Recently, the FTC announced that it would be considering a ban on a type of restrictive covenant commonly known as a “non-compete clause.”

This proposed rule came about after a preliminary finding from the Commission alleged that non-compete clauses “constitute an unfair method of competition,” meaning that they are potentially in violation of Section 5 of the Federal Trade Commission Act. This would apply not only to employees, but to independent contractors, consultants, interns, and volunteers as well.

Needless to say, this would have a dramatic impact on the American healthcare system given how widespread such clauses are in the industry. For context, one multi-state survey from 2018 found that around 45% of primary care doctors are bound by non-compete clauses. Other studies put the number significantly higher.

These restrictions have real-life consequences. For example, at the onset of the pandemic, nurses complained that non-compete clauses were preventing them from working when they were needed most. In their press release announcing the proposed rule, the FTC even went so far as to blame non-compete clauses for rising healthcare prices.

“The evidence shows that noncompete clauses also hinder innovation and business dynamism in multiple ways—from preventing would-be entrepreneurs from forming competing businesses, to inhibiting workers from bringing innovative ideas to new companies,” the Commission wrote on its website. “This ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices—as seen in the health care sector.”

The Commission estimates that a non-compete ban could reduce healthcare spending by $148 billion annually.

While advocates and the FTC itself say that such a ban would benefit both consumers and physicians, group owners and hospital leaders are pushing back against the proposed rule.

In a letter to FTC Chair Lina Khan, the American Hospital Association’s General Counsel and Secretary Melinda Reid Hatton questioned the legality of such a move.

“Even if the FTC had the legal authority to issue this proposed rule, now is not the time to upend the healthcare labor markets with a rule like this,” Hatton wrote.

Hatton then claimed that such a rule “would instantly invalidate millions of dollars of existing contracts while exacerbating problems of healthcare labor scarcity, especially for medically underserved areas like rural communities.”

While Hatton did not provide evidence for his concerns (numerous healthcare workers and professionals have countered that they support the ban on non-compete clauses), he did bring up an important point that could affect the legal rollout of such a policy.

Section 5 of the Federal Trade Commission Act — the portion that would allow the FTC to implement such a ban — says that the FTC only has power to act against “persons, partnerships, or corporations.” A “corporation” is defined as an entity “organized to carry on business for its own profit or that of its members.”

This presents a problem, as the AHA estimated in 2014 that around 80% of hospitals in the United States are given nonprofit status. This includes 58% of hospitals that are private nonprofits and 20% that are operated by state or local governments. While the FTC may pass this ban, the designation of so many hospitals as “nonprofit” may limit how the ban could be enforced.

Even if this issue is resolved, a non-compete clause ban would likely result in further legal challenges. The FTC could be challenged on its authority to pass such a rule at all given that it lacks a clear authorization from Congress to do so — an exercise of the so-called “major questions doctrine” recently reaffirmed in the 2022 U.S. Supreme Court case West Virginia v. Environmental Protection Agency.

“In other words, even if the FTC reviews all the comments it receives and issues a final rule, such final rule will likely be tied up in the federal courts for years to come before it could become effective,” writes law firm Husch Blackwell LLP.

That said, for the time being, the FTC voted 3 to 1 to publish the “Notice of Proposed Rulemaking” about the ban, which is the first step in the FTC’s rulemaking process.

Since the initial announcement, the FTC has voted to lengthen the comment window. This means that the Commission will now accept comments on the proposed rule until April 19th. Information on how to submit comments can be found here.

No matter whether this proposed rule is passed as written, it is sure to face legal challenges. We will follow the situation and keep you updated as it changes.