As you may have heard, in April 2024, the FTC passed a rule banning noncompete agreementsfor the vast majority of employed individuals across the country. However, the effective date of that ruling was supposed to be September 4th, 2024, but in the interim courts have paused enforcement during the various legal challenges facing the rule.
In this blog we’re going to dive into the current status of the rule and discuss potential outcomes.
Long story short, we believe the FTC ruling will ultimately be thrown out in courts and will continue to be left to the states to decide on a state-by-state basis.
Status of Noncompetes Before the FTC Ruling
Before the FTC attempted to ban noncompetes in April 2024, noncompete laws were generally determined on a state-by-state basis. There were certainly some federal protections for federal employees and some light federal limits on noncompetes, but the vast majority of this was decided by each individual state based on their state legislature rules and various judges in those states. This was particularly true in healthcare.
State rules range from being essentially completely banned in California, to most states allowing noncompete clauses if they are reasonable and limited in scope. For example, Wisconsin courts consider the following 5 questions:
1. Is there a need to restrict the employee for the protection of the business?
2. Is the duration of the non-compete agreement reasonable?
3. Is the restricted geographic area reasonable?
4. Are the restrictions against the reasonable and not harsh or oppressive?
5. Do the terms protect public interest?
“Reasonable” is determined on a case-by-case basis, which makes evaluating them clear as mud. For example, there was a trial court ruling in a Milwaukee case, Allen v. Aurora, that suggested a physician leaving a job that did not impact a pre-existing patient panel could be found unreasonable. In that case, a family practice physician was leaving a job with Aurora to take an urgent care position. Aurora attempted to enforce the noncompete, despite the lack of an exit of the family practice physician’s patient panel. Obviously in an urgent care setting, this was not at risk. That court sided with the physician, but other courts have decided otherwise based on the particular facts of each case.
Some states have found some in-between compromises. For example, in New Mexico, the general rule is that for physicians they can have a 1-year nonsolicitation clause, but cannot be restricted geographically from where they practice. Some states, like Minnesota, have recently beefed up their noncompete rules and have made them largely unenforceable across the state. Most states are like Wisconsin and generally allow non-competes under their state statutes butmay have various state court rulings that limit their impact.
Most state court judges across the country take these on a case-by-case basis, sometimes allowing the noncompete, sometimes throwing it out completely, and then sometimes redlining it to make it reasonable in their eyes.
Realities of Noncompetes in Healthcare
Our experience with noncompetes in healthcare is different than most other industries. While it’s certainly possible to challenge noncompetes in court, and you might even get into a coin flip situation in front of a judge, our experience is that most healthcare employers honor each other’s noncompetes and will not hire you. For example, if you want to go from one employed position to another, it’s very common for both of those employers to have very similar noncompetes. Thesecond employer might not be interested in helping a physician violate a noncompete because they want noncompetes to be very enforceable and do not want to help physicians violate them. This leaves most physicians in an unattractive position, either asking the employer for a voluntary waiver which is often denied or filing what’s called a declaratory judgment action in court.
A DJ Action essentially asks the judge to find the contract provision unreasonable before the contract provision is violated. While this sounds attractive, it can be very costly and can sap tons of time, energy, and money from more attractive opportunities for your time. This may also include suing an employer while you are still working for them. Physicians obviously make a lot of money, so being in legal limbo for 6 to 9 months or more without a steady income could make challenging a noncompete functionally unattractive.
Who Does the FTC Noncompete Ban Apply To?
The FTC is a federal agency, and their power is delineated specifically by Congress. A federal agency passing a rule is not as concrete and impermeable as Congress passing a law. The FTC is subject to changing motivations and rules as presidential administrations change. Flipping the balance of power at the FTC from Democrats to Republicans could certainly result in the FTC no longer enforcing its own rule.
Additionally, the FTC noncompete ban does not apply to high earning managers with a pre-existing noncompete in their contract. Those noncompetes would remain in place for folks that have a measure of managerial control, which was not perfectly defined in the FTC rule and left up to some interpretation. As such, even if it were to stand, your pre-existing noncompete might stay in place. We believe this would certainly apply to anyone in a C-suite role and potentially someone in a managerial role like a medical director or division chair.
Also, there is a legal question of whether the FTC has authority over not-for-profit institutions. As you may know, many healthcare organizations are organized as not-for-profit entities, and many big hospital systems and academic institutions do this. As such, many of those institutions signaled early on that they believe this rule did not apply to them, and did not have any plans of honoring it. This is certainly something that could be worked out in future litigation, but for now it remains a bit of an open question.
