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After FTC rule bans noncompetes, legal expert discusses impact on health care

On April 24 the Federal Trade Commission (FTC) previewed its final rule on noncompete agreements (NCA), which effectively bans the practice for most workers in for-profit businesses, and would have a direct effect on the restrictive covenants that practices often use to prevent departing employed physicians from setting up shop nearby (PBN 9/17/18).
The rule is not yet published but the U.S. Chamber of Commerce has already brought suit in Texas seeking injunctive relief, so there’s a good chance its enactment will be delayed.
Traci Boris, a partner with Barclay Damon in Syracuse, N.Y. with extensive experience in legal issues affecting health care practices and health care-related facilities, answers a few of our questions about the rule below.
Would this rule overrule any state laws regarding NCAs?
To the extent that any state laws conflicted with this rule, this rule would control, except where a state law is more protective of a worker. The worker is going to be provided the greatest protection whether it be this federal rule or their own state law.
Let's say a doctor wants to leverage this rule to renegotiate their contract, e.g., "You can no longer enforce this restrictive covenant, but if you give me more money or perks, I will sign a new contract with a longer term or that's more difficult to get out of." Would that be OK, or would this collusion present some kind of a legal issue?
It would absolutely be OK for the parties to mutually agree to a new contract in light of the non-compete becoming invalid … However, in health care there are other regulatory challenges that make contracting with physicians more complex and restrictive. These contracts need to be compliant with Stark and Anti-Kickback laws, which limit the amount of compensation to fair market value and commercial reasonableness, so it is a little harder to incentivize a physician to stay by throwing more money into the contract. In addition, there are also rules regarding how often a physician contract can be revised so some entities will need to be aware of that issue as well.       
Regarding the senior executive exception to the rule, basically exempting employees who make at least $151,164 and have a “policy-making” role in the business, what if the executive (e.g. a medical director or department head) is also a working physician?
This is going to be an area that will likely require further guidance. If the physician is actually in a policy-making position, then in my opinion the noncompete would be permissible just as it would be for any other senior executive. 
But I also think this will be an issue ripe for litigation where a medical director wants to just practice medicine after leaving employment and is prohibited from doing so under a noncompete that is based upon the physician’s senior executive position.  Such a restriction may be struck down by a state court as not reasonable in scope, depending upon the state laws.
The rule exempts nonprofits, but the FTC is cagey about it, suggesting some nonprofits may be judged for-profits for the rule’s purposes. In your view, how would large non-profit medical organizations such as religiously-affiliated hospitals be judged?
They are super cagey about providing clarity or specificity as to who would be impacted by this rule versus who is exempt.  Commenters sought specificity and clarity be built into the rule and the FTC refused to provide that specificity, suggesting it would only create confusion.
I should note that while I have heard suggestions that nonprofit hospitals would not be engulfed by this rule, it does not appear that the FTC agrees with that position. The belief that nonprofit hospitals would be exempt stems from that plain reading of the FTCA (U.S. Federal Tort Claims Act). The definition of “corporation” in the empowerment clause of the FTCA provides that it is an entity that is “organized to carry on business for its own profit or that of its members.” Thus, the FTCA specifically excludes nonprofits from the jurisdiction of the FTC. Based on that limitation of jurisdiction, the FTC generally does not have authority over nonprofits under the Federal Trade Commission Act. 
However, the FTC actually responded to this issue of nonprofit health care entities specifically in the release of the final rule and noted their position that under existing law these tax-exempt entities are not necessarily beyond the FTC’s jurisdiction.
Generally speaking, a nonprofit health care system that does not engage in any for-profit business would not be within the jurisdiction of the FTC and not subject to this rule. But the FTC is clearly intending to exert jurisdiction over nonprofits where certain factors are met and therefore, in my opinion, large nonprofit health care facilities and religiously-affiliated hospitals, to the extent that they continue to utilize non-competes, should expect to be spending time and resources defending themselves against the FTC. They may prevail over the FTC’s exercise of jurisdiction but I don’t think they can expect to be free from an action and having to defend themselves. 
This rule may be stayed a long time by lawsuits. If a physician is currently embroiled in a restrictive-covenant lawsuit, what would be their best course of action?
Existing causes of action are an exception from the rule. So the rule itself will not serve as a basis to have such litigation dismissed or provide victory to the physician. However, I think it would be hard to imagine that the FTC’s statements and findings about the impact of noncompetes would have no impact on a court when making a determination. So it is probably an opportune time to discuss a potential settlement with the employer who may not want to take that chance. 
Of course the employer may determine it is better to keep moving forward with the litigation knowing that the outcome of the rule will not determine the outcome of their case and, in the end, the longer the litigation continues the longer the physician is not competing with them.
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