FTC votes 3-2 on final rule to ban noncompete agreements, but legal challenges expected

Editor's note: Since the publication of this story, the U.S. Chamber of Commerce has filed a lawsuit in a Texas federal court arguing that the Federal Trade Commission does not have the authority to issue the noncompete rule.

The Federal Trade Commission (FTC) voted 3-2 Tuesday to issue a final rule striking new noncompete agreements for all workers and phasing out existing noncompetes for all but senior executives across “most employers.”

The ban does not apply to many nonprofits including much of the country’s healthcare providers due to the limitations of the FTC’s jurisdiction, one of several points of contention that’s been raised by hospital industry groups that have opposed the ban.

The final rule will take effect 120 days after its publication in the Federal Register. To be in compliance, impacted employers will need to stop enforcing existing noncompetes with workers other than senior executives, inform those who are no longer bound by existing noncompetes and stop initiating new noncompetes for all workers going forward, FTC staff said during an open meeting on the final rule held Tuesday afternoon.

The final rule defines a senior executive as those in a “policy-making position” and earning more than $151,164 annually from that employer. Senior executives represent less than 0.75% of the workforce, the commission said.

FTC staff said it received “overwhelming” support from the public, noting that over 25,000 of the 26,000-plus comments received voiced support for a comprehensive ban. Among those highlighted in the final rule and in images displayed during the hearing was a submission from a physician in rural Appalachia describing how noncompetes had become “ubiquitous” in healthcare and how “healthcare providers feel trapped in their current employment situation, leading to significant burnout that can shorten their career longevity."

Though the comments offer “strong qualitative evidence” of the bans’ benefits, FTC Chairperson Lina Khan said the final rule issued Tuesday is “principally based on economic research.”

Among these are estimates that the final rule will increase wages by $400 billion to $488 billion over the next decade, or an average of $524 per person per year. It’s also expected to reduce spending on physician services by $74 billion to $194 billion over the next decade, the agency said.

The FTC estimates that about one in five American workers, or about 30 million people, are subject to noncompetes. Releasing these workers is projected to help create more than 8,500 additional new businesses per year and drive innovation via 17,000 to 29,000 more annual patents over the next decade, the FTC said.

The commission also noted that employers concerned about protecting their investment have “several alternatives to noncompetes,” such as trade secret laws and non-disclosure agreements covering proprietary and sensitive information.

“The Commission also finds that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions,” it wrote in a release.

The American Medical Association, the country’s largest physician professional organization, adopted an official position opposing noncompete clauses for employed physicians last year. However, healthcare employer groups like the American Hospital Association (Aha) and the Federation of American Hospitals (FAH) criticized the commission’s “sweeping” ban and highlighted retention difficulties that would be shouldered by the hospital industry’s for-profit subsector.

"The FTC’s final rule banning non-compete agreements for all employees across all sectors of the economy is bad law, bad policy, and a clear sign of an agency run amok," Chad Gold, general counsel and secretary for the AHA, said in a statement.

“This final rule is a double whammy" Chip Kahn, president and CEO of the FAH, which represents for-profit hospitals, said in a Tuesday statement. "The ban makes it more difficult to recruit and retain caregivers, while at the same time creating an anti-competitive, unlevel playing field between tax-paying and tax-exempt hospitals—a result the FTC rule precisely intended to prevent. In a time of constant health care workforce shortages, the FTC’s vote today threatens access to high-quality care for millions of patients.” 

Dissenting commissioners, industry questions FTC's authority

In comments given during the open meeting, Commissioner Rebecca Slaughter acknowledged that the FTC’s rulemaking record included “powerful stories from healthcare workers who are employed by nonprofits, and I've heard noncompetes hurt patients and providers.” She said she doesn’t believe “there’s a good justification for them to be excluded from this rule” but noted that the FTC’s jurisdiction is limited under statute to for-profit entities.

“I want to be transparent about the limitations in that jurisdiction, and recognize that there are workers, especially healthcare workers, that are bound by anticompetitive and unfair noncompete clauses that our rule will struggle to reach,” she said while voicing support for efforts from Congress and other agencies with more reach into the healthcare industry.

Dissent on the final rule came from the FTC’s newly appointed Republican commissioners, Melissa Holyoak and Andrew Ferguson.

In comments during the open meeting, Ferguson described the estimated $400 billion to $488 billion of increased wages as costs that will be shouldered by employers and noted that the commission “does not even hazard a guess at the value of the 30 million contracts that [the final rule] nullifies."

Both of the dissenting commissioners also questioned whether an administrative agency like the FTC should be at the head of such sweeping policy changes rather than states or Congress, and said they suspect this week’s final rule will be overturned.

“Does the Commission have authority to promulgate legislative rules under Section 6(g) of the FTC Act?” Holyoak asked. “I believe the answer's no, and therefore I respectfully dissent. Further, even assuming arguendo that the Commission had such rulemaking authority, I believe there's no clear Congressional authorization under Section Five of the FTC act for promulgation of the final rule. And therefore, I agree with Commissioner Ferguson's reasons for rejecting the rule.”

AHA's Gold was of a similar mindset.

"Three unelected officials should not be permitted to regulate the entire United States economy and stretch their authority far beyond what Congress granted it," he said. "The only saving grace is that this rule will likely be short-lived, with courts almost certain to stop it before it can do damage to hospitals’ ability to care for their patients and communities.”

The dissenting commissioners said they would produce written statements outlining their position at a later date. In response to their stances, Khan said that “the plain text of the FTC Act clearly gives the agency the authority to promulgate rules addressing unfair methods of competition” and that prior court decisions have supported such a stance.

“To my mind, arguing that the FTC lacks this authority requires ignoring the most straightforward reading of the text,” Khan said.

Heather Weine Brochin, chair of the employment and labor practice at law firm Day Pitney, advised employers to be mindful of the 120-day countdown, but agreed that legal challenges to the final rule will likely delay implementation.

“From a practical perspective, this is not the final say—employers do not need to shred their non-competes,” the employment law advisor said in emailed comments. “We could still be talking about this, and continue to remain uncertain about the future of noncompetes, in a month or even after the presidential election. Employers contemplating noncompetes with senior executives should keep in mind that if the noncompete ban does become effective (120 days after publication of the final rule) that they will no longer be able to enter those agreements.”