New Noncompete Rule Requires Reevaluation of Healthcare Agreements
June 1, 2024 4 minutes read
Executive Summary
The Federal Trade Commission effectively banned noncompete clauses, which commonly are used in healthcare. Employers will have to notify employees that their noncompetes are no longer valid.
- The rule is being challenged in court.
- Nondisclosure agreements are still valid.
- There are some exceptions to the noncompete ban.
A recent decision by the Federal Trade Commission (FTC) changes how healthcare organizations can limit the activities of employees after they resign or are terminated, requiring a review of any noncompete agreements currently in place and policies that require them..
The FTC voted to approve a final rule banning noncompete agreements nationwide, effective 120 days after the decision is published in the Federal Register.
The decision is being challenged in court.
The FTC determined that noncompetes create an unfair method of competition, violating Section 5 of the FTC Act, says Khaled John Klele, JD, partner with the McCarter English law firm in Newark, NJ.
With one exception, the new rule means that existing noncompetes are void as of the effective date, and the FTC specified that employers must notify current and past employees that the employer will not enforce existing noncompetes.
The one exception is existing noncompetes with senior executives. Those noncompetes can remain in force, the FTC says. A “senior executive” is defined as an employee in a “policy-making position” earning more than $151,164 per year.
Once the rule is in effect, an employer cannot enter into new noncompetes, even with senior executives. The FTC calls noncompetes a “widespread and often exploitative practice imposing contractual conditions” that prevent employees from taking a new job or starting a new business.
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” FTC Chair Lina M. Khan said in announcing the rule. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.” The FTC rule is available online at https://bit.ly/3wm1XQD.
Nondisclosure Still OK
A noncompete provision prevents a person from working for a competitor post-employment, whereas a nonsolicitation provision would prevent soliciting a former employer, client, or employee, Klele explains. Meanwhile, a nondisclosure agreement prevents disclosing confidential information.
The FTC rule bans the noncompete provision, but there are certain exceptions, he says. The most important one is the sale of business exception, he says.
“No entity that operates in the healthcare space wants to buy a practice just to have the physician open a new practice across the street to compete with you. I think healthcare organizations are going to have to look at these agreements and determine how important they are to them,” he says. “There aren’t many exceptions, and a lot of these agreements that are litigated are very fact-specific. You also still have the non-solicitation and non-disclosure provisions that are not impacted by this FTC rule.”
The FTC rule on noncompetes could be a significant issue for healthcare entities that have confidential or strategic information they wish to keep from competitors, Klele says.
The U.S. Chamber of Commerce and other business groups sued the FTC in the U.S. District Court for the Eastern District of Texas the day after the noncompete ban was announced. The lawsuit claims that noncompete clauses “benefit employers and workers alike — the employer protects its workforce investments and sensitive information, and the worker benefits from increased training, access to more information, and an opportunity to bargain for higher pay.” The lawsuit challenging the FTC is available online at https://bit.ly/44rGnGY.
“The crux of it is whether the FTC had the authority to issue this rule in the first place,” Klele says. “I think to maintain the status quo — because this will be impactful to the industry, and not just to healthcare but to really all industries — the court will stay the rule. Maintaining the status quo is the purpose of filing an injunction, until there’s a final decision on the merits.”
Assess Dependence on Noncompetes
An example of a healthcare organization using a noncompete is a scenario in which a health system contracts with a radiology group but terminates that agreement, then tries to employ the individual radiologist directly. The group would then try to enforce the noncompete that the radiologist signed. Hospitals and health systems should assess their current dependence on noncompetes, in anticipation of the rule eventually being finalized even if there are legal stays for some time, Klele says.
“I would look at the noncompete that they have in place to see how it is impacted by the FTC ruling and prepare for an eventual loss by the groups challenging the rule,” he says. “If the court does deny the stay, then the rule obviously will go into effect. And then organizations will have to issue the notice to employees that is required by the rule to tell them that they’re not enforceable.” Trade secrets can still be protected by non-disclosure agreements, so organizations also should review them to make sure that they are providing adequate protection for those areas, he says.
Source
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Khaled John Klele, JD, Partner, McCarter English, Newark, NJ. Telephone: (973) 849-4224. Email: [email protected]
A recent decision by the Federal Trade Commission changes how healthcare organizations can limit the activities of employees after they resign or are terminated, requiring a review of any noncompete agreements currently in place and policies that require them..
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