For anyone not in a managerial position or not in a not-for-profit institution, the FTC ban would have applied to them and their noncompete clauses would have been unenforceable.
The FTC issued some guidance suggesting that employers had a duty to notify all of their employees that their noncompetes were no longer enforceable.
Legal Challenges to the FTC Noncompete Ban
Between April and the writing of this blog in late August 2024, many business entities have filed lawsuits attempting to block the ban. For example, groups like the US Chamber of Commerce filed various legal challenges in courts primarily suggesting that the FTC did not have authority to issue this noncompete ban. The legal challenges were less about whether noncompete clauses were good or bad, and more of a procedural argument that noncompetes could not be restricted by this particular federal agency.
The most troubling case has been Ryan LLC versus Federal Trade Commission. The preliminary ruling in July 2024 suggested the judge was very sympathetic to the business entity plaintiffs’ arguments that the FTC overstepped.
On August 21st, the judge in that case issued a ruling that paused the enforcement of the noncompete ban across the country, not just for the legal entities challenging the rule. As it stands right now, the FTC ban is paused indefinitely for the duration of the appeals of that ruling.
We anticipate that the FTC will appeal that ruling, and the appeals process could take anywhere from 6 to 24 months. It’s really hard to say for sure when this will be fully worked out by courts, and we’re in a wait and see position.
What Will The Appeals Courts Do With The FTC Noncompete Ban?
The current makeup of the Supreme Court is exceedingly conservative with six Supreme Court justices having been appointed by Republican Presidents and three having been appointed by Democrats. Generally speaking, conservative judges have been hesitant to allow federal agencies broad ranging power and the right to define their scope unilaterally.
For over 40 years, an important Supreme Court case called the “Chevron Deference” case suggested that federal agencies’ interpretation of their own rules was paramount, and could not be overturned by individual judges unless they met a very high bar. The courts had to generally assume the federal agency was properly interpreting their own rules.
However, in the summer of 2024, the Chevron Deference case was overturned by the current Supreme Court, suggesting that individual judges had far more power to rule that a federal agency overstepped their Congressional charter. This is not a good ruling for the Federal Trade Commission or any federal agency trying to push the bounds of what they are allowed to regulate.
We suspect that this ruling will tip the scales in favor of the business interest groups and away from the Federal Trade Commission, making it more difficult for the Federal Trade Commission to win their various appeals and being able to enforce the noncompete ban.
Essentially, without the Chevron Deference case, the Federal Trade Commission faces serious headwinds in winning their various appeals and being able to enforce the noncompete ban.
The Federal Trade Commission is made up of five Commissioners and the President has authority to shift the balance of power at the FTC in their favor. For example, under the Biden Administration, the Commissioners were three appointed by Democrats and two appointed by Republicans. During the making of this rule, the conservative Commissioners generally objected and did not agree that the FTC had power to issue this ruling.
As such, if the administration changes in the upcoming elections in November, a new administration could simply replace one of the Democratic appointed commissioners with a Republican-appointed one and change the priorities of the FTC. If this occurs, we anticipate that the FTC may actually abandon their appeals, and decide that they no longer want to attempt to enforce their prior ruling. They could also simply vote to remove the rule in full, which would obviously be the end of the noncompete ban.
While there hasn’t been much discussion about this on the national level by Republicans, this was something that Biden ran on in 2020 and could be a target for a new Republicanadministration to overturn.
What’s Next for Noncompetes?
Long story short, we believe that federal efforts to ban noncompetes will fail, and these rules will be left to the individual states to decide. As such we have changed nothing about how we evaluate and negotiate noncompetes in the firm. The safest path is for physicians to assume whatever noncompete is in their contract is enforceable as written and plan on negotiating, complying, or simply not signing the deal.
While it’s certainly possible to challenge these upon exit and physicians should consider a legal consult on this, we do not believe it is best practice to sign a contract and plan on beating out enforcement of that contract later on in courts.
We are also closely monitoring other efforts by different federal agencies, namely, the National Labor Relations Board, in efforts to curtail the most punitive noncompetes, but this is still up in the air.
We also want you to keep in mind that there are other problematic issues in physician contracts, and the noncompete itself is not typically the most important negotiation point in our evaluations. While we are hopeful that more states will follow suit and curtail their enforcement, we will save this discussion for another day.
