How the FTC’s Proposed Non-Compete Rule May Impact Non-Profit Hospitals

Nina Ordinario
Associate Editor
Loyola University Chicago School of Law, JD 2024

On January 18, 2023, the Federal Trade Commission (FTC) proposed a new rule for regulating non-compete clauses. The proposed rule, which has been named the “Non-Compete Rule,” could potentially ban employers from entering into, or attempting to enter into, a non-compete clause with employees and independent contractors collectively referred to as “workers.” The proposed rule has recently sparked several discussions on the scope and constitutionality of the rule. One concern is how the proposed rule, if finalized, would impact the healthcare industry and especially non-profit hospitals.

The Non-Compete Rule

The FTC defines a non-compete clause as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” As such, most non-compete clauses prevent workers from working in similar roles or industries in a specific region or area for a designated period. Most businesses impose non-compete agreements on workers to prevent them from disclosing or using trade secrets and confidential information. If a worker breaches a non-compete agreement, they are at risk of being sued by their previous employer.

According to the FTC, one in five American workers is bound by a non-compete clause, and such agreements stifle competition by suppressing employee wages and employment options. Further, non-compete clauses are especially harmful to low-wage workers who lack the ability to negotiate their employment contracts. In the context of hospitals, hospitals regularly require physicians to sign non-compete agreements upon employment. These non-compete agreements restrict physicians from offering competitive services within a certain region during employment and for a designated period after employment ends. As such, if a physician wishes to join or open a private practice or move to another hospital, their options are limited by prior non-compete agreements.

To address these concerns, the FTC has proposed the federal Non-Compete Rule to limit the use of non-compete clauses in employment contracts. Currently, whether or not non-compete agreements are enforceable varies by jurisdiction. Some courts will enforce non-compete clauses, and others may enforce non-compete clauses only if certain elements are met. For example, in some jurisdictions, if the employer pays the employee during the non-compete period, then a court will look more favorably upon the employer and may enforce the non-compete clause. Because there is variation between jurisdictions, a federal rule would ban all non-competes for good. Under the proposed rule, non-compete clauses will be considered unfair methods of competition in violation of Section 5 of the FTC Act. Accordingly, if the proposed rule is finalized, workers, including physicians, will have more freedom to choose where they work without restrictions or fear of being sued.

Impacts of the proposed rule

The proposed Non-Compete Rule has stimulated much discussion on whether the FTC has the authority to promulgate and enforce such a rule. Legal scholars, critics, and even one of the FTC Commissioners expect there will be legal challenges to the proposed rule if it is finalized. Expected legal challenges include those under both the non-delegation and major questions doctrines. In addition, the broad language of the rule has created further questions regarding what types of industries and organizations could be affected by the rule.

The language of the proposed rule states that “the [r]ule would apply only to non-compete clauses between employers and workers,” including employees and independent contractors. The proposed rule further states that entities exempt from coverage under the FTC Act will not be subject to the rule, such as “an entity that is not organized to carry on business for its own profit or that of its members.”

Most professionals in the legal and healthcare community believe that the proposed rule, as written, would apply to for-profit and government-owned hospitals. However, because the scope and language of the proposed rule and its exceptions are broad, there is a much larger debate about whether the rule applies to non-profit hospitals.

For instance, the FTC Act does not specifically exempt non-profit entities, and the FTC can regulate certain commercial activities of non-profit entities, such as fundraising and telemarketing. Considering the broad language of the proposed rule and the limited scope of activities the FTC can regulate in non-profit entities, the proposed rule leaves a lot of uncertainty as to whether it will apply to non-profit entities. Further, hundreds of physicians have already posted comments to the FTC, pushing it to explicitly extend the rule to non-profit hospitals.

The comment period for the proposed rule will conclude on March 20, 2023. As the FTC begins to review and address submitted comments, hopefully, it will devote more research to this issue and clarify what entities the rule will affect. Regardless of whether the rule will apply to non-profit hospitals, the proposal has sparked a larger discussion on how non-compete clauses negatively impact physicians. As the next generation of physicians enters the workplace, hopefully, more physicians will negotiate better non-compete clause conditions. In addition, non-profit hospitals may be more willing to engage in these negotiations if it means competing for talent against for-profit and government-owned hospitals, which may not require non-compete clauses.