Don’t Panic. Or Don’t Get Your Hopes Up. The FTC’s Proposed Rule Banning Non-competes May or May Not Go Into Effect

James J. Oh

“DON’T PANIC” is perhaps the best advice offered in “Hitchhiker’s Guide to the Galaxy” by Douglas Adams (although some would argue that “always carry a towel” is better). For those who are worried that their restrictive covenants will no longer be enforceable, don’t panic. The FTC’s proposed rule announced on Jan. 5, 2023, banning non-compete agreements may never become final.

Comments on the rule were due to the FTC on March 20, but the FTC extended the comment period to April 19, a sign that the FTC is being inundated with comments.

Which camp is submitting more comments, the “ban the ban” or “adopt the ban” camp? Regardless, with a mandatory 180-day notice period that follows the comment period, the rule cannot go into effect any earlier than mid-October of this year.

Even if the ban wins the popular vote, this FTC, under this administration, will likely declare that it is the will of the people that the non-compete ban be adopted.

A third thing that’s certain — in addition to death and taxes — is litigation to enjoin the final rule. Almost as certain is that the litigation will be filed before a Republican- (Trump-) appointed judge in a circuit with a reputation for being “conservative.” Can you say Texas?

If the case reaches this Supreme Court, the rule will probably be buried six feet under by the legal doctrine de jour, the “major questions doctrine,” which the court recently relied upon to strike down an EPA regulation because the EPA did not have “clear congressional authority” to issue a rule concerning an issue of “great political significance” that would affect “a significant portion of the American economy.”

For those who would like to send non-competes to their grave, don’t get your hopes up.

This prediction won’t make the American College of Emergency Physicians (ACEP) or the American Academy of Family Physicians (AAFP) happy, both of which oppose non-competes for physicians.

In an open letter on March 8, 2023, the ACEP called for the FTC to finalize its proposed rule to ban noncompete clauses in employment contracts, which ACEP asserts “can limit the ability of emergency physicians to practice medicine in their communities and hinder their ability to effectively advocate for their patients.” The AAFP website states its “opposition to restrictive covenants,” which AAFP asserts can disrupt the patient-physician relationship.

In the meantime, what is a healthcare executive to do? Answer: Pay attention to what is going on at the state level.

More state legislatures and state courts, even in states considered to be more “business friendly” than others, have taken up the banner of either banning non-competes or restricting their application in healthcare. Almost half of the states have either statutes or case law that make restrictive covenants affecting direct healthcare workers either illegal or difficult to enforce. Speaking of Texas, a non-compete is enforceable against a physician only if certain requirements are met, including that the non-compete must have a buyout at a reasonable price. In Iowa, healthcare employment agencies are prohibited from including a non-compete in a contract with an agency worker. In New Jersey, non-competes are prohibited in licensed psychologists’ contracts so that New Jersey residents are not prevented from seeing the therapist of their choice. (If you live in New Jersey, you would want to see your own therapist, too.) And, of course, California bans all non-competes, although, interestingly, a recent study found that 31% of doctor contracts in California had non-compete clauses, perhaps for the in terrorem effect.

So, as you watch the non-compete drama play out at the national level, pay attention to the developing patchwork of restrictive covenant law at the state level.

And carry a towel.

James J. Oh is a member of the law firm of Epstein Becker & Green who represents employers in a variety of industries.