A Ban on Non-Compete Clauses? A Guide for Healthcare Practice Owners and Associates on the FTC’s New Proposed Rule
On January 5th, 2023, the Federal Trade Commission (the “FTC”) proposed a sweeping new rule thatwould prohibit worker-related non-compete clauses nationwide (the “ProposedRule”).
Non-compete clauses are frequently used in healthcare industry contracts, so this rule would be a major shake-up for the industry. Below is a guide on the Proposed Rule, with a focus on its potential impact on practice owners and associates.
What would the Proposed Rule prohibit?
The Proposed Rule would prohibit employers from (1) entering into or attempting to enter into a non-compete clause with a worker, (2) maintaining a non-compete clause with a worker, or (3) representing to a worker that the worker is subject to a non-compete clause when the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.
The definition of “worker” in the Proposed Rule is broad, covering not only employees but also independent contractors, among others.
Are there any exceptions?
There is one exception included in the Proposed Rule. It would not apply to non-compete clauses entered into by a person selling a business, so long as the seller owns at least twenty-five percent (25%) of the business being sold.
This is an important exception for the healthcare industry, as nearly all practice purchases and sales include non-compete clauses for the seller. The exception would allow that to continue.
Would it apply to existing non-compete clauses?
Yes. Under the Proposed Rule, employers would have to rescind any existing non-compete clause and notify any worker or former worker subject to a non-compete clause that it is no longer in effect.
Why is the FTC proposing this rule?
The FTC argues that non-compete clauses prevent workers from leaving jobs and decrease competition, leading to lower wages and stifling entrepreneurship and innovation. According to the FTC’s estimate, one in five American workers – approximately 30 million people – are subject to a non-compete clause, and the Proposed Rule could increase American workers’ earnings by nearly 300 billion dollars per year.
How would this impact practice owners?
The Proposed Rule would create new challenges for practice owners. Practice owners often use non-compete clauses in agreements with associates to protect their interests. If non-compete clauses cannot be used, hiring an associate would come with the risk that the associate could leave and start working nearby, potentially drawing away patients or clients. Practice owners would also need to expend time and resources to ensure compliance with the rescission and notice requirements of the Proposed Rule.
How would this impact associates?
The benefits of the Proposed Rule for associates are clear. Currently, non-compete clauses can prevent associates from working at, buying, or starting a practice in a location that is desirable for them. If these barriers are removed, then associates would have a broader area where they can work. However, the Proposed Rule could have also have negative consequences for associates. Without non-compete clauses, employers could be less willing to hire associates or give them full access to patients or confidential information, since they would have to consider the risk of the associate leaving to work nearby and potentially drawing away patients or clients. To compensate for a lack of non-compete clauses, employers could also try other legal mechanisms to protect their interests that may be harmful to unwary associates.
When would it be effective?
The compliance date in the Proposed Rule is 180 days after the final rule is issued. The FTC is accepting comments on the Proposed Rule from the public until March 10, 2023. It will then consider the comments and could issue a final rule thereafter.
If you would like to make a comment to the FTC, you can do so here: https://www.regulations.gov/document/FTC-2023-0007-0001
Can the rule still change?
Yes. After receiving public comments on the Proposed Rule until March 10, 2023, the FTC will consider any changes and then can issue a final rule. There could be significant changes from the Proposed Rule to any final rule, and the FTC could also choose not to issue any final rule at all.
Does the FTC have the power to do this?
Critics argue that the FTC does not have the power to make such a broad ruling. The Proposed Rule is expected to be challenged in court once any final rule is issued and litigation may delay its effectiveness or alter the scope of any final rule. Litigation may even prevent a new rule entirely.
What should practice owners and associates do now?
As explained further above, the Proposed Rule is not currently in effect and will take time to develop and become effective (if it becomes effective at all). We are closely monitoring updates as they occur. If you have any questions about the Proposed Rule or how non-compete clauses affect your practice or associateship, please reach out to our team at https://www.yourdentallawyer.com/ or https://www.yourvetlawyer.com/.
