On Jan. 5, 2023, the Federal Trade Commission (FTC) proposed a rule which would effectively ban employers from using non-compete agreements. Specifically, the rule prohibits employers from: 1) entering into or attempting to enter into a non-compete with a worker; 2) maintaining a non-compete with a worker; and 3) representing to a worker, under certain circumstances, that the worker is subject to a non-compete. Comments on the rule were initially due to the FTC on March 20, but the FTC extended that deadline to April 19 (likely a sign that the FTC is receiving a heavy stream of comments). It’s safe to say that the use of non-compete clauses in employment contracts has become a contentious issue; this is particularly true in the healthcare industry.
What is a non-compete clause?
Non-compete clauses are provisions in employment contracts that allow an employer to limit an employee’s ability to work for competitors for a period of time after leaving employment. In Idaho, non-competes are limited in use to “key” employees or “key” independent contractors and must be reasonable as to the time restriction, geographical area, type of employment or line of business that it is preventing the former employee from engaging in. Further, unless an employer pays an additional sum or provides some other type of consideration, non-competes in Idaho are statutorily limited in duration to a maximum of 18 months.
What is the purpose of a non-compete clause?
Idaho Code provides that non-competes may only be used to protect the “legitimate business interests of an employer” and prevent a former employee from directly competing with the employer for a limited period of time. Typically, these clauses can be used to protect trade secrets and confidential information (although there are other more effective ways to do so), but they can also limit employee mobility and make it difficult for workers to find new job opportunities. In January, the FTC published a statement alleging that non-compete clauses drive wages down and limit competition and explained that its proposed rule demonstrates an effort to remove roadblocks on American workers.
If the proposed ban moves forward, there will be a significant impact on employers. This is especially true in the healthcare sector which often uses restrictive covenants to retain physicians (and their patients, by extension), as well as C-suite business personnel.
Healthcare and non-compete clauses
Smith + Malek has helped guide healthcare entities throughout Idaho and in other states with the many state, federal and regulatory requirements with which they are required to comply. If or when this proposed rule goes into effect – which won’t be until mid-October 2023 at the earliest – we would expect to see lawsuits particular to the healthcare industry. Here’s why.
As written, one of the major concerns is whether and how the ban would impact nonprofit healthcare programs and more specifically, those organized as 501(c)(3) by the IRS. The FTC Act, from which the FTC receives its power, applies to entities “organized to carry on business for its own profit or that of its members.” The proposed rule acknowledges that it may not apply to nonprofit entities, meaning the FTC cannot require non-profit entities to abide by their proposed rule against non-competes. Despite the lack of authority under the FTC Act, in the past the FTC has used the Sherman Act and the Clayton Act, federal antitrust laws, to prohibit hospital systems from engaging in anti-competitive conduct.
According to the American Hospital Association (2019), approximately 56% of hospitals in the nation are nonprofit. For those healthcare entities that are not designated as nonprofits, the rule would have a disproportionate impact on their ability to conduct and protect their legitimate business interests and stifle their ability to compete with nonprofit hospitals nearby and their ability to attract and retain employees. Another more broad area of concern is the effect of the ban on a nonprofit entity that enters a joint venture with a for-profit partner. We hope the FTC will clarify the proposed rules applicable to nonprofits before the rule is finalized.
Many have questioned whether the FTC has the authority to implement such a rule with such wide-ranging and significant impacts which include superseding state laws. If the rule is adopted, we expect to see many court challenges by affected parties, particularly because of the disproportionate impact it may have between for-profit and nonprofit entities.
Between Now and Then
The rule does not seem on its face to affect non-disclosure or non-solicitation agreements between employers and employees, although if these provisions are effectively non-competes under a functionality test, they could still violate the rule. Employers can and should review existing contracts and work with an attorney to evaluate or draft carefully worded non-solicitation and non-disclosure agreements as a way to best position and protect their legitimate business interests.
If the FTC adopts the proposed rule banning non-compete clauses, industries will have 180 days to renegotiate contracts.
Feel free to reach out to our team if you have any questions now, or in the future.