The Federal Trade Commission’s non-compete ban

Non-compete agreements (NCAs) in physician contracts, also termed “restrictive covenants” or “covenants not to compete,” have become a hot topic recently because of the Federal Trade Commission’s (FTC’s) April 2024 ruling invalidating almost all NCAs. But in fact, NCAs have long been controversial, and no more so than in the realm of physician NCAs, which involve substantial policy concerns.

Given its intricacies and importance of NCAs, and the fact that up to 45% of physicians currently have contracts containing NCAs, it behooves physicians to understand the foundation of the NCA, how it relates to a physician employment contract currently, and its possible evolution.

What is It?

Generally speaking, an NCA, usually in the form of an employment contract clause, is an agreement between the employer and the employee that the employee will not enter into post-contract competition with that employer within the limitations of a specific duration, scope of practice, and/or geography. NCAs have traditionally been regulated under state statutory law and common law and have been permitted based on policy considerations that attempt to balance competing employee and employer interests. Physicians should understand their states’ statutory treatment of an NCA.

NCAs protect important employer business interests, including the protection of proprietary information, safeguarding trade secrets, reducing employee turnover, and protecting patient lists. Employees, though, have limited mobility in changing professional positions, have less bargaining power with the employer, and may find themselves with limited options for comparable professional positions.

The NCA ostensibly appears to greatly benefit the employer’s interests over the employee’s; however, NCA protection of employer interests may also substantially benefit employees by encouraging substantial employer investment in employees whom the employer recognizes as a stable and likely long-term human resource, ultimately fostering increased employee satisfaction and innovation. Indeed, one concern with the FTC’s non-compete ban is the potential for significant underinvestment in information sharing and employee training, because employers would, without a NCA, be less likely to recoup those employee investments and would have limited ability to keep competitors from free-riding on investments in employees who leave and join competitors. Ultimately, this would lead to decreased market efficiency.

What is its status today?

Regulation of NCAs, including physician NCAs, has traditionally been based on state statutory law and by common law. Perhaps because of the increasing use of the NCA in professional settings, the NCA has been increasingly scrutinized by courts and state legislatures in the last few decades, with an overall increasing focus on NCA reasonableness and appropriate fit in individual employment settings, and with an emphasis on employer demonstration of legitimate and significant business interests for using a NCA.

States have evolved differently in their treatment of NCAs; some states ban NCAs altogether while others allow them with varying interpretation and enforceability, frequently focused upon the NCA’s duration, scope, and geography. Similarly, in common law, courts will frequently invalidate NCAs that are found to be unreasonably overbroad, either geographically, temporally, and/or in regard to scope. 

On April 23, 2024, however, the FTC altered this existing state of affairs by issuing a rule banning new NCAs in all employment situations after September 3, 2024. The rule also holds that existing NCAs are not enforceable, with a small carve-out for some senior executives. It applies to for-profit businesses, and some, but not all, non-profit organizations. The FTC’s stated intent is to reduce healthcare spending by increasing employee compensation and mobility. The FTC’s ban is likely meant to reduce transaction costs by increasing physician mobility.

There have been several lawsuits regarding the FTC ruling, challenging it on different grounds. The US District Court for the Northern District of Texas in Ryan LLC v. FTC issued first a preliminary injunction, then a final decision overturning the FTC’s rule. The Court held that the FTC had exceeded its statutory authority, and further, that the rule was arbitrary and capricious. It noted that the rule’s “categorical ban” has no equivalent in state law, is “unreasonably overbroad without a reasonable explanation,” “provides no evidence or reasoned basis,” does not “consider the positive benefits of non-compete agreements,” and does not “address alternatives to the Rule.” The Ryan Court reasoned that as an administrative agency, the FTC can only act as Congress authorizes by statute. On Oct. 18, 2024, the FTC appealed the Court’s decision to the Fifth Circuit Court of Appeals, seeking to reverse the holding setting aside its NCA ban. 

The United States District Court for the Eastern District of Pennsylvania in ATS Tree Services LLC v. FTC denied the plaintiff’s motion to stay enforcement of the rule, refusing to issue a preliminary injunction preventing its implementation. As in Ryan, the ATS Tree Services LLC v. FTC plaintiffs argued that the FTC had exceeded its statutory authority in issuing the rule. However, the Plaintiff did not appeal the holding.

