But business groups have vowed to challenge the decision in court.
The proposed final rule passed on a 3-2 vote, with the dissenting commissioners disputing the FTC’s authority to broadly ban noncompetes.
Tensions around noncompetes have been building for years. In 2021, President Biden issued an executive order supporting measures to improve economic competition, in which he urged the FTC to consider its rulemaking authority to address noncompete clauses that unfairly limit workers’ mobility. In January 2023, per that directive, the agency proposed ending the restrictive covenants.
While the FTC estimates that the final rule will reduce healthcare costs by up to $194 billion over the next decade and increase worker earnings by $300 million annually, the ruling faces legal hurdles.
US Chamber of Commerce president and CEO Suzanne P. Clark said in a statement that the move is a “blatant power grab” that will undermine competitive business practices, adding that the Chamber will sue to block the measure.
The FTC received more than 26,000 comments on noncompetes during the public feedback period, with about 25,000 supporting the measure, said Benjamin Cady, JD, an FTC attorney.
Mr. Cady called the feedback “compelling,” citing instances of workers who were forced to commute long distances, uproot their families, or risk expensive litigation for wanting to pursue job opportunities.
For example, a comment from a physician working in Appalachia highlights the potential real-life implications of the agreements. “With hospital systems merging, providers with aggressive noncompetes must abandon the community that they serve if they [choose] to leave their employer. Healthcare providers feel trapped in their current employment situation, leading to significant burnout that can shorten their [career] longevity.”
Commissioner Alvaro Bedoya said physicians have had their lives upended by cumbersome noncompetes, often having to move out of state to practice. “A pandemic killed a million people in this country, and there are doctors who cannot work because of a noncompete,” he said.
It’s unclear whether physicians and others who work for nonprofit healthcare groups or hospitals will be covered by the new ban. FTC Commissioner Rebecca Slaughter acknowledged that the agency’s jurisdictional limitations mean that employees of “certain nonprofit organizations” may not benefit from the rule.
“We want to be transparent about the limitation and recognize there are workers, especially healthcare workers, who are bound by anticompetitive and unfair noncompete clauses, that our rule will struggle to reach,” she said. To cover nonprofit healthcare employees, Ms. Slaughter urged Congress to pass legislation banning noncompetes, such as the Workforce Mobility Act of 2021 and the Freedom to Compete Act of 2023.
The FTC final rule will take effect 120 days after it is published in the federal register, and new noncompete agreements will be banned as of this date. However, existing contracts for senior executives will remain in effect because these individuals are less likely to experience “acute harm” due to their ability to negotiate accordingly, said Mr. Cady.
States, AMA Take Aim at Noncompetes
Before the federal ban, several states had already passed legislation limiting the reach of noncompetes. According to a recent article in the Journal of the American College of Cardiology, 12 states prohibit noncompete clauses for physicians: Alabama, California, Colorado, Delaware, Massachusetts, Montana, New Hampshire, New Mexico, North Dakota, Oklahoma, Rhode Island, and South Dakota.
The remaining states allow noncompetes in some form, often excluding them for employees earning below a certain threshold. For example, in Oregon, noncompete agreements may apply to employees earning more than $113,241. Most states have provisions to adjust the threshold annually. The District of Columbia permits 2-year noncompetes for “medical specialists” earning over $250,000 annually.
Indiana employers can no longer enter into noncompete agreements with primary care providers. Other specialties may be subject to the clauses, except when the physician terminates the contract for cause or when an employer terminates the contract without cause.
Rachel Marcus, MD, a cardiologist in Washington, DC, found out how limiting her employment contract’s noncompete clause was when she wanted to leave a former position. Due to the restrictions, she told this news organization that she couldn’t work locally for a competitor for 2 years. The closest location she could seek employment without violating the agreement was Baltimore, approximately 40 miles away.
Dr. Marcus ultimately moved to another position within the same organization because of the company’s reputation for being “aggressive” in their enforcement actions.
Although the American Medical Association (AMA) does not support a total ban, its House of Delegates adopted policies last year to support the prohibition of noncompete contracts for physicians employed by for-profit or nonprofit hospitals, hospital systems, or staffing companies.