Hospitals, physicians clash over FTC rule banning non-compete agreements

In a much-anticipated move, the Federal Trade Commission has issued a rule banning the vast majority of non-compete agreements, and hospitals and doctors are very much at odds on the issue.

The FTC has issued a new rule barring most non-compete agreements, angering hospitals. But doctors say the rule will allow them to pursue more career opportunities.

Hospitals dreaded the prospect of the FTC prohibiting such clauses since the commission proposed regulations barring non-compete agreements last year. Conversely, physicians have clamored for the regulation, saying it will provide them with the chance to pursue better opportunities if they aren’t tied to agreements that place restrictions on where they can work.

And there are ongoing questions if the FTC’s rule will survive legal challenges. The commission voted 3-2 this week to bar non-compete agreements, illuminating the divide over the proposal and battles looming in court. The U.S. Chamber of Commerce has already filed suit challenging the ruling.

In its ruling, the FTC says eliminating non-compete agreements will be better for employees and consumers. Workers will be able to earn more, and they’ll be able to start their own businesses more easily without clauses that bar employees from working at competitors or other restrictions, regulators say. The FTC says eliminating non-compete clauses will aid 30 million Americans, or nearly 1 in 5 U.S. workers.

While the FTC rule applies to all industries, the commission also crafted the policy with the healthcare industry at least partly in mind. The FTC projects that the rule could lower healthcare costs by up to $194 billion over the next 10 years.

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‘Bad law, bad policy’

Groups representing hospitals blasted the commission after issuing the final rule this week.

Chad Golder, general counsel for the American Hospital Association, said the FTC’s ban of non-compete agreements is “bad law, bad policy, and a clear sign of an agency run amok.”

The hospital association eliminating non-compete agreements would hurt the industry, and would radically reshape the labor market, especially for senior executives and physicians. The AHA had petitioned for exceptions for top executives and doctors.

The AHA also argues that the FTC lacks the authority for such a law. Such sweeping changes should only come from Congress, rather than unelected officials, Golder said.

“The only saving grace is that this rule will likely be short-lived, with courts almost certain to stop it before it can do damage to hospitals’ ability to care for their patients and communities,” Golder said in a statement.

Chip Kahn, president and CEO of the Federation of American Hospitals, which represents for-profit hospitals, described the FTC rule as a “double-whammy.”

“The ban makes it more difficult to recruit and retain caregivers to care for patients, while at the same time creating an anti-competitive, unlevel playing field between tax-paying and tax-exempt hospitals – a result the FTC rule precisely intended to prevent,” Kahn said in a statement. “In a time of constant health care workforce shortages, the FTC’s vote today threatens access to high-quality care for millions of patients.”

The FTC’s authority typically encompasses for-profit companies. However, the commissions’ ruling suggests some nonprofit organizations, or their subsidiaries, could fall under the regulation. In the rule, the commission states, “entities that claim tax-exempt nonprofit status may in fact fall under the Commission’s jurisdiction.”

The FTC also noted that some medical groups petitioned for an exemption for the healthcare industry, but opted against such a provision.

“The Commission is not persuaded that the healthcare industry is uniquely situated in a way that justifies an exemption from the final rule,” the ruling states. “The Commission finds use of non-competes to be an unfair method of competition that tends to negatively affect labor and product and services markets, including in this vital industry; Commission also specifically finds that non-competes increase healthcare costs.”

Doctors cheer ruling

Conversely, doctors have cheered the prospect of ending non-compete agreements.

Steven P. Furr, MD, president of the American Academy of Family Physicians, said the FTC’s decision “ensures family physicians can pursue opportunities that value their expertise and continue to provide high-quality care that their communities need.”

"We are hopeful that the elimination of noncompete clauses will encourage employers to pursue more collaborative ways to retain physicians and become employers of choice, while preserving long-term, meaningful patient-physician relationships,” Furr said in a statement.

Furr also said he is happy that the rule could apply to the entities of nonprofit organizations.

“Nonprofit health systems often have significant financial assets and employ a large portion of physicians and clinicians,” Furr said. “They should not be permitted to continue to restrict patient access and physician choice in employment.”

The American College of Emergency Physicians had urged the FTC to end non-compete agreements. The organization has said that the agreements are “unfair, exploitative, and coercive because they can restrict emergency physician autonomy and limit otherwise viable employment options.”

Christopher Kang, MD, past president of the American College of Emergency Physicians, said in 2023 that emergency doctors shouldn’t be held to “harmful non-compete agreements.”

“Restricting an emergency physician’s ability to choose a job can stall or upend their career, contribute to workplace dissatisfaction, and accelerate currently high rates of burnout, especially in rural or underserved communities where it is already challenging to attract and retain physicians,” Kang said last year.

The FTC rule allows organizations to continue existing non-compete agreements with senior executives, but the rule bars companies from entering new agreements. The FTC defines senior executives as those who earn more than $151,164 annually and have authority to help make policy.

Hospitals had argued that eliminating non-compete agreements would exacerbate physician shortages, such as organizations in rural areas. Conversely, some argued prohibiting such agreements would alleviate such shortages.

However, the FTC said in its ruling that barring non-compete agreements “will increase labor mobility and enable skilled workers who are currently trapped by non-competes to work for others in the industry.”

The FTC also said that the commission received “a large number of comments from physicians and other healthcare workers stating that non-competes exacerbate physician shortages.”

Legal battle brewing

Lina Khan, the FTC’s chairwoman, said non-compete agreements suppress wages and new, innovative ideas, while making it harder for Americans to launch startup companies.

“The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market,” Khan said in a statement.

Federal regulators also argue that non-disclosure agreements can help organizations protect their trade secrets without barring workers from pursuing other positions at other companies.

The rule is slated to take effect 120 days after publication in the Federal Register. But legal experts have offered skepticism that the rule can withstand forthcoming court battles.

Jesse Coleman, a partner with the Seyfarth Shaw law firm, says he thinks it’s likely that the FTC rule won’t survive legal challenges.

“My personal opinion is I think it's going to get shut down in court,” Coleman said. “I think that it faces significant constitutional challenges that go directly to the heart of the FTC jurisdiction.”

Coleman suggests courts will find that Congress hasn’t specifically given the FTC the power to enact such a wide-ranging rule. In areas where federal agencies make rules that have vast economic significance, Congress has given those agencies clear and direct authority, he said.

“I think that the more fundamental issue here is whether the FTC has authority to promulgate rules like this, and I don't think that they do,” Coleman said.

Daryl G. Leon, an attorney for BakerHostetler, also said the provision determining who qualifies as a “senior executive” in the FTC rule will also be a point of contention. Organizations could say that many employees could be considered to be making important policy decisions. Leon said he expects that question will be “hotly litigated.”

Some legal experts also suggest that opponents of the rule will ask courts to implement a stay before the rule takes effect.