In a decision that may have major implications for healthcare, the Federal Trade Commission has moved to outlaw noncompete clauses in job contracts.
The new rule would strike down the widely used practice of noncompete clauses, which prohibit many workers from leaving a job and going to work for a rival company within a certain geographical area or subject area.
The ruling, announced April 25, is to come into effect 120 days after it is published in the federal register. Noncompetes cover about 30 million workers, the F.T.C. said, with their employers barring job-hopping in an attempt to protect trade secrets and keep employees in their employ.
But experts immediately noted that court challenges sprang up right away. “Odds are this rule will not become law anytime soon allowing healthcare organizations to consider alternatives to the non-competes they use,” Paul Keckley, who writes about the business of healthcare, wrote in the Keckley Report.
Among the biggest implications in healthcare: Doctors who practice in hospitals or in medical groups often are forced to sign a noncompete that restricts them from practicing medicine within a certain number of miles of an employer. This effectively traps them in a job, or forces them to move, which is unpalatable for many. If a doctor’s employer — hospital or staffing agency — accuses them of underperforming or is an undesirable employer, this means that the doctor could be trapped.
The doctor then either stays in the job or moves to a different place, disrupting treatment, since the patient may have to switch doctors.
The noncompetes tend to protect hospital system interests over doctor’s interests, reinforcing the power of the institution over the power of the employee.
Right to choose
President Biden wrote on X-Twitter: ““Workers ought to have the right to choose who they want to work for.”
But the U.S. Chamber of Commerce immediately promised to sue. “The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive. … The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”
The Chamber filed a lawsuit in the Eastern District of Texas.
An early court challenge was filed by Ryan, a global software and tax services provider. It said in its suit in U.S. District Court in the Northern District of Texas that the “would upend companies’ IP protections and talent development and retention by invalidating millions of employment contracts and nullifying the laws of dozens of states, according to the FTC’s own public estimation.
Exemption for nonprofits?
There was a lot of speculation that non-profit or tax-exempt entities like hospitals would not fall under the F.T.C.’s jurisdiction, if the rule does go into effect. In its rule, the F.T.C. wrote: “The Commission disagrees with commenters’ contention that all hospitals and healthcare entities claiming tax-exempt status as nonprofits necessarily fall outside the Commission’s jurisdiction and, thus, the final rule’s purview. As explained in Part II.E.2, a corporation’s ‘tax-exempt status is certainly one factor to be considered,’ but that status is not coterminous with the FTC’s jurisdiction and therefore ‘does not obviate the relevance of further inquiry into a [corporation’s] operations and goals.’
“Accordingly, as noted by commenters, entities that claim tax-exempt nonprofit status may in fact fall under the Commission’s jurisdiction. Similarly, whether the final rule would apply to quasi-public entities or certain private entities that partner with States or localities, such as hospitals affiliated with or run in collaboration with States or localities, depends on whether the particular entity or action is an act of the State itself under the State action doctrine, which is a well-established, fact-specific inquiry. Thus, some portion of the 58% of hospitals that claim tax-exempt status as nonprofits and the 19% of hospitals that are identified as State or local government hospitals in the data cited by AHA likely fall under the Commission’s jurisdiction and the final rule’s purview.
“Further, many States have banned non-competes for a variety of healthcare professionals in both for-profit and nonprofits entities by statute. Even if the final rule’s coverage extends only to hospitals that do not identify as tax-exempt non-profits based on AHA data, as explained in Part IV.A.1, the Commission finds every use of covered non-competes to be an unfair method of competition and concludes that the evidence supports the Commission’s decision to promulgate this final rule, which covers the healthcare industry to the full extent of the Commission’s authority.”
Noncompete contracts involving senior executives (those making over $151,164 and who are in “policy-making positions”) can remain in place, the rule said, but employers cannot impose new noncompetes on any employees going forward, including senior executives.
Doctors’ roles
Mitch Li, co-founder of Take Medicine Back, a group formed to oppose the corporatization of medicine, wrote in a Facebook message: “This is a bold step by the Federal Trade Commission and represents only the first step in what will surely be heavily litigated. But it should be noted that there’s also sister legislation, because this needs to become the law of the land as statute.
“Non-compete clauses drain local communities of their physicians,” he wrote. “And allow monopsony power over physicians allowing corporations that do not take oaths to put patients first to control the practice of medicine.’
Li noted that the possibility of legislation in Congress is unsure, which is one reason that the F.T.C. made its move.
Texas suit grounds
Mike Masnick writes at Techdirt that he opposes noncompetes, and points out that the suit in Texas against noncompetes takes aim at the F.T.C. in an attempt to dismantle the administrative state. He quotes the suit as saying: “Compounding the constitutional problems, the Commission itself is unconstitutionally structured because it is insulated from presidential oversight. The Constitution vests the Executive Power in the President, not the Commission or its Commissioners. Yet the FTC Act insulates the Commissioners from presidential control by restricting the President’s ability to remove them, shielding their actions from appropriate political accountability.”
Masnick adds: “Non-competes should be banned because they’re awful and bad for innovation and employee freedom. But it should be Congress banning them, not the F.T.C. But, now that the F.T.C. has moved forward with this rule, it’s facing an obviously planned out lawsuit, filed in the Northern District of Texas with friendly judges, and the 5th Circuit appeals court ready to bless any nonsense you can think of.
“And, of course, it’s happening at a time when the Supreme Court majority has made it pretty clear that dismantling the entire administrative state is something it looks forward to doing. This means there’s a pretty clear path in the courts for the F.T.C. to lose here, and lose big time. One hopes that if the courts are leaning in this direction, they would simply strike down this rule, rather than effectively striking down the F.T.C. itself. But these days, who the fuck knows how these cases will go.”
“Multiple studies done over the previous couple of decades had more or less shown that non-competes are a tremendous drag on innovation, to the point that some argue (strongly, with data) that Silicon Valley would not be Silicon Valley if not for the fact that California has deemed non-competes unenforceable.”
