FTC's Final Rule on Noncompetes: Recent Developments

Health Affairs has posted a new article by Erin C. Fuse Brown, Megha Reddy, and Christopher M. Whaley: "The FTC's Noncompete Rule: Legal Challenges And Potential Solutions For Physician Markets." It's a welcome comprehensive review of what the rule does and doesn't do and its current legal status. (My summary of the rule is here. (4/24/24)) It's well worth reading.

The article does a nice job of summarizing the August decision out of the Northern District of Texas, holding that the FTC's rule exceeds its statutory rulemaking authority and is arbitrary and capricious. Unlike another district court, which found the rule to be invalid but enjoined its enforcement only against the plaintiff in the case, the order in the Northern District case entered a nationwide injunction against the rule's enforcement. 

Although the trial court didn't cite the Supreme Court's Loper Bright decision (discussed here and here), the authors point out that the decision represents a Loper Bright-like refusal to accord any deference to the FTC's interpretation of its rulemaking authority. The FTC is "considering" an appeal. I hate to predict, but I'd be surprised if there's no appeal, although its appeal would be to the ultra-conservative Fifth Circuit Court of Appeals, where an affirmance would be likely, imho.

Hall Render on the Latest Ruling Against the FTC in Challenge to Its Noncompete Rule

The good folks at Hall Render have posted an alert concerning last Thursday's injunction against enforcement of the FTC's final rule banning almost all noncompete clauses. The injunction came out of the Middle District of Florida and favors only the named plaintiff in the suit, not the entire country. Other district courts earlier disagreed over similar requests for injunctions:

• Ryan, LLC v. FTC (Northern District of Texas): injunction granted against FTC's enforcement of the final rule.
• ATS Tree Services, LLC v. FTC (Eastern District of Pennsylvania): injunction denied (plaintiff failed to show both irreparable harm and the likelihood of prevailing on the merits).

As for the long-running debate over whether the politics of the appointing president makes a difference to the outcomes in specific cases, Hall Render notes: "The presiding judge in the Ryan, LLC lawsuit in Texas was appointed by then-President Trump in 2019. The presiding judge in the ATS Tree Services, LLC lawsuit in Philadelphia was appointed by President Biden in 2022."

The most recent Hall Render post includes this reminder: "Limits on FTC Jurisdiction: Don’t lose sight that the FTC lacks jurisdiction over nonprofit entities." That means the FTC's final rule doesn't apply to the 49.2 percent "of the 4,644 Medicare-enrolled hospitals [that] are non-profit" (HHS Office of Health Policy, August 2023).

Federal Judge (in the Northern District of Texas, Of Course) Enjoins FTC from Enforcing Its Ban on Non-Competes

U.S. District Judge Ada Brown (N.D. Tex) today entered an order against the Federal Trade Commission that puts on indefinite hold the agency's controversial rule barring most non-compete clauses (previously discussed here). The opinion can be found at Law360 (behind a paywall). Once the opinion is available for free, I'll add a link to this post. 

Before a preliminary injunction can be issued, the moving party must satisfy a number of requirements. On the important issue of "likelihood of prevailing on the merits," the challengers (the Chamber of Commerce and others) persuaded Judge Brown that "the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g)" (opinion at p.1). Beyond that, Judge Brown ruled that the FTC's rule is "arbitrary and capricious," because:

On this record, the evidence put forth by the Commission does not warrant the NonCompete Rule’s expansive ban. In enacting the Rule, the Commission relied on a handful of studies that examined the economic effects of various state policies toward non-competes. . . . However, no state has ever enacted a non-compete rule as broad as the FTC’s NonCompete Rule. Further, the FTC’s evidence compares different states’ approaches to enforcing non-competes on based on the specific factual situation—completely inapposite from the FTC imposing a categorical ban. . . . As to this latter point, the FTC provides no evidence or reasoned basis. The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes— instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious. (opinion at pp. 21-22)

In addition:

the FTC insufficiently addressed alternatives to issuing the Rule. “The role of this court is to determine whether the [FTC] provides a sufficient explanation of the alternatives to permit a reasoned choice among the different courses of action.” Sierra Club v. Fed. Highway Admin., 715 F. Supp. 2d 721, 734 (S.D. Tex. 2010), aff’d, 435 F. App’x 368 (5th Cir. 2011). However, on this record, the FTC did not sufficiently consider alternatives. (See generally ECF No. 149). While considering less disruptive alternatives, the FTC “was required to assess whether there were reliance interests, determine whether they were significant, and weigh any such interests against competing policy concerns.” Wages & White Lion, 16 F.4th at 1139 (quoting Regents, 591 U.S. at 33, 140 S. Ct. at 1915)). The record shows the Commission did not conduct such analysis, instead offering the conclusion that “case-by-case adjudication of the enforceability of noncompetes has an in terrorem10 effect that would significantly undermine the Commission’s objective to address non-competes’ tendency to negatively affect competitive conditions in a final rule.” (record citations omitted) (opinion at p. 22)

The original effective date was September 4, and Judge Brown has promised a determination on the merits of the challengers' arguments no later than August 30. Expect one or more trips to the Fifth Circuit by the FTC to get their rule back on track.  

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. 

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."