*The above article is for informational purposes only and does not constitute legal advice or create a lawyer-client relationship*
See below for a full transcription of the episode:
Rob Montgomery 0:04
Hello, everyone. I'm Rob Montgomery. I'm joined today by my colleague Joshua Salzer is an associate and our firm. And we're here today to talk about the recent proposed rule from the Federal Trade Commission, the FTC that is seeking to ban restrictive covenants, more specifically non compete clauses. On January 5 2023, the FTC proposed a sweeping new rule that would prohibit worker related non compete clauses nationwide. non compete clauses are frequently used in health care contracts, as we all know, so this rule would be a major shake up for the health care industry. And before we get into the substance of things today, I want to remind everybody that this is for discussions for information purposes only. This is not legal advice, you should always consult with a lawyer about your specific situation prior to getting involved with a contract signing a contract or taking any kind of legal action. So with that being said, Hey, Josh, how are you?
Josh Salzer 1:10
Hey Rob, thanks for having me.
Rob Montgomery 1:11
Yeah, it's good to be here. And it's good to be chatting about the hot topic of what the FTC is up to with this new proposed rule. I think this was something that was brought out, I guess, maybe six months ago, there were grumblings of this. And people are a little bit surprised. So I think the sort of the impact of this has had a little time to settle. But now we have this proposed rule, which is the next step for, for the FTC. So tell our listeners, Josh, what would the proposed rule actually prohibit?
Josh Salzer 1:45
Right, so the proposed rule is quite broad, it would prohibit employers from entering into or attempting to enter into a non compete clause with a worker of maintaining a non compete clause with a worker or representing to a worker that the worker is subject to a non compete clause when the employer has no good faith basis to believe that that's the case. The definition of worker here is also quite broad. It covers not only employees, but also independent contractors, among others.
Rob Montgomery 2:14
Yeah. So that's, that's a big, big one. Now, are there any exceptions to the proposed rule?
Josh Salzer 2:22
Yeah, there is one big exception that's explicitly included in the proposed rule, it would not apply to non compete clauses that are entered into by a person selling a business, so long as that person owns at least 25% of the business being sold. And as we all know, that is an important exception for health care, contracts going forward. As nearly all of the practice purchases and sales include non compete clauses for the seller,
Rob Montgomery 2:48
right. So in the standard practice transition, we've talked about an asset purchase agreement. And that's something that we obviously negotiate fairly heavily for in our deals for our clients. But a buyer is going to want to know that the seller is not able to go across the street, hang out a shingle, buy a practice, and basically take their goodwill someplace else. But the good news with this proposed rule is that it would not impact those transactions. Right, exactly. And similarly, I guess, by ends as well, equity by ends as long as the person owns at least 25%. Yep. So that's really a huge thing. And, you know, I think when you look at the damage that can be done by someone who is competing with your practice, the person that you're buying the practice with concern, we pose a lot more trouble generally, than then an associate. Good. Right. So it's good that that's out there. Well, this proposed rule as of now will apply to existing non compete clauses, so non competes that were entered into prior to any kind of FTC role.
Josh Salzer 3:59
Yes, this is this was another big part of the proposed rule that it would apply to even existing non compete clauses. And any employers that have these existing non compete non compete clauses would need to notify any worker or former worker that they have a non compete agreement with that that agreement is no longer in effect.
Rob Montgomery 4:19
And we're going to talk about sort of what this rule is and isn't and the likelihood, I guess, of it turning into into an actual rule, because now I'm guessing I said the rule but the proposed rule from a legality and challenge standpoint, this is one of the things that as a lawyer, I look at and scratch my head and say, how can the FTC just come along and start to undo existing arrangements because people make business decisions? Obviously, reliance of these contractual provisions they may share certain confidential information with people in reliance to the fact that they know that they can't then trade on that and compete so this This is one of those jobs where I kind of scratch my head and wonder how how that this this could this aspect of lease could thrive a challenge?
Josh Salzer 5:08
Yeah, certainly this is one of the hot topics of controversy surrounding this proposed rule.
Rob Montgomery 5:14
All right. So why, why is the FTC doing this?
Josh Salzer 5:19
The FTC has been looking into this issue for quite a few years now. And as part of this proposed rule, they made an argument that non compete clauses prevent workers from leaving their jobs and decreased competition, which leads to lower wages and stifles entrepreneurship and innovation. According to the FCC FTC, is estimate about 30 million people in the US are subject to non compete clauses. So it would affect quite a lot of people. And they estimate that this proposed rule could actually increase Americans work American workers earnings by nearly $300 billion dollars per year. So quite a lot of money. They're talking about here, at least in their estimate.
