A large swath of the healthcare sector may be exempt from the federal government’s proposal to ban noncompete arrangements in employment contracts. Whether this will apply to nonprofit hospitals — which make up half of all the hospitals in the U.S. — isn’t clear, legal experts say.
In a sweeping proposal released Jan. 5, the Federal Trade Commission said noncompete clauses depress worker wages and limit competition. The agency’s proposal would bar future noncompetes and also invalidate existing ones.
The FTC’s proposal is poised to alter the healthcare sector, which frequently relies on restrictive covenants to retain physicians and the patients they treat.
A plain reading of the proposal would suggest that nonprofit organizations are exempt from the draft rule seeking to ban restrictive covenants in employment contracts.
An entity not “organized to carry on business for its own profit or that of its members” is exempt from the rule seeking to ban noncompetes, according to the proposal.
The language also comes from the FTC Act, which gives the agency authority to police unfair competition. Still, the conduct of nonprofits typically falls outside of the FTC’s jurisdiction.
The FTC Act’s nonprofit exemption “applies here as well,” Douglas Farrar, director of the FTC’s office of public affairs, said in an email. However, Farrar did not answer a follow-up question asking specifically whether that exemption would apply to nonprofit hospitals.
Still, Ken Field, an attorney and co-chair of law firm Jones Day's global healthcare practice, said it won’t apply to nonprofit healthcare organizations. Field previously worked for the FTC in the Bureau of Competition.
The American Hospital Association shares the same interpretation of the rule — “that FTC lacks authority in this area,” it said in an emailed statement.
Still, other antitrust attorneys aren’t so sure.
“The scope of the nonprofit exemption itself is not very well settled,” Ben Dryden, a partner at the law firm Foley & Lardner said. Dryden also is vice chair of Foley’s antitrust practice group.
The FTC has brought challenges against nonprofit organizations in the past. In the late 1990s, the FTC sued the California Dental Association over advertisement policies for its dentists. The case, which landed before the Supreme Court, tested the bounds of the FTC’s authority. The court found that the FTC did have jurisdiction over the dental association, a nonprofit entity.
The FTC’s “jurisdictional limitations are much fuzzier than many say,” said Barak Richman, a law professor at Duke University who focuses on antitrust.
The FTC Act and the proposed rule do say entities are exempt if they do not carry on business for their own profit or that of its members.
“But most nonprofit health entities DO carry on business for its members/employees/partners’ profits,” Richman added.