On April 23, 2024, the Federal Trade Commission (FTC) approved a final rule (the “Rule”) broadly banning all employee non-compete clauses, with limited exceptions. The Saul Ewing Labor and Employment Group prepared an alert summarizing the Rule through a non-industry specific lens. Saul Ewing Health Care Industry Group members Caroline Patterson, Bruce Armon, Alyson Leone and Brenda Abrams describe their initial three (3) takes regarding the Rule’s impact for hospitals, health care practices and physicians.

What You Need to Know:

• On April 23, 2024, the Federal Trade Commission approved a final rule broadly banning all employee non-compete clauses, with limited exceptions.
• Saul Ewing Health Care Industry Group members describe their initial take regarding the Rule’s impact for hospitals, health care practices and physicians.
• If the Rule survives legal challenge, there will be a new landscape in the health care delivery system that will impact many providers.

1. A Physician May Be Considered an Exempt “Senior Executive” Under the Rule in Limited Circumstances.

The Rule rescinds existing non-competes for all workers who are not “senior executives” provided the non-compete was entered into prior to the Rule’s effective date, which will be 120 days following the publication of the Rule in the Federal Register (not the April 23, 2024 FTC announcement). The Rule’s definition for a “senior executive” requires the employee to satisfy two conditions: (1) they must be in a “policy-making position”; and (2) the individual must have a “total annual compensation” of at least $151,164. “Total annual compensation” is a defined term and includes salary and nondiscretionary bonuses.

“Policy-making position” means a business entity’s president, CEO, or equivalent, or other person who has policy-making authority, i.e., the ability to make decisions that “control a significant aspect of a business entity.” Under that guidance, not all physician owners of a medical practice will be considered to have a “policy-making position” unless they serve in those identified roles or have policy-making authority, which will require a careful and fact-sensitive analysis. That is particularly true in medical practices with numerous owners.

2. Sale of a Business.

The Rule does not apply to non-compete clauses entered “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” While the language of the exception is relatively vague, the FTC's comments suggest that a non-competition clause may be enforceable if it relates to a scenario where a physician partner sells their ownership in an independent physician practice.

3. Health Care Nonprofits.

The FTC stated it has no jurisdiction over most nonprofits. For that reason, a nonprofit health system may still be able to enforce its non-competes with physicians or other employees. The commentary issued with the Rule clarifies that “both judicial decisions and [FTC] precedent recognize that not all entities claiming tax-exempt status as nonprofits fall outside [FTC’s] jurisdiction.” As such, the FTC left open the possibility that it may be looking to enforce the Rule against some tax-exempt entities that are effectively operating as for-profit enterprises, including health systems and hospitals.

The FTC’s proposed rule relating to non-competes was released in January 2023. The FTC received in excess of 26,000 comments relating to the proposed rule.

The day after the FTC posted the final Rule, the U.S. Chamber of Commerce and other parties sued the FTC in the United States District Court in the Eastern District of Texas seeking declaratory and injunctive relief to stop the Rule from taking effect.

If the Rule survives legal challenge, there will be a new landscape in the health care delivery system that will impact many providers. The Saul Ewing Health Care Industry Group and other firm industry and practice groups will continue to review the Rule and monitor courtroom developments and provide additional alerts as warranted.