On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (Proposed Rule) regarding non-compete agreements. The Proposed Rule would prohibit non-compete clauses in labor contracts for most workers, including independent contractors, and require employers to notify individuals with a preexisting non-compete clause via writing that the clause is no longer in effect. Such clauses are common for physicians, and the Proposed Rule could have a large effect on the healthcare industry. Public comments on the Proposed Rule will be open for 60 days after publication in the Federal Register, which has yet to occur as of this writing. We set forth below additional information about the FTC’s Proposed Rule. Moreover, click here for a Client Alert containing an analysis of the Proposed Rule by King & Spalding’s Antitrust team.

The Proposed Rule

Under the Proposed Rule, non-compete clauses are broadly defined as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The FTC would assess whether a clause fits this definition by looking at how the clause functions rather than what it is called. The FTC would not typically consider other types of restrictive employment covenants, such as non-disclosure agreements, to be non-complete clauses because these covenants generally do not prevent a worker from seeking or accepting employment or operating a business after the conclusion of the worker’s employment with the employer. However, under the proposed definition of “non-compete clause,” such covenants would be considered non-compete clauses if they are so unusually broad in scope that they function as such. In addition, the Proposed Rule’s definition of “worker” broadly includes “employee[s], individual[s] classified as an independent contractor[s], extern[s], intern[s], volunteer[s], apprentice[s], or sole proprietor[s] who provide[] a service to a client or customer,” regardless of whether the individual is paid or unpaid.

One limited exception to the broad ban on non-compete clauses in the Proposed Rule is for clauses between the seller and buyer of a business where the restricted party is an owner, member, or partner holding at least a 25% ownership interest in the business entity at issue.

As stated earlier, if the employer already has a non-compete provision in place with a worker, the Proposed Rule would require the employer to inform the worker in writing that their non-compete is rescinded and no longer in effect. This would include former workers whose contact information the employer has “readily available.” The Proposed Rule provides model language an employer may use in doing so. Additionally, an employer could not falsely suggest that a worker is bound by a non-compete agreement.

The FTC specifically seeks further public comment on how this would apply to executives and if the rule should apply differently to high wage earners, which might be of relevance to physician contracts.

Potential Challenges to the Proposed Rule

Should the Proposed Rule become final, it would likely be challenged in court. The FTC claims that Sections 5 and 6(g) of the Federal Trade Commission Act, which authorizes the FTC to promulgate rules to prevent entities from using “unfair methods of competition,” empowers the FTC to issue this rule. The FTC argues that non-compete clauses are “unfair methods of competition” because they negatively affect competition in the product and service markets. Challengers to the proposed rule would likely argue that the data does not support the FTC’s conclusions regarding non-compete clauses’ effect on competition and that the cited provisions of the Federal Trade Commission Act are too vague to support the action.

While several states have laws banning the enforceability of non-compete agreements, these agreements are often still utilized by employers in those states despite being largely unenforceable. In addition, the FTC asserts that its Proposed Rule would supersede state law that specifically allows non-compete clauses.

The Proposed Rule’s Impact on Healthcare

In its rationale for the Proposed Rule, the FTC specifically cites healthcare costs as a benefit of the ban on non-compete clauses. The FTC estimates that the Proposed Rule would save consumers up to $148 billion annually in healthcare costs. Physicians are often subject to non-compete clauses in labor contracts or purchase agreements that limit their practice within a certain geographic area for a particular timeframe. It is possible that the ban on non-compete clauses could decrease physicians’ earnings since the physician could leave a practice and immediately set up or work for a close-by competing practice. However, in the FTC’s estimation, healthcare prices would decrease due to increased competition rather than pass-through savings from lower labor costs.

Certain nursing or allied health training programs that are sponsored by employers, such as large healthcare systems or hospitals, could also be implicated by the proposed rule. The Proposed Rule would ban contractual terms triggered by a premature end to employment on repayment of training costs that are not reasonably related to the costs the employer incurred for training the worker. Therefore, healthcare systems and other employers could not include a penalty in their repayment terms and instead would be limited to recoup the costs actually incurred from training the employee. This could potentially result in a higher turnover rate among the sponsored employees.

The Proposed Rule would have an effective date of 60 days, and a compliance date of 180 days, after the publication of a final rule in the Federal Register. A copy of the FTC’s Proposed Rule is available here.