Last Updated: Apr 25, 2024

PAMED Position: PAMED truly appreciates that the Federal Trade Commission (FTC) rule has elevated the important issue of noncompete clauses and their detrimental effects to consistent patient care to the public’s awareness.  It is important for patients to be aware of how noncompete clauses can affect their relationship with their physician and continued care.

While noncompete clauses have a place for some smaller independent practices, PAMED strongly supports the end of these contracts by large hospitals and massive health systems. Unfortunately, the FTC rule likely does not help physicians working for large health care systems as this rule does not apply to the vast majority of nonprofit entities. The FTC’s jurisdiction covers only for-profit activities.

PAMED has actively been advocating for and will continue to support legislation at the state level to reform the use of noncompete clauses in physician employment contracts.

Background:

In a three-to-two vote, the Federal Trade Commission (FTC) approved a final rule that will ban noncompete clauses for workers nationwide except in limited circumstances. This rule will take effect 120 days following its publication in the Federal Register. The date of publication in the Federal Register is not known currently.

The provisions of the rule include:

• Noncompete clauses are an unfair method of competition in violation of Section 5 of the FTC Act;
  

• Existing noncompete clauses remain enforceable for senior executives only;
  • A senior executive is defined as a worker earning more than $151,164 annually and working in a “policy-making position;”

• Existing noncompete clauses are unenforceable for all other workers;
  • Existing noncompete clauses do not need to be rescinded;

• New noncompete clauses are prohibited for all workers, including senior executives;
  • To comply with the new rule, employers must provide notice of nonenforcement of noncompete clauses to workers;

• State laws that do not conflict with this rule will remain enforceable, but state laws in conflict with the rule will be pre-empted by the rule and be unenforceable.

It is important to remember that the vast majority of non-profit organizations will NOT be subject to this rule as FTC jurisdiction covers only for-profit activities. However, the FTC does claim jurisdiction over non-profit organizations that are deemed to be “profit-making enterprises.” There is a case law that supports this.

To determine whether a non-profit organization is a profit-making enterprise, the FTC employs a two-part test, looking to both (1) “the source of the income, i.e., to whether the corporation is organized for and actually engaged in business for only charitable purposes, and (2) to the destination of the income, i.e., to whether either the corporation or its members derive a profit.”

At least one commissioner, in comments preceding the vote, definitively stated that this rule will not apply to healthcare non-profits. But some medical societies and other healthcare-related non-profits have already been deemed to be profit-making enterprises. Considering the current make-up and philosophical bent of the FTC, it is reasonable to conclude that healthcare non-profits will receive heavy scrutiny as to whether they should be subject to the rule.

This morning, the U.S. Chamber of Commerce sued to prevent implementation of the rule. The Chamber argues that the FTC lacked the authority to issue such a sweeping rule. Litigation and the uncertain timeline of publication in the Federal Register make it impossible to say when, if ever, the rule will actually take effect.

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Media Contact

Myla Merkel, Pennsylvania Medical Society

MediaRelations@pamedsoc.org