Noncompete Clauses, the FTC, and the Health Care Industry

As described in an excellent paper on the American Bar Association's website (sorry, but you need to be an ABA member -- or know one -- to get access), states are all over the map when it comes to noncompete clauses. They've been unenforceable in California for 150 years. A few other states have banned them, some with limited exceptions. For physicians, state law is a big deal. According to the paper, Medscape reports that 87% of physicians report being subject to a noncompete clause sometime during their careers.

State law may become irrelevant in light of a rule proposed by the Federal Trade Commission this year, that would prohibit many firms from including noncompetes in their contracts with employees and independent contractors (press release, FTC (Jan. 5, 2023).  

There are some limits to the scope of the proposed rule:

• As written, it does not apply to noncompetes that are written into contracts for the sale of a business.
• The FTC generally doesn't regulate nonprofits, unless they are "organized to carry out business for its own profit or that of its members.” Under most states' laws and § 501(c)(3) of the Internal Revenue Code, nonprofits (and tax-exempts) must be organized primarily for public as opposed to private benefit. It is a sketchy distinction in some cases, but it endures.
• There's no private cause of action under § 5 of the FTC Act, so enforcement of the prohibition (if it is adopted as a final rule) will be up to the FTC and DOJ.

I say "if it is adopted" because over 21,000 comments have been filed for and against the proposed rule. Former FTC Commissioner Christine Wilson dissented from the Notice of Proposed Rulemaking, noting that the proposed rule would prohibit conduct that is permitted in 47 states. If the rule is adopted, expect (1) lots of work for lawyers revising work contracts and (2) a court challenge. It's likely that any case would wind up in the Supreme Court. And if that happens, expect a tug of war among the justices over the recently discovered "major questions doctrine."