PPMs, Take Note: FTC Proposed Rule Banning Noncompetes May Have Significant Industry Impact
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On January 5, 2023, the Federal Trade Commission (FTC) issued a proposed rule that would prohibit employers from using noncompete agreements with their employees or independent contractors. Noncompete agreements are prevalent in the physician practice industry, as stakeholders have long recognized the importance of noncompetes as a tool for physician alignment. Physician employers, such as physician practices and physician practice management companies, may be significantly impacted if the proposed rule is adopted, and should consider submitting comments to the FTC on this important issue.
On January 5, 2023, the Federal Trade Commission (FTC) issued a proposed rule that would prohibit employers from using noncompete agreements with their employees or independent contractors.
If adopted, this rule would make it illegal for an employer to enter into a noncompete agreement with a worker (employee or independent contractor), maintain a noncompete with a worker or represent to a worker that the worker is subject to a noncompete. Employers would also be required to rescind existing noncompetes and inform workers that they are no longer enforceable. Other restrictive covenants such as nondisclosure agreements would not be affected by the FTC's proposed rule unless they are so broad in scope that they essentially function as a noncompete agreement.
Noncompete agreements are prevalent in the physician practice industry, as stakeholders have long recognized the importance of noncompetes as a tool for physician alignment. These agreements are executed by physicians in connection with their practice employment, practice sales and similar transactions, and ownership of medical practices. While the proposed rule is directed at restrictive covenants in the employment context, all physician noncompete agreements may be impacted as (a) the proposed rule applies to any contractual term that prevents an employee from seeking or accepting employment post-termination, with no carve-out for noncompetes in LLC agreements or related corporate entity restrictions and (b) the exception for noncompete clauses entered into in connection with sale transactions are limited to "substantial owners" holding at least 25% of the ownership interest in a business entity, a threshold too high to apply in the context of larger physician practice sales.
The proposed rule falls under Section 5 of the FTC Act, which does not apply to nonprofit entities, including nonprofit health systems and universities. As a result, the proposed rule states that it would not apply to an entity that is not "organized to carry on business for its own profit or that of its members."
Physician employers, such as physician practices and physician practice management companies, may be significantly impacted if the proposed rule is adopted. As such, employers should closely review their confidentiality and trade secret covenants to ensure maximum protection and they should consider and discuss other tools for physician alignment.
The FTC is also inviting public comment on its proposed rule. The full text of the proposed rule and information on the public comment period is available here. In particular, the FTC seeks comment on whether senior executives or franchisees should be covered by the rule, as well as whether low- and high-wage workers should be treated differently under the rule. Comments are due 60 days after the Federal Register publishes this proposed rule, after which the FTC is likely to issue a final rule. Should the rule become final, companies should be prepared for it to go into effect 180 days after the date of publication.
The proposed rule arrives with the FTC's concurrent announcement of settlements in complaints it issued against three employers' use of noncompetes. These settlements ban those employers from enforcing, threatening to enforce or imposing noncompetes against specified groups of employees and require that the companies notify all affected employees.
Whether the FTC will succeed remains an open question. Republican Commissioner Christine S. Wilson, in a dissenting statement, cautioned that the proposed rule is open to meritorious challenges that (a) the commission lacks authority to engage in "unfair methods of competition" rulemaking and (b) the Supreme Court of the United States' "major questions" doctrine suggests that the federal courts may preclude the FTC from venturing into this novel area of regulation absent legislative amendments to its enabling statute. Plus, interested parties may persuade the FTC to scale back its proposed regulation.
Interested parties, including physician practice management companies interested in submitting such comments, can obtain further guidance and drafting assistance from any of the authors of this On the Subject or their McDermott Health lawyer.
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