What Does the Federal Trade Commission Noncompete Rule Mean for Orthopaedic Practices?

On April 23, in a narrow 3-2 decision, the Federal Trade Commission (FTC) issued a final rule on noncompete practices in the United States. The rule is to be implemented 120 days from publication, setting a start date of Sept. 4. This landmark decision has ramifications throughout medicine that require exploration and thought for practicing physicians and administrators.

Federal ban on noncompetes
This broad, sweeping rule impacts nearly all noncompete arrangements; however, there are some arrangements that are not covered. Specifically, there is an allowance for maintaining noncompetes against “senior executives,” who are defined as meeting both of two criteria: annual compensation in excess of $151,164 and in a policy-making position for the company. Companies may not enter into new noncompetes with “senior executives” but may maintain existing noncompetes. The FTC has clarified that, as it relates to the definition of “senior executives,” most physicians (e.g., department chairs) would not be considered in a position to make hospital-wide policy decisions compared with the role of hospital executives. However, physicians who are partners in a group practice would be considered decision-making executives; therefore, existing noncompetes may remain in effect. Another allowance was granted for noncompetes that arise from a sale of a company.

The final uncovered issue is regarding state law and the enforceability in nonprofit arrangements. As many physicians are employed or managed through nonprofit organizations, the extent of FTC oversight on these organizations is paramount. In the rule, the FTC noted that some nonprofit organizations may be subject to the noncompete ban if they are truly functioning as a corporation. How might a nonprofit be labeled as a corporation? They would do so by functioning as a business intended to drive profits to itself or its members. The FTC further discussed that in order to continue to be labeled as a nonprofit (and therefore exempt from the ban), those organizations must ensure that “there be an adequate nexus between an organization’s activities and its alleged public purposes, and that its net proceeds be properly devoted to recognized public, rather than private, interests.”

Despite significant contemplation and effort from the FTC, this decision is sure to be litigated for an extended period of time. Many legal experts anticipate delayed implementation and likely injunctions as large employers, such as health systems and academic institutions, question the scope and legality of the rule. There are several legal and constitutional challenges to the rule, which may lead to its invalidation, in whole or in part, and are beyond the scope of this article. Some of the most prominent challenges come from the American Hospital Association and the U.S. Chamber of Commerce.

In a significant setback to the FTC’s efforts to regulate noncompete agreements, on Aug. 20, Judge Ada Brown of the U.S. District Court for the Northern District of Texas struck down the FTC’s rule prohibiting such agreements, in response to a lawsuit brought by the Chamber of Commerce. The court found that the FTC had overstepped its congressionally delegated authority and that the ban was arbitrary and capricious. Judge Brown rejected the FTC’s argument for limited application of the ruling, instead prohibiting the agency from enforcing its rule nationwide. This decision effectively halts the momentum that had been building for a federal ban on noncompete agreements, leaving their governance to state and local laws for the foreseeable future.

State rulings
Although uncertainty remains regarding the federal rule, states are increasingly taking up the issue (Fig. 1). Currently, four states fully ban noncompete language, including California, Minnesota, North Dakota, and Oklahoma. Another 33 states and the District of Columbia restrict noncompetes in some way. Recently, Pennsylvania has banned new noncompetes in healthcare while expiring existing noncompetes when they come due. Rhode Island had a narrower ban focused on nurse practitioners. Maryland’s new healthcare noncompete bill focuses on income: Healthcare workers making more than $350,000 can have a noncompete, but it is limited to 1 year and 10 miles from the primary place of employment, whereas those making less than $350,000 cannot have a noncompete. Many legal experts believe that state laws, unlike federal rules, are likely to pass any legal challenges, as issues of noncompete laws are felt to be the domain of the states.

So, what should orthopaedic surgeons and practice administrators be considering today in light of the changing legal environment? Physicians in most states will likely still be under noncompetes for the foreseeable future. Most legal scholars believe that the federal law will be overturned, and physicians will need to turn to their state legislatures for relief. This process provides time for physicians and administrators to consider options in the unique legal environment of their practices. Many groups have already begun to move away from noncompetes and toward other economic incentives to protect group interests. These alternative options may include a penalty for leaving the group within a certain time period that equals the amount of money spent or invested in bringing a surgeon to the market. In addition, many groups have ownership in ancillary businesses, such as ambulatory surgery centers, and these entities typically have noncompete language based on ownership that has not been challenged or disrupted by noncompete employment language. Given the uncertainty and complexity of the legal environment regarding noncompetes, physicians and administrators alike will need to obtain local counsel that is aware of not only federal implications but also the unique legislation and regulation in that community.

The issue of noncompetes is contentious among physicians. Many would like to see the practice go away. After all, the attorneys who write the noncompetes are legally and ethically unable to sign or enforce noncompetes in their own profession. Others, such as private practicing partners, need noncompetes to protect their investments in new graduates or surgeons moving to the community. It is extremely expensive, both in terms of time and money, to bring in new surgeons, and there must be mechanisms in place to provide security to make those difficult decisions and investments. Ultimately, the federal rule likely will be decided by the Supreme Court, but state legislators are increasingly interested in addressing noncompetes locally. AAOS is here to support all orthopaedic surgeons regardless of specialty or practice type and will continue to educate its membership on the options available to them regarding complicated topics such as noncompete language. Stay tuned to emails from AAOS and future articles in AAOS Now for updates as new laws arise in state legislature, as appeals and a Supreme Court decision appear to be on the horizon for the federal rule.

Adam J. Bruggeman, MD, MHA, FAAOS, FAOA, is chair of the AAOS Advocacy Council and a council liaison to the AAOS Now Editorial Board.