Hospitals exhale after judge blocks FTC rule on non-compete agreements

Hospitals and health systems are among the businesses expressing relief after a federal judge blocked the Federal Trade Commission's plans to prohibit non-compete agreements.

A federal judge has blocked a rule by the Federal Trade Commission that would block most non-compete agreements. The rule was to take effect Sept. 4. Hospitals had opposed the rule.

U.S. District Judge Ada Brown of the Northern District of Texas issued a decision Tuesday that blocks the FTC’s rule on non-compete agreements. The FTC rule prohibiting most non-compete agreements was slated to take effect Sept. 4. The commission had said eliminating non-compete agreements would benefit 30 million people, or nearly one in five Americans.

In her ruling, Brown wrote, “the Court concludes the Commission has exceeded its statutory authority in promulgating the Non-Compete Rule.” The judge’s order prevents the FTC rule from taking effect.

The U.S. Chamber of Commerce sued to block the FTC rule earlier this year. The American Hospital Association and the Federation of American Hospitals filed an amicus brief last month in support of the lawsuit.

Chad Golder, the American Hospital Association’s general counsel and secretary, said the group welcomed Brown’s decision. He called the FTC’s rule “unlawful.”

In a statement, Golder said, “The rule was a breathtaking assertion of regulatory power by three unelected Commissioners, made worse by the fact that the Commissioners did not attempt to understand the disruptive impact it would have on hospitals, health systems, and the patients they serve.”

Hospitals protested the rule and warned of its implications on health systems. Hospitals had argued that the FTC lacked the authority to impose the rule on non-profit organizations, noting only tax-paying hospitals and health entities would be subject to the rule. Hospitals had argued that the rule would have created disparities in competition for talent.

“This disparate treatment will produce an uneven playing field among hospitals and will likely create significant, unstudied, and anticompetitive distortions,” hospitals wrote in the amicus brief.

Chip Kahn, president and CEO of the Federation of American Hospitals, said the judge “made the right call” in blocking the rule.

“We have been clear from the start that this rule would threaten patient access to care by making it more difficult for hospitals to recruit and retain physicians and invest in training and technology,” Kahn said in a statement. “In addition, this rule would create an unlevel playing field for tax-paying hospitals, an outcome completely at odds with FTC’s mission to promote competition. Especially at a time of workforce shortages and other challenges, this was the right decision.”

Suzanne P. Clark, president and CEO of the U.S. Chamber of Commerce, celebrated the judge’s ruling, calling it a “significant win.”

"A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage,” Clark said in a statement.

While hospitals and many businesses cheered the ruling, doctors derided the judge’s decision and have argued that non-compete agreements are hurting physicians.

Looking at appeals

The battle over non-compete agreements is expected to continue. FTC isn’t dropping its efforts to end most non-compete agreements.

“We are disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hard working Americans, hamper economic growth, limit innovation, and depress wages,” an FTC spokesperson said in a statement. “We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”

The FTC narrowly decided in a 3-2 vote earlier this year to approve regulations barring non-compete agreements. Such agreements typically prohibit executives and other key employees from working for direct competitors for a period of time. The commission said the rule would improve competition and enable Americans to pursue better and more lucrative opportunities.

Regulators said that non-compete agreements were being used too extensively to keep Americans from finding better positions. Proponents for the rule said non-compete agreements could have a place for top executives with knowledge of trade secrets, but they shouldn’t be applied widely beyond the highest levels of the organization.

Under the FTC rule, non-compete agreements would be prohibited, with exceptions applying to senior executives earning more than $151,000 and those in “policy-making” roles.

Last month, a federal court judge in Pennsylvania sided with the FTC and rejected an appeal from a tree service seeking to block the commission’s rule on non-compete agreements.

In her opinion declining to block the FTC rule, U.S. District Judge Kelley Bribson Hodge wrote, “the Court finds Plaintiff has failed to establish a reasonable likelihood that it will succeed on the merits of its claims that the FTC lacks substantive rulemaking authority under its enabling statute, that the FTC exceeded its authority, and that Congress unconstitutionally delegated legislative power to the FTC.”

Disappointed doctors

While hospitals had feared the FTC’s rule, physicians welcomed the commission’s move. Some doctors said non-compete agreements were unfairly preventing physicians from pursuing more rewarding opportunities.

The American Medical Association has supported efforts to curb non-compete agreements, saying such pacts cover 37% to 45% of doctors. With such contracts, doctors could face months of unemployment, or the prospect of relocating to find a job.

The American Academy of Family Physicians and other physician groups had supported the FTC’s plan to restrict non-compete agreements. Steven P. Furr, MD, president of the AAFP, said the group was disappointed by the judge’s order blocking the rule.

“Noncompetes harm family physicians and their patients by jeopardizing long-term patient-physician relationships and creating an uneven playing field for physicians,” Furr said in a statement. “The AAFP will continue to support the FTC’s mission to eliminate noncompetes in health care that prioritize the interests of organizations over those of patients and their physicians.”

The American College of Emergency Physicians strongly supported the FTC’s efforts to prohibit most non-compete agreements and assailed the ruling in Texas. The group said such pacts restrict the career choices of doctors.

“Non-compete agreements limit the right of emergency physicians to freely practice medicine in their communities. Our efforts to eliminate these harmful, predatory and coercive clauses will not stop,” the ACEP said in a statement. “We urge the FTC to promptly challenge this decision. As burnout rates and staffing constraints challenge emergency departments nationwide, restricting physicians’ job options only weakens our health care safety net.”

Hospitals could end up paying more in labor costs if the FTC rule took effect, potentially adding to their financial pressures, Fitch Ratings projected. Hospitals could see more turnover, and smaller hospitals and rural facilities could find it harder to hire and keep talent. However, Fitch also suggested eliminating non-compete agreements could increase the labor pool for many providers.

Doctors also argued that eliminating the rule would spur hospitals to pay better and provide a better working environment.

Minnesota recently enacted a ban on non-compete agreements under Gov. Tim Walz, the Democratic nominee for vice president. California, North Dakota and Oklahoma also have laws barring such agreements.