Noncompete Clauses and the FTC's Ban (UPDATED 4/29/24)

UPDATE (4/29/2024, 5:15PM CDT):

The Chamber of Commerce filed a "coalition lawsuit" against the FTC on Wednesday, April 24 (news release; complaint). In addition to the points listed below, the CoC is also hanging its hat on the retroactive application of the new to rule to nearly all 30 million existing noncompete agreements (see Complaint, ¶¶ 8, 21, 59, 84, 104-05). Retroactivity is not per se illegal, but there generally must be clear authorization from Congress (Bowen v. Georgetown University Hospital (U.S. 1988)) or the agency must be writing on a clean slate with its retroactive rule (Smiley v. Citibank (U.S. 1996)), as seems to be the case here.

ORIGINAL POST (4/24/2024):

After 15 months of reviewing over 26,000 public comments on its proposed rule, the Federal Trade Commission voted 3-2 yesterday to adopt a final rule banning most noncompete agreements, including those involving health-care professionals and employees, effective 120 days after publication of the rule in the Federal Register. A 2-1/2-page fact sheet provides a helpful overview of the 570-page final rule. The majority claimed that "noncompetes are an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act ('FTC Act')."

Highlights of the rule (from the fact sheet):

• The rule states that noncompetes are an unfair method of competition. As a result, the rule prohibits employers from entering into new noncompetes with workers, as of the effective date. 
• The rule prohibits employers from enforcing noncompetes with workers other than senior executives as of the effective date. 
• Less than 1% of workers are estimated to be senior executives under the final rule. 
• Specifically, the final rule defines the term “senior executive” as workers earning more than $151,164 who are in a “policy-making position.” 
• The rule requires employers to notify workers whose noncompetes are no longer enforceable that their noncompetes are no longer in effect and will not be enforced. The FTC provides model language that employers can use to notify employees. 
• The rule includes an exception that allows noncompetes between the seller and buyer of a business. 
• The final rule differs from the proposed rule in several respects. For example: 
• The rule does not ban existing noncompetes with senior executives. 
• The rule simplifies the notice and compliance requirements for employers. 
• The rule expands the sale of business exception.

Of particular interest to hospitals, Becker's Hospital Review (4/24/2024) observes:

• Though the FTC recognized that it does not have jurisdiction over nonprofit entities, it reserved the right to evaluate an entity's nonprofit status, which would include a significant portion of the 6,120 hospitals in the U.S. 
  
  
• Specifically, the agency said that "some portion of the 58% of hospitals that claim tax-exempt status as nonprofits and the 19% of hospitals that are identified as state or local government hospitals in the data cited by [American Hospital Association] likely fall under the commission's jurisdiction and the final rule's purview."

The American Hospital Association continued its rejection of the rule:

• The final rule would have significant implications for the healthcare industry and has been described by Federation of American Hospitals President and CEO Chip Kahn as a "double whammy" against hospitals. 
  
  
• "The ban makes it more difficult to recruit and retain caregivers to care for patients, while at the same time creating an anticompetitive, unlevel playing field between taxpaying and tax-exempt hospitals — a result the FTC rule precisely intended to prevent," Mr. Kahn said in a statement shared with Becker's. "In a time of constant healthcare workforce shortages, the FTC's vote today threatens access to high-quality care for millions of patients."

The AHA position seemingly concedes the point that noncompetes tend to lock employees into the current job, and once the constraint of a noncompete is removed, it will be just that much more difficult to retain workers in a job market that is already producing shortages at many hospitals.

The U.S. Chamber Commerce has already stated its intention to challenge the rule in the courts:

“The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive.  

“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules. Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy. 

“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy. 

“The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”

For the record, the FTC sees the situation differently:

Noncompetes restrict the freedom of American workers and suppress wages.

• Noncompetes restrict workers’ fundamental freedom to leave for a better job or to start their own business.
• In many cases, noncompetes are take-it-or-leave-it contracts that exploit workers’ lack of bargaining power and coerce workers into staying in jobs they would rather leave, or force workers to leave a profession or even relocate.
• By restricting workers from moving freely, noncompetes prevent workers from accepting higher-paying jobs.
• Noncompetes even reduce the wages of workers who aren’t subject to noncompetes. Noncompetes stifle new businesses and new ideas. 

Noncompetes restrict the freedom of American workers and suppress wages. 

• Noncompetes prevent workers from starting their own firms and block new businesses from hiring qualified workers. 
• Noncompetes restrict the flow of knowledge between firms, and studies have found that noncompetes reduce innovation. This affects not just workers but also consumers by depriving consumers of better products and lower prices that result from competition and innovation. 

Noncompetes are widespread throughout the U.S. economy. 

• Roughly one in five Americans, totaling nearly 30 million people, are subject to noncompetes. 
• The Commission received over 26,000 comments, with thousands of workers describing how noncompetes blocked them from taking a better job, negotiating better pay, or starting their own business. 
• The Commission also heard from entrepreneurs and small businesses who said noncompetes prevented them from starting new ventures or hiring knowledgeable workers to help grow their businesses. 
• Over 25,000 commenters supported a categorical ban on noncompetes. 

By banning noncompetes, the FTC estimates that: 

• New business formation will grow by 2.7%, creating over 8,500 new businesses each year. 
• American workers’ earnings will increase by $400-$488 billion over the next decade, with workers’ earnings rising an estimated $524 a year on average. 
• Health care costs will be reduced by $74-$194 billion over the next decade in reduced spending on physician services. 
• Innovation will increase, with an average estimated increase of 17,000-29,000 more patents each year over the next decade.