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  • Alex Hattaway

BLOG: Noncompete agreements are not a thing of the past yet

There has been a lot of attention about a proposed rule from the Federal Trade Commission that would prohibit many noncompetes. However, much of the discussion has been misleading, if not entirely wrong.

Some of the confusion is entirely understandable. I now believe that my first interpretation of the proposal was incorrect. Here is what we know.

Proposed rule

First, and most importantly, the fact that it is a proposed regulation means that it currently has absolutely no impact on anything. A proposed regulation, as the name implies, gives notice about possible future rulemaking. Many proposed rules are never finalized, and even when a proposal is ultimately adopted, the final version can be materially different from the original. So, nothing in the proposal by the FTC has any immediate impact on any noncompetition agreement.

If the proposal is adopted as written, it would ban a large variety of noncompetes. In fact, when I first read the rule, I confidentially stated that if the proposed rules were finalized, with the exception of individuals who owned 25% or more of a business and were getting the noncompete as part of the sales transaction, noncompetes would be broadly banned across the entire economy. I now think I was wrong.

Understanding errors

Where did I go wrong? I focused on the proposed text, which bans all noncompetes by “any natural person, partnership, corporation, association or other legal entity, including any person acting under the color of authority or statute, are covered by the regulation.” That sounds universal, which is why I was so certain it would eliminate almost all noncompetes. But I failed to do two things, and understanding my errors can be useful for anyone who works with health care regulation.

So where did I go wrong? First, when analyzing the proposed regulation, I did not read the preamble to the proposed regulation. The preamble is the explanation provided by a government agency to explain its intent with the regulation. If I had read the preamble, I would have seen this text:

“Some entities that would otherwise be employers may not be subject to the rule to the extent that they are exempted from coverage under the FTC Act.”

These entities include certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons subject to the Packers and Stockyards Act of 1921, as well as an entity that is not organized to carry on business for its own profit or that of its members. Where an employer is exempt from coverage under the FTC Act, the employer would not be subject to the rule.

That bolded language offers a preview of the core issue: The rule will not apply to nonprofits. The reason for this is that the FTC does not have statutory authority to regulate nonprofits. And this was my second mistake. I didn’t consider the applicable statute. In my blog, speeches and webinars, I routinely discuss the regulatory hierarchy. I emphasize that just because someone cites to an authority, that doesn’t mean the authority is valid. Medicare manuals are not binding. Local coverage decisions are not binding. While regulations are binding, these are only effective when consistent with the statute authorizing the regulation and with the Constitution. Because the authorizing statute of the FTC does not give it authority over nonprofits, courts are unlikely to permit the action by the FTC to apply to nonprofit health care entities. That would mean nonprofit health systems could still have noncompetes, while physician-owned clinics and for-profit health systems could not. Such a result is odd and obviously unfair.

It is safe to assume that there will be major legal challenges to the rule. This arbitrary distinction between for-profit and nonprofit health systems will provide one basis for that inevitable litigation. It also increases the probability that the litigation successfully challenges any final regulation.

Bottom line

The bottom line is that for right now, nothing in the federal law changes the enforceability of noncompetition agreements. If the FTC rule is finalized, we will have to see what happens, but the impact on the health care industry may be different than in the rest of the economy because nonprofit entities control such a large share of the health care market.

It appears that nothing the FTC can do will have any impact on nonprofit health systems. The announcements about the death of noncompetes is premature.

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