Texas Judge Strikes Down FTC Noncompete Ban Nationwide

A Texas federal judge on Tuesday struck down the Federal Trade Commission’s (FTC’s) ban on noncompete agreements in employment contracts, holding that the ban violates the Administrative Procedure Act (APA) and exceeds the agency’s statutory authority.

The ruling, essentially a win for employers like hospitals and a loss for medical workers, comes just 15 days prior to the ban’s effective date of Sept.4.

Prior Ruling

Judge Ada Brown of the U.S. District Court for the Northern District of Texas had already ruled against FTC in Ryan LLC v. Federal Trade Commission last month. Brown preliminarily enjoined the noncompete ban but only with respect to the case’s plaintiffs and plaintiff-intervenors. Her Aug. 20 decision, however, sets the regulation aside entirely, as the APA “does not contemplate party-specific relief,” she wrote.

Background

The FTC proposed the rule in April, stating that noncompete clauses suppress wages and constitute an unfair method of competition. The agency estimated that about 20% of U.S. workers (approximately 30 million people) are bound by a noncompete agreement.

The FTC’s ban would have covered all existing and new noncompete agreements for U.S. workers, with exceptions for certain industries (airlines, financial services, and nonprofits). In addition, it would have prohibited employers from creating new noncompete agreements with “senior executives,” defined as people earning more than $151,164 annually who are in a “policymaking position.”

The rule would have also required employers to provide notice to current and former workers that their noncompete clauses are no longer in effect.

The FTC’s noncompete ban targeted contractual clauses that apply to an estimated 1 in 5 U.S. workers by the agency’s own estimates. The rule would have allowed noncompete agreements with certain senior executives prior to the rule’s effective date to remain in force while rendering all other noncompetitive agreements unenforceable.

A Mixed Bag for The Healthcare Industry

The #noncompeteban was expected to help #physicians, nurses and other #medical workers locked into restrictive contracts by making it easier to change jobs and potentially cause wages to increase.

Roughly 35% to 45% of doctors are bound by noncompetes, according to the American Medical Association.

However, there were lingering questions about the ban, including whether the FTC had legal authority to promulgate it, whether it would apply to nonprofit hospitals and how it would affect M&A activity, physician shortages and recruitment efforts, especially for smaller regional systems.

The American Hospital Association and the Federation of American Hospitals filed an amicus brief in July urging the court to vacate the final rule.

The hospital groups had pushed the FTC to limit the reach of its authority specifically for the healthcare industry. Pointing to hospitals registered under section 501(c) of the Internal Revenue Code claiming tax-exempt status as nonprofits, the AHA argued that these entities are outside the FTC's jurisdiction — a claim the FTC refutes.

AHA General Counsel and Secretary Chad Golder described the noncompete rule as a "breathtaking assertion of regulatory power" by three unelected commissioners who "did not attempt to understand the disruptive impact it would have on hospitals, health systems and the patients they serve."

FTC Next Steps

While the FTC’s blanket ban has now been struck down and employers nationally can continue using noncompete agreements that comply with existing state-specific restrictions, the ban might be resurrected if the FTC appeals, or even seeks an emergency order from the appellate court to let the rule take effect as scheduled while the appeal plays out.

If the FTC does push ahead with an appeal, it would go to the Fifth Circuit Court of Appeals to be heard. Appeals on district court decisions are often a lengthy process.

The next step after that would be a potential visit to the Supreme Court, which has taken direct aim at the regulatory state in recent years and is likely a hostile environment for any attempt by the FTC to wield such power.

Summary

The rule eliminates, for now, the uncertainty that has paralyzed the creation of non-competition provisions affecting workers other than senior executives. In the absence of the rule, non-competition provisions, provisions limiting the right to solicit clients to a competing business, and other provisions that function as non-competition provisions, will again be governed by applicable state and local laws as opposed to the FTC's one-size-fits-all overreach.

The Physician's Advocate in Payer Contracting

CodeToolz is about keeping insurance payers accountable. Most practices are not getting the rates required to keep up with inflation. If you haven’t negotiated your reimbursement rates in the last three years, you’re leaving money on the table.

We Bring 30 Years of Successful Negotiations with Payers

Contact Us Today (512) 787-1852 or Schedule Your Free Consultation / Demo here.