Rob Montgomery 5:57
Yeah. Wow. That's some that's a good sell on that I find those numbers again, I'm a little skeptical. Yeah. And obviously, we, while we do help associates with their agreement reviews, we most of our clients are people that are purchasing practices or practice owners, it's hard to see how this would have that kind of impact on the economy. And you know, there's obviously a compelling reason to, to have them. And it's interesting to me to Josh, that you talked about this, increasing American workers earnings by $300 billion per year ICU, you mentioning that the FTC said, I'm not attributing that to you, Josh. But, you know, it seems like you're just shuffling the deck, so to speak, you know, and if you own a practice and and a an associate leaves and takes 20% of the revenue with them, then, you know, it's maybe that associate is able to make more money someplace else, but that that's decreasing somebody else's wages, you know, it's sort of like the pie is only so big, I find hard to believe that by getting rid of these, it's going to make the pie bigger. In fact, I find that to be impossible, but I don't fault, the FTC for trying to sell it's the numbers they've got here. Sounds good. Shoot The Messenger. Dramatic. They're dramatic. I'm not going to shoot the messenger. It's a dramatic portrayal of what of this, in fact, and I guess if, if that were truly the case, then that would make it more compelling. But I'm, again, skeptical about that. How would obviously, you know, the things that we could think about, but talk to the folks about how this would impact practice owners.
Josh Salzer 7:41
Right. So the proposed rule would, of course, create new challenges for practice owners, practice owners, as we all know, often use non compete clauses in agreements with associates to protect their interests, if they can't use those kinds of provisions anymore, hiring an associate would come with the added risk that the associate could leave and start working nearby potentially drawing away patients or clients from that practice owner. And like we talked about practice owners would also need to spend time and resources to ensure that they're complying with this rule, including that that notice requirement and rescinding all existing non compete agreements that we like we talked about,
Rob Montgomery 8:18
right? So definitely have a cost and an impact on the practice owners like that. Yeah, and I think when we're talking about this, there are we're talking about generally about restrictive covenants. In this context, this this pool only speaks to covenants not to compete. So what we're talking about is that somebody can't work in a certain area for a certain period of time generally, this would not seemingly limit the ability to use non solicitation provisions. Correct.
Josh Salzer 8:51
Right. There's a certain part of the proposed rule that would prohibit certain extreme kind of other restrictive covenants if it if it gets into the territory of being a non compete, but essentially, non solicitation and confidentiality provisions could still continue as long as they don't stray too far.
Rob Montgomery 9:10
Right. So this does not mean that associates would be able to download a patient list and send emails to patients if they went someplace else. Like so that and some of that is contractual, where you would have a non solicitation and then there's also trade secret laws, Uniform Trade Secret Act that most states have adopted some version of still protects the practice against that kind of stuff. So if you're able to, even if this rule does go into effect, I think that there is still going to be room for practice owners to devise a strategy where non solicitation provisions that would include prohibitions against advertising and contacting clients, you'd be able to put in place to try to bridge the gap that's now would then be there from for We're not having this non compete.
Josh Salzer 10:01
Rob Montgomery 10:03
How would this potential role impact associates? Josh?
Josh Salzer 10:08
Yeah, the benefits of the proposed rule for associates are clear and obvious. And what we would think of that currently non compete clauses can prevent associates from working at buying or starting a practice in a location that's desirable for them. They're already working, they're already working in the area, they're familiar with it. They've developed patients and client relationships. If these barriers were removed for for them, then the associate would have a broader area where they could work. So the benefits are pretty clear. And what you would think, associates would also have to think, though, about certain potential negative consequences that could come out of this proposed rule. Without non compete clauses, employers might be less willing to hire associates or give them full access to patients or confidential information, since they would have to worry about the risk of the associate leaving to work potentially next door, and drawing away those patients or clients.
