Prepare for Impact: How the FTC’s Final Rule Banning Non-Competes Might Affect Health Care Providers

On April 23, the FTC voted 3-2 in favor of issuing a final rule that, if it becomes effective, would:

• make all current non-compete clauses entered into by all workers who are not characterized as “senior executives” unenforceable and bar employers from entering into new non-competes with such workers going forward; and

• prohibit employers from entering into new non-compete clauses with workers defined as “senior executives” (those who earn more than $151,164 per year and whose job includes a policy-making position), while allowing current non-competes for senior executives to remain in effect.¹

Here is a link to the Commission’s press release. The final rule is written to apply to as many workers as possible, concomitant with the FTC’s rulemaking authority to issue rules defining “unfair methods of competition” under Sections 5 and 6(g) of the FTC Act.² In response to numerous comments from health care entities requesting differential treatment,³ the Commission expressly declined to exempt workers in the health care sector from the final rule.⁴

Notably, the final rule:

• Includes a broad definition of a “non-compete clause,” encapsulating conditions of employment that prohibit, penalize or prevent workers from:
  
  • seeking or accepting work in the United States with a different person where such work would begin after the conclusion of their current employment, and/or
    
  • operating a business in the United States after the conclusion of their employment.⁵

• Applies to contractual terms or workplace policies, whether written or oral.⁶

• Defines “worker” broadly to mean “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee [or] independent contractor . . .”⁷

• Does “not apply to a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”⁸

The final rule raises several important questions and considerations for health care providers.

• First, health care providers must determine whether the final rule will apply to them.
  • The preamble to the final rule includes a full section describing its jurisdiction over non-profit, tax-exempt entities in response to health care industry comments claiming that such entities are categorically outside the Commission’s regulatory authority.⁹
  • The preamble describes a “two-part test to determine whether a corporation is organized for profit and thus within the Commission’s jurisdiction,”¹⁰ noting that a corporation’s tax-exempt status is a factor considered within the test, but is not dispositive.¹¹
  • The Commission concludes that “entities that claim tax-exempt nonprofit status may in fact fall under the Commission’s jurisdiction. Similarly, whether the final rule would apply to quasi-public entities or certain private entities that partner with States or localities, such as hospitals affiliated with or run in collaboration with States or localities, depends on whether the particular entity or action is an act of the State itself under the State Action doctrine, which is a well-established, fact-specific inquiry. . . Even if the final rule’s coverage extends only to hospitals that do not identify as tax-exempt non-profits based on AHA data . . . the Commission finds every use of covered non-competes to be an unfair method of competition and concludes that the evidence supports the Commission’s decision to promulgate this final rule, which covers the healthcare industry to the full extent of the Commission’s authority.”¹²

• Second, if a health care provider is confident the final rule will apply to its arrangements, it must review its workforce and categorize individuals based on whether they meet the definition of “senior executives.” 
  • For providers with non-competes in their employment or other contracts with individuals earning in excess of $151,164, the providers will need to determine whether each such individual is in a policy-making position. The final rule appears to focus on the most senior decision-makers within an organization.
    • The final rule defines “policy-making position” as “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.”¹³
    • The final rule, in turn, defines “policy-making authority” as “final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”¹⁴
    • In the preamble to the final rule, the FTC states that “neither the head of a hospital’s surgery practice nor a physician who runs an internal medical practice that is part of a hospital system would be senior executives, assuming they are decision-makers only for their particular division.”¹⁵
    • The Commission declined to adopt an exception to the final rule for workers with access to trade secrets and confidential information.¹⁶
  • For “senior executives,” current non-compete clauses will remain in effect, but hospitals’ contractual practices will need to be reviewed and updated to ensure compliance with the new prohibition on non-competes for senior executives after the final rule goes into effect.
  • For workers with existing non-competes that are not “senior executives,” providers will be required to provide “clear and conspicuous notice to the worker by the effective date that the worker’s non-compete will not be, and cannot legally be, enforced against the worker.”¹⁷ In a change from the earlier released proposed rule, formal recission of the non-competes will not be required. The final rule includes other requirements specific to the notice and provides model language.¹⁸
  • The final rule’s effective date will be 120 days after an expected imminent publication in the Federal Register, absent any court order to suspend enforcement of the final rule if (and when) challenged.¹⁹

• Third, health care providers should consider the potential impacts the final rule will have on local, regional, and national labor markets, and anticipate potential disruption to their current staffing practices. Health care providers also should prepare for uncertainty in the coming weeks and months (and potentially years) as the final rule almost certainly will be challenged in court by impacted entities.

Dentons’ national health care group is well-prepared to assist you in answering these various questions.

1. See generally, Non-Compete Clause Rule, FTC Final Rule (RIN 3084-AB74) (“Draft Rule Under Consideration” as posted by the FTC on April 23, 2024), hereinafter “the final rule.” ↩︎
2. 15 U.S.C. § 45 (prohibiting “unfair methods of competition) and 15 U.S.C. § 46 (authorizing the Commission “to make rules and regulations for the purpose of carrying out the provisions of this subchapter”). ↩︎
3. FTC Final Rule at 373-79. ↩︎
4. Id. at 379. ↩︎
5. 16 C.F.R. § 910.1 (FTC Final Rule at 561-62). ↩︎
6. Id. (FTC Final Rule at 562). ↩︎
7. Id. (FTC Final Rule at 563-64). ↩︎
8. 16 C.F.R. § 910.3(a) (FTC Final Rule at 567). ↩︎
9. See FTC Final Rule at 50-54. ↩︎
10. Id. at 52. ↩︎
11. Id. at 52-53. ↩︎
12. Id. at 380-81 (emphasis added). ↩︎
13. 16 C.F.R. § 910.1 (FTC Final Rule at 562-63). ↩︎
14. Id. (FTC Final Rule at 562). ↩︎
15. FTC Final Rule at 273. ↩︎
16. Id. at 277-78. ↩︎
17. 16 C.F.R. § 910.2(b)(1) (FTC Final Rule at 564-65). ↩︎
18. 16 C.F.R. § 910.4 (FTC Final Rule at 565-66). ↩︎
19. FTC Final Rule at 2. ↩︎