The US District Court for the Middle District of Florida in Properties of the Villages, Inc. v. FTCheld, like Ryan, that the rule exceeds the FTC’s statutory authority, noting the FTC’s prior lack of any NCA enforcement actions; however, its reasoning differed from Ryan. The Florida Court held that the FTC in fact has statutory authority to issue such rules; however, the Court held that the FTC could not enforce its rule because it violates the “major questions doctrine.” The “major questions doctrine” requires an agency such as the FTC to “point to clear congressional authorization” for any rule it issues that has “extraordinary ... economic and political significance,” as the NCA ban rule certainly does.

What is its future?

The FTC’s NCA ban remains unsettled. State legislatures, in response to the recent court holdings, are reassessing their statutory law regarding NCAs. The Ryan Court’s holding prevented the FTC’s rule from going into effect on September 4, 2024. The Texas and Florida court decisions are awaiting 5th and 11th Circuit Court of Appeals review, respectively. Assuming affirmation of either of the cases on appeal, a circuit split regarding the NCA ban may occur. The US Supreme Court may be called upon to determine the validity of the FTC rule banning NCAs. The Circuit Court decisions are likely to occur in 2025, and any Supreme Court decision would not likely occur until 2026. Meanwhile, state statutory law and common law still apply to NCAs, and the FTC may challenge the validity of NCAs on a case-by-case basis.

US antitrust law remains a potential remedy to scrutinize and restrain inappropriate business practices, including NCA-related abuses. The Sherman Act allows federal and state actors and private citizens, to sue for redress. Antitrust cases are typically considered using the “rule of reason” formulated by the Supreme Court in 1911, which requires plaintiffs show that defendant businesses possessing market power did in fact undertake anticompetitive conduct that had or likely had anticompetitive effects. In other words, the court in an antitrust case will require that the plaintiff show that the business actually had a significant controlling market presence in the geographic area; and further, that the plaintiff show that the business’ actions in fact had an anticompetitive effect, or likely had one. The latter can be found by showing an anticompetitive effect such as abusive pricing

The FTC’s ruling is legally and academically controversial and in fact may not withstand court scrutiny. The rule was put forth by the FTC as an ambitious rule to reduce healthcare spending. But businesses survive only if their revenue surpasses their costs, including personnel costs. Further, maximization of capitalization is attained when businesses require NCAs. Businesses invest heavily in recruiting, hiring, and training personnel, and increased personnel turnover increases these expenditures. NCAs arguably provide a collective benefit by ensuring force continuity, mitigating the risk of the loss of highly trained personnel with proprietary knowledge. NCAs also help a business maintain a skilled workforce, helping maximize business valuation. If FTC’s NCA ban rule were ultimately upheld, businesses would likely respond by instituting longer-term employee contracts, extended termination notice periods, and disincentives for employees who do not fully serve their contract length, including substantial financial disincentives. Business valuation might decrease, reducing investment incentives. 

NCAs have long been a method of balancing the interests of employees and employers. They protect businesses’ confidential information, trade secrets, and patient lists, at some cost to employees pursuing new opportunities. The employee, though, is also provided with some benefit from the NCA, albeit indirect. State statutory law and courts have traditionally worked to ensure an appropriate delicate balance between interests, with courts generally finding unbalanced NCAs unenforceable.

For now, physicians should understand the policy considerations of and recognize the uncertainty surrounding NCAs, become familiar with their state’s statutory NCA law, review employment contracts carefully for NCA reasonableness, and seek legal advice if necessary.

Perhaps the FTC’s approach is the correct one for our future. Or perhaps the appropriate future of NCA interpretation and enforcement should continue to rest on state statutory law and common law, where antitrust enforcement is on a case-by-case basis, rather than FTC rulemaking. The results of high court decisions, state statutory law changes in response to the FTC rule, and perhaps US congressional action will provide the final answer.

Dr. Allen is based at the University of Oklahoma Health Sciences Center in Oklahoma City. He has declared no conflicts of interest in relation to this article.