The Federal Trade Commission recently propounded a rule regarding non-competes. This is complicated, as is demonstrated by the extensive FTC comments that are a hundredfold longer than the regulation itself. Of significant concern to those who submitted early comments on the proposed rule was the status of healthcare organizations and non-competes. Many commentators argued that healthcare, in its entirety, should be exempt from the rule. The FTC however, indicated that the broadest exemptions are exclusively for not-for-profits. 

Not-For-Profits

While many healthcare entities are not-for-profit, the FTC test is fairly strict. Citing 15 USC 44 the comments state, “To fall within the definition of ‘corporation’ under the FTC Act an entity must be “organized to carry on business for its own profit or that of its members.”  The FTC further states, “not all entities claiming tax-exempt status, such as nonprofits, fall outside the commission’s jurisdiction.” 

In order to determine what the FTC calls a “so-called nonprofit corporation or association” is, in fact, a not for profit they will apply a two-part test stating there must be “an adequate nexus between an organization’s activities in its alleged public purposes and that its net proceeds be properly devoted to recognize public, rather than private interests.”  In other words, the FTC will look to the source of the income and the ultimate destination of the income to make this determination.

In many other instances, a business relies on the IRS's determination as to whether its business is not-for-profit. Under this definition, an IRS determination alone may not be enough. Some examples cited by the FTC comments include physician hospitals where some component of the organization is “engaged in business on behalf of for-profit physician members.” 

Another example is a professional association of physicians that the FTC deemed was “organized with the care and benefits of its for-profit members” since it contracted with various payors on behalf of physicians and provided other services for a fee.  Additionally, if a nonprofit entity is managed or “has ceded effective control” to a for-profit partner, the FTC will consider the rule relating to non-competes applicable to the entity.  A variety of other factors including paying unreasonable compensation to board members and others may also be considered by the FTC in this analysis. 

Staffing Agencies

As covered previously, the Iowa legislature already addressed the issue of travelers or persons acting through a staffing agency, essentially prohibiting nurse and CNA non-competes in those companies. This was also a question for the FTC. At the time they were drafting the rules, the FTC specifically indicated that for the purposes of this rule, the employer and employee relationship includes independent contractors, pool or pool staff as well as volunteers, interns, and others. 

Data Use and Privacy

In essence, at every turn, the FTC will take the broadest, most inclusive definition of the rule. There are distinctions in relationship to non-competes that are particularly important in the healthcare area. The FTC regulations, as written, do not prohibit data use and privacy limitation agreements, patient non-solicitation agreements, and similar items. However, certain components of non-solicitation agreements may otherwise be impacted by the current position of the National Labor Relations Board.

It is critical for healthcare providers to look carefully at their HIPAA/HITECH and other policies relating to the use and access of data. Evaluations of metadata, audits, and other forms of tracking will become increasingly important in determining compliance with contractual agreements regarding data access or removal from hospital-based systems.

Another unanswered question is whether there can be specific limitations based on advertising within a particular area. Healthcare-based employers should look carefully at their contacts and as we have previously recommended, focus on data and patient contact issues as well as building in contractual requirements, such as if the provider has the right to access their information for things like continuity of care or as a mental health provider they must first coordinate that access with the entity. Notice can assist the employer in creating a smooth and legally compliant transition.

Noncompetition Clauses

Also, note that the rule does not prohibit any requirement that a health care provider or others do not compete during the term of employment. It is extremely common in the industry for providers to request or simply engage in competitive activities such as opening their own storefront weight loss clinic, med spa, or engaging in similar conduct.  Noncompetition clauses can clearly be enforced for conduct that occurs during the term of employment.

Also note that a noncompete can include a variety of other categories such as a nondisclosure because if it is so broadly drawn it would prohibit the worker from working in the same field.

Training Repayment

Perhaps more importantly in the healthcare field, a training repayment agreement may either be acceptable or a violation depending on structure. While CNA training is in a special category by federal law and normally cannot be the subject of repayment other types of training may be reimbursable. Other agreements may exist that require repayment for certain types or the nature of training. If the costs are specifically related to the cost of the training itself, such as where tuition reimbursement occurs these are likely to be enforceable agreements. If the costs exceed those costs, like a penalty, it is likely to violate the rules. There are also specific concerns under the DOL regulations in the event of any agreement for repayment. 

One element that may make such terms, like the repayment of tuition, more palatable to the FTC is if it is applicable regardless of where the employee goes to work. So, if the repayment is limited to the work for a competitor this is likely to be considered to be an inappropriate noncompete provision. If it applies across the board and there is no additional penalty it is less likely to be considered a violation of the requirements.

Healthcare Senior Executive Exemptions

For certain hospitals, there are also issues relating to the senior executive exemption.  A senior executive is defined as someone in a policy-making position who has earned in the preceding year an annual compensation of at least $151,164.  This can be prorated if the person has not worked a full year. The rule indicates that existing non-competes for senior executives can remain in place but new non-competes cannot be enacted after the effective date of the rule.

The FTC intends to limit the term “senior executive” to the highest levels of the company, such as the C-Suite. As one example, the FTC cites, “Physician partners of an independent physician practice, also generally qualify as senior executives…assuming the partners have authority to make decisions about the business.”  As an aside, the FTC also states that partners of this type would also likely fit under the sale of business exemption in Section 9101.3 if the partner leaves the practice and sells their share of the practice. 

However, the FTC does not consider a provider who works within a hospital system but does not have broader policy-making authority to be a senior executive. The right to excessive independent medical judgment is not the same as policy-making authority. Healthcare employers must meet both thresholds – those of compensation and the senior executive definition to meet this exception.

While providers, particularly physicians, exercise considerable discretionary authority in terms of patient care, care determinations, and protocols, with some limited exceptions, they do not generally have overarching enterprise-wide policy-making authority. The FTC is clear that in order to qualify for the exemption, they must have final authority to make policy decisions. Unlike the DOL wage-hour exemptions, having an input for the ability to advise or exert “influence over such policy decisions” does not render the exception applicable.

Small Entities

On page 541 of the FTC commentary, the agency states small entities must do three things to be in compliance with the final rule.

1. First, this includes no longer entering into non-competes with workers. Additionally, they need to assess and potentially revise “human resources materials and manuals and templates or form contacts to ensure they are not misused on a forward going basis …”
2. Further employers may not make misstatements about the enforceability of non-competes going forward and businesses “must refrain from suing or threatening to sue workers other than senior executives regarding a noncompete after the effective date …”
3. Finally, small businesses must provide notices to workers that non-competes will not be enforced against the worker. This includes providing notice to prior workers who previously held the noncompete but are no longer employed using the last known address or email and/or text.

The Big Picture

This regulation is already under litigation and enforcement is likely to be delayed even if it’s not fully overturned. However, there is clear national sentiment to limit non-competes, with many states enacting bans or limitations. Employers in the healthcare industry would do well to build into contracts, policies, and practices stricter controls on data, non-solicitation, and similar terms.

Related Resources:

• Iowa Takes Another Step in Limiting Non-Competes – 2023
• Iowa Passes New Requirements for Health Care Employment Agencies - 2022