How the FTC’s noncompete ban could apply to nonprofit hospitals

While the legislation that created the Federal Trade Commission may shield nonprofit entities from the agency’s oversight, some former FTC staffers say the commission could invoke other laws to prevent individual nonprofit hospitals from using noncompete provisions in employment contracts.

The FTC in January proposed a sweeping ban on noncompete clauses, which many healthcare organizations use to prevent former employees from working for local competitors for a set period following their departure. Since the announcement, healthcare lawyers and industry observers have expressed uncertainty about whether the nearly 60% of short-term, non-government, acute-care hospitals classified as nonprofit would be subject to the proposed rule.

The FTC Act, which created the agency and outlined its purview in 1914, defines a corporation as a company that “is organized to carry on business for its own profit or that of its members.” Some healthcare lawyers said the act definitively exempts nonprofits from the FTC’s oversight, while others said the scope of the exclusion is unclear.

The agency says the FTC Act’s Section 5, which it cites in the proposed noncompete rule, gives it broad authority to prohibit unfair forms of competition. The section’s reach has been debated in the courts.

A spokesperson for the commission declined to comment on whether the noncompete provision ban would apply to nonprofit hospitals.

Nonprofit hospitals’ for-profit subsidiaries may be subject to the rule, but generally, the ban would not apply to nonprofits, said Ken Field, an antitrust partner at law firm Hogan Lovells who was a staff attorney at the FTC’s Bureau of Competition.

“Most of our not-for-profit health system clients are largely exempt,” he said.

Still, the commission could invoke other legislation in individual cases via consent decrees to work around the exceptions outlined in the FTC Act, said Amanda Wait, an antitrust partner at law firm Norton Rose Fulbright and former staff attorney at the FTC’s Bureau of Competition.

“Section 5 of the FTC Act is not the only tool in the FTC’s toolbox,” she said. “Even if Section 5’s reach doesn’t go that far, the agency will find a way to get it to apply to nonprofits.”

The FTC could enforce Section 1 of the Sherman Act, which says every contract that restrains trade or commerce is illegal, if it perceives a nonprofit provider’s noncompete arrangement harms competition among the workforce, Wait said.

“Not-for-profit systems, which are usually more risk-averse than for-profit companies, don’t want to be on the opposite side of the FTC when the agency says they are unfairly treating workers,” Wait said. “There is fair reading that Section 5 [of the FTC Act] does not allow the rule to apply to nonprofits, but I wouldn’t rely on that as compliance strategy.”

The FTC could also enforce Section 7 of the Clayton Act, which prohibits transactions that substantially lessen competition, Wait said, if one nonprofit health system planning to merge uses noncompete provisions in contracts and the other does not, for instance.

William Kovacic, a law professor at George Washington University, director of the GWU Law School’s Competition Law Center and former FTC chair, agreed the agency could rely on the Clayton Act in some circumstances.

Generally, however, the proposed noncompete rule does not apply to nonprofits, and Congress should strike the outdated limitations of the FTC Act to simplify the rulemaking process, Kovacic said.

“The glaring question is: Why does this anomaly persist and why doesn’t the U.S. legislature fix it?” he said.

A bill introduced in December by Reps. Pramila Jayapal (D-Wash.) and Victoria Spartz (R-Ind.) would give the FTC authority over nonprofit hospitals regarding matters of unfair competition.

The proposed ban’s future

Many hospitals, health systems, physician groups, insurance companies and pharmacy benefit managers hold their employees to noncompete provisions to prevent them from working for a competitor and potentially sharing proprietary information. Previous employers may sue or withhold deferred compensation if a former employee violates the contract. Without a federal policy, noncompete agreements have been governed by a patchwork of state laws.

A federal ban is necessary to stop an “exploitative practice that suppresses wages, hampers innovation and blocks entrepreneurs from starting new businesses,” the FTC said in a January news release.

Barring future noncompete clauses and eliminating existing ones would increase wages by nearly $300 billion a year, the agency estimated.

The comment period for the proposed rule closed on April 19, and the agency has not publicized when it will release the final version. Many of the nearly 27,000 comments supported the proposed prohibition. Others argued, however, that noncompete clauses can encourage employers to invest in technology or boost compensation.

Hospital associations criticized the proposed ban after the announcement. If the ban only applied to for-profit entities, it would create an uneven playing field, a spokesperson from the Federation of American Hospitals, which represents investor-owned hospitals, said during a Feb. 16 forum. The commission doesn’t have rulemaking authority, the spokesperson said.

The American Hospital Association said in a Feb. 22 letter to FTC Chair Lina Khan that the “proposed regulation errs by seeking to create a one-size-fits-all rule for all employees across all industries, especially because Congress has not granted the FTC the authority to act in such a sweeping manner.”

The rule is expected to be challenged in court. Some legal experts say the agency could use the judicial process, which could take years, to argue it has authority over nonprofits under Section 5 of the FTC Act.

It’s unlikely the FTC would make a sweeping rule with a loophole that 60% of hospitals could fit through, said Barak Richman, a law and business professor at Duke University.

“Where there is a policy will, there is a legal way,” Richman said.

Lauren Berryman contributed.


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