, so it is possible that the FTC may modify its proposed rule when it issues the final rule. Given the broad scope of the rule and controversial nature of the ban, litigation regarding the final rule can be expected. It is possible that a court might “stay,” or delay, the effective date of the final rule until the court issues a decision. In summary, the timing of when a final rule would become effective is uncertain.
What challenges have been raised to the proposed rule?
The dissenting statement of Commissioner Christine Wilson outlines several jurisdictional bases to challenge the rule, including whether the FTC has authority to engage in “unfair methods of competition” rulemaking. The American Hospital Association comments opposing the proposed rule also raise similar concerns (asamonitor.pub/42lSzXY).
Are there other possible limitations on the use of noncompetes in employment?
Yes. On February 1, 2023, a bipartisan group of Senators and members of the House of Representatives introduced the Workforce Mobility Act, which would prohibit post-termination noncompetes in employment and would grant the FTC, the Department of Labor, and state attorneys general authority to enforce the ban. This legislation previously was introduced in 2018, 2019, and 2021, but did not advance (asamonitor.pub/3Md6V7u; asamonitor.pub/3HUdzNj; asamonitor.pub/3VQF4gp; asamonitor.pub/3NVXWca). In addition, as discussed at length in the preamble to the FTC proposed rule, in recent years, states have been enacting a variety of restrictions on the use of noncompetes in employment (Fed Reg 2023;88:3494).
How would the new rule make life different?
For one, it would make it more difficult for practices to defend against an unwelcome competitor encroaching on the practice’s “turf.” For example, if a hospital decided to terminate a contract with a group and either award it to another practice or pursue hospital employment, with noncompetes among owners and employees in effect, those individuals might not be at liberty to pursue the new option without the group’s consent or without the group being compensated for the release. If the ban on noncompetes were in effect, the group would have limited ability to prevent individuals from pursuing what may appear to be a “better deal” for the individual, but which may in fact be a death knell for the practice, and perhaps even the long-term best interest of the individual as well.
On the plus side, eliminating noncompetes would make it easier for individuals to transition out of a dissatisfying situation without having to move. With an enforceable noncompete, physicians who wish to leave a practice may have to move somewhere else, or endure a long commute, for a few years to “ride out the noncompete.” Without noncompetes, individual physicians could move freely to pursue their personal and professional goals. But will the price of that freedom be to make all groups less able to maintain their workforces? In this tight hiring market, the new proposed rule could make a difficult situation even more challenging.
The use of noncompetes in employment – in general and in medicine – is controversial. Workers find them to be unfair and coercive provisions that limit their options post-termination. Employers often believe they serve to protect the employer’s interests. In the case of anesthesiology practices, noncompetes sometimes are mandated by a practice’s services agreement with a hospital, which requires that the group impose a noncompete on its individual anesthesiologists. Even though the ultimate scope of the FTC final rule is yet to be determined, that final rule can be expected to change the landscape for anesthesiology practices nationwide.
Update: On May 31, 2023, the National Labor Relations Board (NLRB) General Counsel issued a memorandum asserting that the use of noncompete provisions in employment contracts and severance agreements violates the National Labor Relations Act, except in limited circumstances. The memorandum will be used to guide NLRB enforcement efforts, and it is anticipated that the General Counsel will urge the NLRB to adopt the same position as it rules on cases.