New FTC Rule Could Impact Non-Competes for Many Healthcare Businesses: What You Need to Know

The vast majority of medical practices and other healthcare businesses rely on non-competition covenants to protect against competition. On May 7, 2024, the Federal Trade Commission (“FTC”) published a Final Rule that, if implemented, will have a massive impact on such non-competition covenants. In its rule (the “Final Rule”), the FTC bans non-competition clauses in the employment context. This ban leaves individuals optimistically asking if they can immediately provide competitive services free of geographic restrictions, and employers wondering how to protect their business from an individual departing with patient, referral source and other valuable relationships. This article answers key questions regarding the Final Rule, including when the Final Rule becomes effective, how the Final Rule will potentially impact non-competes, whether there are any exceptions to the Final Rule, and what action items are required of employers at this time.  

When will the Final Rule take effect?

The Final Rule is effective September 4, 2024. However, we expect opposition to the Final Rule on constitutional, statutory, and administrative grounds. In fact, the Final Rule is already subject to a number of legal challenges and may not actually go into effect until certain legal challenges are resolved in court.

Will the Final Rule impact my non-compete?

The Final Rule would impact most existing non-competition arrangements with employees and other categories of workers following the termination of employment, and new non-competition arrangements in such circumstances will be prohibited. Breaches of non-competition arrangements that occurred prior to the effective date of the Final Rule are not impacted by the Final Rule.

Following the termination of employment, the Final Rule prohibits an employer from restricting “workers” from seeking or accepting work elsewhere, functioning to prevent workers from seeking or accepting work elsewhere, and operating a business. In addition to employees, the term “workers” encompasses other engagements, including, for example, engagements with independent contractors and volunteers. The Final Rule requires employers to notify employees and other workers that their non-competition clauses are no longer enforceable.

Notably, the Final Rule does not explicitly impact other restrictive covenants and even states that such prohibitions are generally not considered non-compete clauses. Thus, properly drafted restrictions on solicitation, breaches of confidentiality and trade secrets, etc. would still be enforceable in many circumstances. However, the Final Rule includes language intended to prohibit restrictions that function to prevent a worker from accepting future work. Consequently, other such restrictions should be evaluated on an individual basis.

Are there any exceptions to the prohibition on non-competes?

There are limited situations in which the Final Rule does not apply, including (1) existing non-competition arrangements with “senior executives,” (2) bona fide sales of a business, and (3) for certain entity types.

1. Existing Non-Competition Arrangements with Senior Executives

The Final Rule does not prohibit the enforcement of existing non-competition arrangements with “senior executives.” However, non-competition arrangements with senior executives established after the effective date of the Final Rule are prohibited. The FTC defines a “senior executive” as an individual earning at least $151,164 annually who is in a “policy-making position.” The FTC provides commentary on what constitutes a “policy-making position,” and additional guidance may develop through ongoing litigation regarding the validity of the Final Rule.

2. Bona Fide Sales of a Business

Although the Final Rule bans most non-competition agreements with workers, the Final Rule does not prohibit restrictions on competition in connection with a “bona fide sale” of the assets or equity ownership of a business. The FTC comments that a sale is “bona fide” if it is an arm’s length transaction made in good faith between independent parties and the seller has a reasonable opportunity to negotiate the sale terms. 

3. Certain Entity Types

The Final Rule does not apply to certain entity types, including, for example, tax-exempt organizations outside the FTC’s jurisdiction. However, the FTC comments that tax-exempt status alone is not dispositive of whether the Final Rule applies. For example, in the context of the healthcare industry, the FTC has exercised jurisdiction over certain hospitals and independent practice associations with non-profit tax-exempt status due in part to their partnerships with for-profit entities. Thus, applicability of the Final Rule to entities claiming tax-exempt status as non-profit organizations should be analyzed on a case-by-case basis.

How should I prepare for the Final Rule?

If it survives legal challenges, the Final Rule will significantly impact arrangements with workers and transaction structures in the healthcare industry where patient relationships are a material portion of the value of a business. Until the Final Rule is officially implemented and litigation related to its validity is reconciled, we believe most employers can continue under existing policy regarding restrictions on competition with employees.

Nevertheless, employers should be prepared to notify workers of the Final Rule and evaluate using other tools to protect their legitimate business interests, such as non-solicitation, non-hire, confidentiality, trade secret and intellectual property restrictions. Other forms of restriction and incentive should also be considered.

We will remain apprised of developments concerning the Final Rule and their impact on the topics discussed in this article. If you have any questions concerning the Final Rule, the Johnson Pope Health Care Team is happy to assist you.

THIS ARTICLE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSIDERED LEGAL ADVICE.  LEGAL ADVICE CANNOT BE GIVEN WITHOUT INFORMATION ABOUT YOUR SPECIFIC SITUATION.