Healthcare providers and preparing for the impact of the FTC Final Rule prohibiting non-compete agreements
UPDATE: In late August 2024, the Northern District of Texas (Ryan LLC et al. v. Federal Trade Commission) provided nationwide clarity on the status of the FTC’s Non-Compete Rule, setting the FTC’s Non-Compete Rule aside and ordering that the “Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”
For more information on the ruling and future considerations, please see the update prepared by our Trade secret, non-compete and unfair competition team - The FTC’s Non-Compete Rule is enjoined: Texas Court sets Rule aside and issues nationwide injunction.
Even though the FTC Rule has been enjoined, all organizations can use this as an opportunity to review the use of restrictive covenant provisions, not only non-competition provisions, but also non-solicitation, confidentiality, and proprietary information provisions, all of which work together to protect the interest of the organization.
It has been three months since the Federal Trade Commission (FTC) announced its rule to ban certain workplace non-competition agreements (FTC Rule).The McDonald Hopkins Healthcare Practice Group recognizes that the healthcare industry has unique challenges and has been working with healthcare clients over these past few months to help them prepare to comply with the rule if it takes effect in its current form on September 4, 2024.
If implemented as drafted, the FTC Rule will invalidate most existing non-competes for workers of for-profit entities, so it is important for healthcare entities to be aware of the limited exceptions and limitations and to take steps now to maximize protections against unfair competition that may not be available once the FTC Rule takes effect. While current legal challenges may impact the implementation of the FTC Rule, it is critical that healthcare entities be prepared to comply with the FTC Rule if implemented.
General Overview
- The FTC Rule is applicable to workers of for-profit entities. During the rulemaking process, an exemption for the healthcare industry was raised and the FTC specifically addressed the request, stating its position that it would not extend a specific exemption to the FTC Rule for the healthcare industry.
- The definition of “workers” under the FTC Rule is not limited to employees, but also other individuals that provide services for healthcare entities, such as independent contractors, interns, volunteers.
- While non-profit entities are outside the purview of the FTC, non-profit organizations should still be prepared for scrutiny, for example if the organization has significant business that is not directly mission-based or holds for-profit subsidiaries, the FTC may evaluate certain specific situations.
- Existing non-competes with senior executives will remain enforceable after the FTC Rule takes effect; however new non-competes for senior executives will not be permitted. To qualify as a senior executive, the individual must make more than $151,164 annually and have a policymaking role within the organization. The FTC estimates that less than 1% of workers will be considered “senior executives” pursuant to the FTC Rule.
- An exception exists for non-competes that are the result of a sale of a company.
- New non-competes will be prohibited after the FTC Rule takes effect September 4, 2024; however, other types of reasonable restrictions, such as non-solicitation provisions and non-disclosure agreements, will remain permissible as long as the limitations are not so broad that they function as a non-compete.
- Entities subject to the FTC Rule will be required to provide notice to affected workers informing the workers that existing non-competes will not be enforceable. A model notice is available on the FTC website in various languages.
Preparing for Implementation
Healthcare entities should use this time to take stock of current non-competes and other restrictive covenants. Entities should also prepare to comply with the notice requirement, as notice is required prior to implementation of the FTC Rule. Although notice is required prior to implementation of the FTC Rule and healthcare entities should prepare to provide notice, entities should not yet send FTC Rule notices, because there are two prominent legal challenges currently proceeding against the implementation of the FTC Rule, and it is possible that court rulings will result in a stay or injunction of the FTC Rule prior to September 4, 2024.
Recently, the court in one of those cases, Ryan, LLC v. FTC, issued a limited injunction for the plaintiffs named in the case; however the court denied the plaintiffs’ request for a broader nationwide injunction. Although the ruling did not result in a nationwide injunction against the FTC Rule, the court’s discussion indicated that the court doubted the FTC’s ability to issue the nationwide ban, and leaves open the possibility that the court will issue a broader injunction against the rule in its final decision, which is scheduled for August 30, 2024.
For more information on the Ryan, LLC v. FTC preliminary opinion and order, click here.
Existing non-competition provisions remain enforceable and new non-competes can still be entered into until the FTC Rule takes effect. Non-competes entered into prior to the effective date of the FTC Rule will remain effective for senior executives and because of this, existing non-competes with senior executives should be prioritized, first to determine what workers are likely to qualify for the definition of “senior executive” as set forth in the FTC Rule, as well as to analyze any existing non-compete provisions to determine if modification is advantageous or necessary. In addition, if an entity’s senior executives are not subject to a non-compete yet, there is still time.
For many healthcare entities, the relationships held by the provider’s workforce are most valuable. Therefore, non-solicitation and non-disclosure provisions that remain permissible following any implementation of the FTC Rule may still operate to protect the business of the healthcare entity. For example, if a sales representative or a physician cannot solicit a healthcare entities’ current clients or patients, it may minimize the potential business damage of eliminating the non-competition provisions.
At the same time, while non-solicitation and non-disclosure provisions are likely to improve a healthcare entity’s protection, healthcare entities must also be mindful of state-specific laws that are applicable to the professional practice of medicine and other healthcare entities. For example, certain states, such as Ohio, require notification of patients when a provider leaves a practice or organization. In Ohio, this notice can be provided by the entity, it does not have to be the physician, allowing the entity to control the language of the notice. Such state laws are relevant to any business strategy that a healthcare entity implements in response to the FTC Rule.
Finally, healthcare entities should begin to prepare to comply with the FTC Rule notice requirement after the FTC Rule takes effect on September 4, 2024, while at the same time continue to monitoring case law prior to sending any such notice. The FTC Rule specifies delivery requirements, so it is necessary to have a strategy for deploying the notices. As noted above, a model notice is available on the FTC website in various languages.
The attorneys in our Healthcare Practice Group work seamlessly with our Trade Secret, Non-Compete, and Unfair Competition team to deliver tailored guidance to our healthcare clients. Contact your McDonald Hopkins healthcare attorney to evaluate the potential impact of the FTC Rule and to better prepare your organization today.
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Elizabeth Sullivan |
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Emily Johnson |
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Jane Pine Wood |
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Patrick Campbell |
