FTC noncompetes ban may create 'dichotomy' in health care space

The Federal Trade Commission’s rule prohibiting employers from imposing noncompete agreements on their workers could spur division within the health care industry between nonprofit and for-profit entities, antitrust experts said this week. 

In April, the FTC voted 3-2 on party lines to finalize its ban on most noncompete agreements . The agency said these clauses restrict workers from seeking better employment opportunities and harm competition. The rule, which is facing legal challenges, is scheduled to take effect next month.

The FTC’s jurisdiction, however, is limited to companies that operate for profit.

In the health care industry, many medical facilities are organized as not-for-profit entities and, thus, not subject to the FTC’s rule.  

“Not-for-profit health systems … therefore, at least as a function of that rule, are able to continue to use [noncompetes] if they decide it’s in their business interest to do so,” said Robert Cooper, an antitrust partner at the law firm King & Spalding. “That’s the dichotomy that’s created. While it is not health care specific as a practical matter, that is the industry where it will be most noticeable.” 

Cooper said medical facilities, like any other employer, compete for talent on multiple dimensions including compensation, employment terms, benefits and work-life balance.

“It’s an oversimplification to say that [noncompetes] alone would create a competitive disadvantage,” he said. “I think it creates an interesting dynamic, and I think it remains to be seen how that will play out among different systems.” 

Douglas Ross, an antitrust law professor at the University of Washington, said time will tell whether the rule will give nonprofits an advantage over for-profit entities.

“Do nonprofits have some advantage over for-profit health care entities? Yes, they can, if they think it’s strategically wise to still use noncompetes,” Ross said.

“They need to be aware that the FTC might try to make a test case out of one of these nonprofits and argue that it is subject to FTC jurisdiction,” he added. “But for the most part, nonprofits can continue to have noncompetes if they want them, and in some markets, maybe that gives you an advantage.” 

In its final rule, the FTC disagreed with comments regarding competitive imbalances between nonprofit and for-profit entities. 

“To the contrary, those entities outside FTC jurisdiction that continue to deploy noncompetes may be at a self-inflicted disadvantage in their ability to recruit workers, even if they derive some short-term benefit from trapping current workers in their employment,” the FTC stated. “Furthermore, commenters’ concern that for-profit healthcare entities will be at a competitive disadvantage is based on the false premise that entities outside the jurisdiction of the FTC will not be otherwise regulated or scrutinized with respect to the use of noncompetes.”

The FTC also warned that some nonprofit health entities may in fact be subject to agency regulation. 

“The Commission disagrees with commenters’ contention that all hospitals and healthcare entities claiming tax-exempt status as nonprofits necessarily fall outside the Commission’s jurisdiction and, thus, the final rule’s purview,” the FTC stated. “A corporation’s tax-exempt status is certainly one factor to be considered, but that status is not coterminous with the FTC’s jurisdiction and therefore does not obviate the relevance of further inquiry into a [corporation’s] operations and goals.” 

Cooper, the attorney, called it unclear how much FTC’s enforcement efforts will focus on examining not-for-profit entities.

“The FTC has made clear in its rule that when it is assessing whether an entity is a not-for-profit organization, it may, but may not necessarily take their word for it,” he said. “Many large not-for-profit systems also have for-profit subsidiaries or affiliates. Those for-profit entities presumably will be subject to the rule as well.” 

Earlier this week, a Florida federal judge temporarily blocked the FTC’s ban on noncompetes, stating the agency must cite explicit statutory authority to promulgate such a rule. 

“The major questions doctrine is the name recently given to a long-standing principle governing the interpretation of statutes conferring power on administrative agencies,” wrote U.S. District Judge Timothy Corrigan of the Middle District of Florida. “The principle is this: When an agency claims to have the power to issue rules of extraordinary … economic and political significance, it must point to clear congressional authorization for the power it claims.” 

Read more: Noncompetes under fire, the benefits of forfeiture-for-competition clauses getting a fresh look

Corrigan’s decision followed that of a Texas federal judge who temporarily blocked the rule, arguing it exceeded the agency’s statutory authority.

However, a Pennsylvania federal judge refused to block the rule. 

The Texas court indicated it would render a final decision by the end of August. 

Ross, the professor, said the Pennsylvania, Texas and Florida cases will likely go to the appellate courts with jurisdiction: the U.S. Courts of Appeal for the Third, Fifth and Eleventh Circuit, respectively.

“You’re going to have three courts of appeal ruling on this at some point in the future,” Ross said.

“And it seems very possible that at least one of them is going to declare the rule invalid, in which case we’re off to the Supreme Court,” he added. “If this gets to the Supreme Court, that’s where the odds that the rule will be struck down are pretty high.”