The FTC released its final rule banning noncompetes last week. The lengthy (570-page) rulemaking provides ample fodder for legal minds to mull over for the near future,[1] but for readers in the healthcare industry, we can reduce the final rule to a general warning: The FTC wants to regulate the entire healthcare industry, and it will go to great lengths to drag nonprofit healthcare providers into the mix.
Federal antitrust regulation of nonprofit healthcare is nothing new, but the FTC’s final rule on noncompetes moves the agency in a new direction. To put it simply, FTC scrutiny of nonprofit activity has historically taken the form of merger review under the Clayton Act. To reach vertical industry activity like employer-employee relationships, the FTC has to go through the FTC Act – and that’s the rub.
As soon as the FTC released its draft rule in January 2023, industry experts questioned whether the FTC’s rule would reach nonprofits. The debate over the FTC’s scope of authority stems from a troublesome phrase buried in the FTC Act’s definitions. The FTC Act authorizes and directs the FTC to “prevent persons, partnerships, or corporations … from using unfair methods of competition,”[2] and corporations are defined as “any company … which is organized to carry on business for its own profit or that of its members.”[3]
The FTC cites this issue in Tuesday’s final rulemaking, but what follows is not so much a clarification of the FTC Act’s definitions as a methodical erosion of the typical grounds for nonprofit classification, in a clear effort to extend the FTC’s authority.
Out of the gate, the FTC sets the tone of its analysis by categorically lumping nonprofits together as “entities claiming tax-exempt status as a nonprofit.” The FTC then proceeds with a choice quote from a 1969 Eighth Circuit case (Cmty. Blood Bank of Kansas City Area, Inc. v. F.T.C.):
Congress took pains in drafting § 4 [15 U.S.C. § 44] to authorize the Commission to regulate so-called nonprofit corporations, associations and all other entities if they are in fact profit-making enterprises.[4]
In the Blood Bank case, the FTC butted heads with a hospital association and blood bank association over the organizations’ nonprofit status (and, therefore, their exemption from coverage under § 5 of the FTC Act). The Eighth Circuit analyzes in depth the scope of the FTC’s authority over nonprofits, including under the Clayton Act and the Sherman Act compared with its more limited authority under § 5 of the FTC Act.
Despite the fact that the Eighth Circuit’s thorough analysis in the Blood Bank case directly discusses the issue at hand, the FTC skips over the bulk of the Blood Bank opinion and instead jumps to its own two-part test[5] to determine whether a corporation is organized for profit. The FTC then asserts that its test “reflects the Eighth Circuit’s analysis in Community Blood Bank of Kansas City Area, Inc. v. FTC”[6] with no further explanation as to why or how.
Going further, the FTC discards the IRS’s determination of an entity’s tax-exempt status as a conclusive factor in whether an entity is nonprofit (but preserves a determination by the IRS that an entity does not qualify for tax-exempt status as “meaningful” evidence in the FTC’s analysis). The FTC then ends its jurisdictional analysis with an ominous footnote:
The Commission cannot predict precisely how many entities claiming nonprofit tax-exempt status may be subject to the final rule. The Commission finds that the benefits of the final rule justify implementing it no matter how many nonprofit entities claiming tax-exempt status it ultimately reaches—including under the unlikely assumption that it does not reach any of them.[7]
The FTC’s enforcement efforts face an uphill battle.[8] While we have to wait for challenges to resolve in order to learn the future of noncompetes generally, for now, we can take one warning to heart: The FTC will not willingly accept limits on its review authority over nonprofit healthcare providers.
Click here read our Client Alert regarding the FTC’s Final Rule.
[1] Notable challenges have already been filed, as expected.
[2] 15 U.S.C.A. § 45(a)(2).
[3] 15 U.S.C.A. § 44 (emphasis added).
[4] 405 F.2d 1011, 1018. Notably, the FTC lost this case, and this portion of the opinion continues: “But contrary to the position of the Commission, Congress did not intend to bring within the reach of the Commission any and all nonprofit corporations regardless of their purposes and activities.”
[5] As explained by the FTC at page 52 in the final rulemaking, for an entity to qualify as a nonprofit and exemption under § 5 of the FTC Act, (1) an entity must have an adequate nexus between an organization’s activities and its alleged public purposes; and (2) its net proceeds must be properly devoted to recognized public, rather than private, interests.
[6] See the FTC’s final rulemaking, page 52.
[7] Id. at 54.
[8] The final rule has already been challenged in the Eastern and Northern districts of Texas.
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