Rob Montgomery 11:03
Yeah, which that ultimately that could impact compensation levels for associates too. And I would think that, potentially, if there are certain, quote unquote, good patients in the practice that are high ticket items, that the practice owner may not want to share those with the associate. So it may not just be a free ticket here for the associate there, like you said that it could have some impact. I think, too, that listeners should be aware that this is just the FTC proposed rule. There are state laws in a number of states that have already been passed that prohibit or limit covenants not to compete in California, North Dakota, and Oklahoma, past outright bans. As of the time of this recording, another 21 states have limited them. I know that some states such as New Hampshire and Connecticut, allow them, but limit them for physicians. And I think now, New Jersey is in the early stages of proposing legislation that would greatly limit and restrict the enforceability of these provisions. So there's a movement out there at the state level to curtail some of these already, as you know, that Washington, Oregon being some others. So again, this is one of those things, as I said at the outset, you really need to consult with legal counsel on any specific employment matter, especially when it comes to this stuff, because it really does vary from from state to state. So regardless of what the FTC does, listeners may be in a state where they're already faced with restrictions on their ability to impose these are included these non compete covenants in their agreements. Josh, when would the proposed rule if it were to be turned into a final rule? When would that be effective
Josh Salzer 13:06
at the compliance date in the proposed rule is 180 days, so about six months after the final any final rules issued. So this is just a proposed rule, the FTC is currently accepting comments from the public that they have to consider as part of their rulemaking process. And they're doing that until March 10 2023, then they will consider the comments and could issue a final rule anytime thereafter. And so
Rob Montgomery 13:33
a lot of groups are already weighing in on that, obviously, and business groups and organizations and trade groups to object to this. Can the rules still change? Josh?
Josh Salzer 13:44
Yes, absolutely. After receiving public comments, like we talked about, the FTC will then consider them and consider any kind of changes that they want to make in any final ruling, there could be significant changes from the proposed rule to any final rule. And the FTC could also choose not to issue any final rule at all.
Rob Montgomery 14:05
And in which case, they would just just die into fade into the ether, so to speak. Yeah, exactly. You know, and this is something we talked about a couple of times during the session, but the legality of this and the challenge is, does the FTC have the power to do this?
Josh Salzer 14:23
So that's, that's a controversial question here. A lot of critics are arguing that the FTC does not actually have the power to make this broad of a ruling. The proposed rule is certainly expected to be challenged in court, once any final rule is issued and litigation could delay the effectiveness of the rule, alter its scope, or even potentially prevent any kind of new rule entirely.
Rob Montgomery 14:47
It's hard. It's still hard for me as somebody that's been a lawyer for 28 years now, to see how the FTC could kind of do an end around here and really pass what I consider to be legislation. I have sort of concerns about this as a couple of levels. One is, is this really something that the federal government should get involved in, as we talked about, there's probably close to half the states in this country have already looked at this issue and proposed or passed legislation or have legislation and process is probably even more now than than half. But then also does the fact that it's happening at the federal level, but then also, the fact that it's not happening through the legislature through the federal legislative process. It's just through an agent, federal agency. implementing something that would have such an impact and illegal impact on on business owners makes me makes me wonder, again, how that how that could be. And obviously, that's the short version of some of the challenges I guess, that we're seeing.
Josh Salzer 15:51
Right, those are the two hot button challenge issues is whether the FTC should leave this to the states to do it, or whether it should be up to Congress instead of an FTC. FTC. FTC or federal agency. The old federalism debate right in question. Don't want to don't want to touch that. No, that was that was
Rob Montgomery 16:09
done in law school. Josh, we stopped talking about that kind of stuff, constitutional law and all that. All That Jazz, I vaguely remember it. It's been a few decades. But just to wrap up, Josh, what should practice owners and Associates do now, in response to this proposal,
Josh Salzer 16:27
as we talked about, the proposed rule is not currently in effect, it could certainly change how it ends up being and it will take time to develop into becoming effective if it becomes effective at all. So we are closely monitoring updates as they occur. So if you have any questions about this proposed rule, or how non compete non compete clauses affect you, your practice your associate ship, please feel free to reach out to us and we're happy to help. Yeah,
Rob Montgomery 16:57
it sounds good. And I'll just repeat again, you know, this session has been for informational purposes only doesn't constitute legal advice or create a lawyer client relationship. So much of these issues are state specific, and they are always changing too. So be sure to reach out to to an attorney before you make any kind of decision in this in this realm. And thanks for taking the time today, Josh, and thanks, everyone for listening. Yeah,
Josh Salzer 17:21
Thanks, Rob. Thanks, everyone.