FTC’s Recent Proposal to Ban Non-Compete Clauses Could Have Lasting Effects on Health Care Contracts

The FTC issued a display copy of a Notice of Proposed Rulemaking on Jan. 5, to prohibit employers from imposing non-compete clauses on workers, which could have a big impact on the health care industry.

Non-compete clauses generally block individuals from working for a competing employer, or starting a competing business, in a specified geographic region, and for a specified period of time both during and after their employment ends and are commonly used in contracts or transactions in the health care industry.

According to the FTC’s research, non‑compete clauses impact one in five American workers, or approximately 30 million people.

The FTC states in the proposed rule that it is opposed to employers’ use of non-compete clauses because non-competes:

• • restrict workers from moving freely and have the power to suppress wages;
  • hinder innovation by inhibiting workers from bringing innovative ideas to new companies; and
  • exploit workers and hinder economic liberties.

The FTC further takes the position that non-compete clauses are not necessary for employers to protect trade secrets and other valuable investments in training and capital, and that those employer assets may be protected in other ways without resorting to non-competitive practices.

The heart of the FTC’s position and its proposed rule is that non-compete clauses are an unfair method of competition. The rule proposes that employers be banned from entering non‑compete clauses with their workers, which would include employees as well as independent contractors. The rule also would require employers to rescind existing non-compete clauses with workers and actively inform their workers that the non-compete clauses are no longer in effect.

Health care contracts, including employment and personal service agreements, are some of the more common arrangements to include non-compete clauses. These contracts are generally between health care employers and physician or mid-level provider employees or independent contractors. If the FTC’s proposed rule is finalized, health care providers and suppliers will need to carefully review their contracts to determine whether a non-compete clause exists, and if so, the employer will have a legal obligation to notify its employees or independent contractors that the non-compete clause in their contracts are no longer in effect. In addition, this could further result in the employer having to amend or revise its existing contracts to delete non-compete provisions and any other provisions in the agreement relating to the non‑compete clauses, such as liquidated damages provisions.

Although this is only a proposed rule, employers would be well served to become familiar with the general requirements of the rule and prepare for the possibility that non-compete clauses commonly used in the past will be determined to be of no force or effect. Employers may want to analyze other options to protect their businesses in the event they lose the ability to utilize non-competes with their employees or independent contractors.

The public may comment on the proposed rule by submitting a comment to the Federal Trade Commission within 60 days after the proposed rule is published in the Federal Register.

If you have any questions regarding the proposed rule or would like assistance in preparing a comment, please feel free to contact Jeffrey Moore or any other member of Phelps’ Health Care team.