On January 5, 2023, the Federal Trade Commission (FTC) published a notice of proposed rulemaking (NPR) for a non-compete clause rule. The NPR, if approved as published, would ban as an unfair method of competition all non-compete clauses between an employer and workers in all industry sectors throughout the country. The NPR might also extend to other restrictive covenants in an employment agreement if the covenants hamper post-employment re-employment. Upon the NPR’s adoption, an employer would be obligated to give employees written notice of recission of existing non-compete clauses.
The NPR has a narrow exception from the general prohibition for the sale of a business if the seller owns at least 25% of the business sold.
The NPR is likely to be challenged as being promulgated without authority under Section 5 and 6(g) of the Federal Trade Commission Act. In addition, since the NPR will regulate a significant portion of the U.S. economy, will be of great political significance, and will intrude in an area that has been the domain of state law, the NPR will also likely be challenged under the Supreme Court’s “Major Questions” doctrine. Finally, the NPR may run afoul of the prohibition against congressional delegation of its legislative power to an agency without an intelligible principle to which the agency must conform.
In the healthcare industry, there will be many unintended consequences if the rule is adopted. Several examples are: (i) physician equity transactions rely upon non-compete clauses to maintain the economic integrity of the participating physicians. The physicians are the economic engine that drive the equity transaction; and (ii) in a consolidated healthcare industry, large numbers of physicians are employed by “Friendly PCs” controlled by non-profit healthcare systems. All the physicians in their employment agreements are bound by non-compete clauses, which would be rescinded under the NPR because the Friendly PCs are profit-making entities subject to the NPR.
As a result of the potential legal challenges, the road to adoption of the NPR is long and uncertain. In the interim, non-competes should be narrowly crafted to protect the employer’s legitimate interest and be reasonable in duration and geographic scope.