Healthcare Industry May be Impacted by FTC Proposed Rule Prohibiting the Enforcement of Non-Compete Agreements by Employers

January 30, 2023Legal Alerts

Healthcare Industry May be Impacted by FTC Proposed Rule Prohibiting the Enforcement of Non-Compete Agreements by Employers

On January 5, 2023, the Federal Trade Commission (“FTC”) issued a Proposed Rule that would prohibit employers from enforcing non-compete agreements against former employees, contractors, and other workers. Dinsmore & Shohl’s Labor and Employment Group’s legal alert on January 5, provides general information about the changes envisaged in the Proposed Rule. 

Healthcare providers should be aware of the Proposed Rule because the FTC calls out the healthcare market in multiple examples, hypotheticals, and factual circumstances regarding the perceived adverse effects of non-compete clauses. For the healthcare sector, these include higher consumer prices, greater market concentration and decreased labor mobility.

Medical providers who contract through a professional association (“PA”) or a professional limited liability company (“PLLC”) may not fall within the definitions of the Proposed Rule. This is because the definition of a “Worker” is “a natural person who works, whether paid or unpaid, for an employer.” It includes “an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.”

The Proposed Rule may also apply to not-for-profit healthcare providers depending on the circumstances. The FTC’s Supplementary Information regarding the Proposed Rule states that “some entities that would otherwise be employers may not be subject to the [Proposed] Rule to the extent they are exempt from coverage under the FTC Act. . . .[including] an entity that is not ‘organized to carry on business for its own profit or that of its members.’” (quoting The Federal Trade Commission Act, 15 U.S.C. § 44). Nevertheless, the Federal Trade Commission Act does not provide a blanket exclusion to not-for-profits[1] and the FTC has enforced its rules against not-for-profit in the healthcare sector[2]. Similarly, it is unlikely that state or locally owned healthcare providers are exempt from the Proposed Rule unless they qualify for state-action immunity.[3]

Finally, a person selling a business entity or disposing of all of the person’s ownership interest in the business entity, is also excluded from the Proposed Rule if the person is a “substantial owner.” Substantial owner is defined as an “owner member, or partner holding at least a 25 percent ownership interest in a business entity.” However, neither the definition of substantial owner, nor the Proposed Rule at large, provide any insight into what type of ownership interest qualifies for the exception. For example, will the FTC view non-voting equity the same as equity with voting rights even if the owner member or partner holds at least a 25 percent ownership interest?

The process for the adoption of the Proposed Rule is still in the early stages, however it signals the FTC’s intent to address employment restrictions, which have broader adverse effects on the market place from the FTC’s perspective. We will continue to monitor developments and provide updates on progress and any significant legal challenges along the way. If you have any questions please feel free to contact your Dinsmore Health Care industry attorney.

[1] See Cmty. Blood Bank v. FTC, 405 F.2d 1011, 1017 (8th Cir. 1969)

[2] See Cal. Dental Ass'n v. Ftc, 526 U.S. 756, 769, 119 S. Ct. 1604, 1612 (1999)

[3] See generally, FTC v. Phoebe Putney Health Sys., 568 U.S. 216, 224-26, 133 S. Ct. 1003, 1010-11 (2013)