The Federal Trade Commission (FTC) recently voted to issue a final rule that would ban nearly all noncompetition agreements. The rule was officially published a few weeks later, meaning it will take effect Sept. 4, 2024 (if it is not held up by a court before then).
The final rule has already faced – and will likely continue to face – substantial pushback from the business community and from most health care entities.
On July 3, 2024, a federal court in Texas is slated to issue a decision on the merits of an employer’s challenge to the final rule. This court’s decision will provide insight into how courts will view the final rule as well as provide guidance as to whether employers should begin taking action aligned with the final rule. If the plaintiff employer loses in this first round, then employers should ready themselves to comply with the final rule starting in September.
Tom G. O'Day, U.W. 2006, is a partner with Husch Blackwell in Madison, where his labor and employment practice focuses on the health care and education sectors.
Audrey Merkel, Northwestern 2021, is an associate with Husch Blackwell in Milwaukee, where she assists clients with a wide variety of labor and employment matters.
The Final Rule and Its Exceptions
The FTC’s final rule seeks to categorically prohibit any clause or agreement that restrains a worker from seeking employment with a competing enterprise after the end of their existing employment relationship.
This blanket ban embraces a broad definition of noncompetition obligations, intending to encompass various provisions often camouflaged as less restrictive terms. It is the FTC’s position that the sweeping ban on noncompetes will encourage innovation and enhance employee bargaining power.
The rule addresses noncompete restrictions entered into after the rule takes effect differently from noncompete restrictions that employers may seek to use prior to the date the rule takes effect. The final rule prohibits employers from entering into (or attempting to enter into) noncompetes with any employees after the effective date of the rule – Sept. 4, 2024 (or later depending on court activity).
The final rule also prohibits employers from seeking to enforce noncompete agreements entered into prior to the final rule taking effect, except for such noncompete agreements with “senior executives.”
The rule expressly allows for employers to continue to utilize nonsolicitation and confidentiality agreements, as long as they do not restrict employees from pursuing or accepting employment elsewhere.
However, should a nonsolicitation or confidentiality agreement effectively impede an individual from seeking employment or establishing a business post-termination, it may be classified as a noncompetition agreement under the final rule.
Thus, employers cannot circumvent the noncompetition ban by simply labeling the agreement with a different name. As a result, employers should shift focus toward utilizing nonsolicitation agreements and confidentiality agreements following the enactment of the final rule.
A Nonprofit Health Care Exception
Notably, the rule carves out an exception for true nonprofit health care organizations – permitting them to continue utilizing noncompetition agreements.
However, the exception is contingent on the legitimate nature of an entity’s nonprofit status. Health care entities that may claim the tax-exempt benefits under federal law, but in practice operate for profit, remain subject to the final rule’s prohibitions.
Moreover, there is no ambiguity regarding for-profit health care systems – they are clearly encompassed within the scope of the rule and must adhere to its restrictions on noncompetition agreements.
Physician groups, although they may be created as nonstock nonprofit organizations, may also be covered by the rule.
The Senior Executive Exception
Another exception applies to senior executives who already have noncompetition agreements in place.
The FTC’s basis for this exclusion rests on its presumption that senior executives are more likely than other workers to have negotiated the terms of noncompetition agreements and are more likely to have received a considerable amount of monetary benefit in return.
In order to meet this exception, the senior executive must:
“Policymaking authority” means final authority to make policy decisions that control significant aspects of an entity. To determine this level of authority, entities must conduct a thorough and factual assessment, specifically assessing the scope and implications of the individual’s job responsibilities.
Notably, this exception does not allow for senior executives to enter into noncompetition agreements in the future after the rule takes effect – the exception only applies to senior executives with noncompetition agreements prior to the time the final rule was enacted.
The core of the analysis for the applicability of this senior executive exception centers on the second prong: whether the individual has policymaking authority. Numerous employees may surpass the required salary threshold and possess responsibilities suggestive of meeting this criterion. However, few employees will likely have the requisite policymaking authority.
A policymaking position is one that is the business entity’s president, chief executive officer or equivalent, any other officer of a business entity that exercises policymaking authority for the business entity.
Policymaking authority is defined as the final authority to make policy decisions that control significant aspects of a business entity or common enterprise. Policymaking authority does not include authority limited to advising or exerting influence over such policy decisions, nor does policymaking authority include having final authority to make policy decisions for only a subsidiary or affiliate of a common enterprise.
For instance, a director with decision-making powers that affect the entire health care entity would typically qualify for this exception. Conversely, a manager with policymaking authority limited to a specific department or a few floors within the health care facility is unlikely to be encompassed by this exception.
Thankfully, for physician groups, the FTC said that physician partners of an independent practice, if they have authority to make policy decisions about the business, likely meet the senior executive exception. Depending on the level of involvement of individual physicians in groups, they may be exempt from the final rule as a senior executive.
Determining the applicability of the exception requires employers to meticulously examine all the facts. Consequently, it is essential that employers take the time to conduct this analysis to help ensure compliance with the final rule.
Potential Impact on the Health Care Industry
The health care industry has long been a bastion for noncompetition agreements, using these legal tools to maintain patient care, safeguard confidential information, and ensure consistent quality of care. The FTC’s ban, rooted in its pro-competitive and pro-employee policy objectives, undoes decades of established legal practice.
The first step for all nonprofit health care entities is to undergo an analysis of whether they meet the nonprofit tax-exempt standard to be exempt from the rule.
Health care entities that are covered by the rule can employ an array of strategies to navigate the post-noncompetition agreement landscape. In addition to relying on nonsolicitation and confidentiality agreements, some additional proposed strategies include:
applying different types of restrictions to different levels of employee – your executives and senior leaders may get geographic noncompete restrictions (before the final rule takes effect) while clinicians get patient and employee nonsolicitation restrictions;
developing robust training programs to build internal talent;
expanding the scope and enforceability of existing nondisclosure and confidentiality agreements to protect sensitive information without hindering employee mobility; and
creating positive workplace cultures that prioritize employee satisfaction and engagement, thus naturally incentivizing retention.
The health care industry stands on the cusp of a potentially transformative era brought about by the FTC’s decision to ban noncompetition agreements. As the industry confronts this challenge, it will necessitate a dual focus on innovative retention strategies and safeguarding intellectual property, all while maintaining the integrity of patient care services.
Proactive Steps for the Interim
As the rule progresses toward enactment, health care entities should consider taking the following steps in anticipation of the final rule taking effect:
Monitor legal challenges to the final rule to see how courts proceed.
Conduct an audit to understand whether your health care entity is covered by the rule and, if so, the potential impact the final rule would have on your entity.
Consider updating or entering into geographic noncompete restrictions with true “senior executives” with policymaking authority before the final rule takes effect.
Strengthen nonsolicitation restrictions for patients and employees.
Ensure that confidentiality and nondisclosure protections are strong and enforceable under both federal and state law.
Work on strengthening your health care entity’s culture to increase employee loyalty and reduce the desire for employees to leave and go to another health care provider in the area.
Evaluate and update your health care entity’s intellectual property protection strategies to safeguard your trade secrets and proprietary information without relying on noncompetition agreements.
If you have questions regarding the FTC’s final rule on noncompetition agreements, please contact the authors.
This article was originally published on the State Bar of Wisconsin’s Health Law Blog. Visit the State Bar sections or the Health Law Section webpages to learn more about the benefits of section membership.
