By Matt Fisher, Healthcare Attorney
LinkedIn: Matthew Fisher
X: @matt_r_fisher
Host of Healthcare de Jure – #HCdeJure
The state of non-compete provisions across the country remains in a bit of flux. The Federal Trade Commission (FTC) promulgated a new rule in April 2024 that, if allowed to go into effect, will ban non-compete provisions. Almost as soon as the final rule was announced, challenges to the rule were filed in court. Decisions on two of those cases have been made with completely different outcomes in the two cases. Where does that leave the state of things? It’s a good question with a lot to still be sorted out.
The FTC Rule (in brief)
The new rule banning non-competes is currently set to become effective on September 4, 2024 (the Non-Compete Rule). The Non-Compete Rule will apply to all potential non-competes, whether existing when the Non-Compete Rule becomes effective or future provisions that may attempt to be put into place. Non-competes will still be allowed for senior executives, but that is intended to be a small subset of the overall worker population. A senior executive is an individual making more than $151,164 annually and is in a policy making provision.
When the Non-Compete Rule becomes effective, employers will be obligated to notify all workers with existing non-competes that those provisions will no longer be enforced.
The FTC acknowledged that other restrictive covenants or agreements may be put into place that can protect an employer’s interests. Examples of those alternatives include non-disclosure agreements and measures to protect trade secrets.
The Texas Decision
The first court decision addressing the Non-Compete Rule came from the U.S. District Court for the Northern District of Texas on July 3, 2024. The court issued a preliminary injunction just for the parties in the case that would delay enforcement of the Non-Compete Rule against those parties. A key part is that the court did not issue a national injunction, so the rule can proceed against everyone else.
The court assessed the scope of the FTC’s rulemaking authority to address unfair methods of competition. In siding with the plaintiffs, the court determined that the FTC only had the power to issue so-called housekeeping rules when it comes to addressing unfair methods of competition. By contrast, the court determined that the Non-Compete Rule was an example of substantive rulemaking that exceeded the authority given to the FTC by statute.
In another component of the preliminary injunction analysis, the court held that the Non-Compete Rule likely represented an arbitrary and capricious decision of the FTC because it was too broad. The court found initial fault with the scope of the rule and questioned whether a one-size fits all approach was the right way to go.
In light of those considerations, the court granted the preliminary injunction, but, as noted, only for the plaintiffs in the case. The court felt that remedy would be sufficient as opposed to enjoining the Non-Compete Rule on a nationwide basis.
The Pennsylvania Decision
The second court decision, in late July 2024, the U.S. District Court for the Eastern District of Pennsylvania declined to enjoin enforcement of the Non-Compete Rule. In contrast to the Texas court, the Pennsylvania court stated that the FTC has clear authority to promulgate procedural and substantive rules as the FTC deems necessary to address unfair methods of competition.
The case in Pennsylvania was brought by a small company that provided tree trimming and other related services. The company alleged that it spends a lot of time training employees and teaching them specific methods, which drove the company’s desire to impose non-competes on most employees. The company asserted that complying with the rule would force it to scale back internal training and reduce other activities. The court, however, did not buy that argument and failed to find that irreparable harm would be suffered by the company, which is a critical component of being able to obtain injunctive relief.
Given the lack of irreparable harm, the court declined to issue an injunction. Instead, the court upheld the rule and would allow it to become effective as contemplated.
Litigation Next Steps
What will come next in the different cases? Appeals can and should be expected, which will push the matters further up the federal court system into the Appellate Courts. At that point, the issue to track will be whether the difference of opinion continues. If the difference is resolved and the Appellate Courts in different Circuits reach the same decision, then the issue will likely be resolved in whichever direction the courts agree on. However, if the Appellate Courts maintain the split, then it would be untenable for the different jurisdictions in the country to be divided on whether a rule from a federal agency can be enforced. In that instance, it would be expected that the split would continue up the federal court system to the Supreme Court for resolution.
If the issue goes before the Supreme Court, then to be overly optimistic, it is anyone’s guess as to the final decision. Being a bit more realistic, recent Supreme Court decisions pulling back the power and authority of regulatory agencies more clearly suggest that the Non-Compete Rule would face a very skeptical court and face the high likelihood of being struck down.
In the meantime, compliance efforts will need to proceed ahead for all companies.
Impact to Healthcare
What is the current impact for the healthcare industry, since that is where the attention of this blog and the author usually goes? A number of associations criticized the rule at all stages, arguing that it would stifle various activities across the industry. The argument goes that non-compete provisions are needed to protect the investment made by hospitals, groups, or other organizations in bringing a clinician into the fold and integrating into operations. There is a stated concern that prohibiting non-competes would drive down interest in making those investments.
However, how real are those concerns? While many states commonly include non-compete provisions in physician and other clinician employment contracts, opposing precedent exists in certain locations. For instance, Massachusetts has long had a statutory prohibition on non-compete provisions for physicians. The statutory prohibition has certainly not resulted in mass upheaval in the physician community nor has it prevented organizations from being able to recruit and retain physicians.
Without non-competes as an option, employment agreements in Massachusetts lean into other restrictive covenants, such as non-solicitation provisions. Arguably, non-solicitation provisions centered on patients just reinforce obligations under HIPAA because taking patient information post-employment would pose problems under the privacy rule.
The experience in Massachusetts would seem to offer an example for other locations if the Non-Compete Rule does become effective. Concerns that the sky will fall can likely be viewed as a bit extreme and a means of trying to push hard against change. However, reality could very well show a different outcome.
This article was originally published on The Pulse blog and is republished here with permission.