States Take Lead on Health Noncompete Limits With FTC Ban Tossed

A federal judge’s ruling blocking the FTC’s nationwide ban on noncompetes is likely to further spur legislation in states, where lawmakers have seen success in limiting restrictive employment contracts among health-care professionals.

The fate of the Federal Trade Commission’s rule is tenuous after a judge from the US District Court for the Northern District of Texas said this week that the agency lacked legal authority to prohibit nearly all employee noncompetes. An FTC spokesperson said the agency was “seriously considering” an appeal.

Employment attorneys and health policy analysts say proponents of limits on noncompetes in health care are better suited turning to state legislatures to enact changes.

Interest in limiting noncompetes at the state level has grown in recent years, in part to prevent health workforce shortages in regions known to have restrictive noncompete clauses in employment contracts. Otherwise, these clauses can push people out of rural regions and other areas where patients are already facing limited access to health care, according to legislators and policy analysts.

The Texas ruling “could light a fire under some state legislators to take a look at how noncompete policies are affecting workers in their state,” said Michelle Long, a senior policy analyst for KFF’s Program on Patient and Consumer Protections.

State lawmakers who have passed restrictions on noncompetes in the health-care sector have overcome pushback from some of the business groups that opposed the FTC rule, including the US Chamber of Commerce and the American Hospital Association.

California, Minnesota, North Dakota, and Oklahoma ban all noncompete provisions prohibiting workers from switching jobs within an industry, with 10 additional states prohibiting these clauses for certain health-care workers.

Illinois, Louisiana, Maryland, and Pennsylvania each passed legislation this year set to take effect in January 2025 that would limit restrictive employment contracts among health professionals.

Skepticism in the States

Attorneys who counsel health professionals expect a potential FTC appeal of the ruling to be unsuccessful given the US Supreme Court’s recent skepticism toward agency deference on interpreting statutes that are ambiguous or silent on an issue.

In Tuesday’s decision, Judge Ada E. Brown made multiple references to the Supreme Court’s decision in Loper Bright Enters. v. Raimondo, in which justices overturned a decades-old legal doctrine that empowered federal regulators to interpret unclear laws.

The Loper Bright ruling signals the Supreme Court may not view the FTC’s rule favorably, putting more pressure on states to address noncompetes, said Gregory Care, a partner at Brown, Goldstein & Levy LLP who counsels physicians and other health-care providers on employment matters.

“I wouldn’t be surprised if legislators and policymakers” in states “took from this the lesson that if they want to get something done, they need to do it themselves,” Care said in an interview.

The “increased skepticism towards noncompete agreements in some state legislatures and courts,” isn’t likely to go away anytime soon, said Kevin Paule, an associate at Hill Ward Henderson focused on commercial litigation.

Days after the FTC finalized its noncompete rule, Maryland Gov. Wes Moore (D) signed into law bipartisan legislation banning noncompete agreements for health-care professionals in the state with a total annual compensation of $350,000 or less, and limiting noncompetes for those with incomes above that threshold.

In Pennsylvania, legislation signed into law by Gov. Josh Shapiro (D) in July will limit employers from using noncompete agreements to prevent certain doctors, nurses, and other medical professionals who leave a job from practicing elsewhere.

State regulations can also go further than the FTC rule would, said Russell Beck, a business and employee mobility litigator at Beck Reed Riden LLP. There has been uncertainty on whether the FTC’s rule would apply to nonprofit hospitals, which account for roughly half of all US hospitals, according to the American Hospital Association.

“The states were pushing head with legislation to regulate noncompetes, despite the prospect of federal regulation or legislation,” Beck said.

Opposing Forces

Business and hospital groups that have opposed the FTC rule have also been active in advocating against state legislation seeking to limit noncompetes, and that’s likely to continue, attorneys say.

The groups have defended the use of contracts restricting worker movement within an industry, arguing that agreements protect investments companies have made in recruiting and retaining workers and prevent intellectual property and trade secrets from being shared with competitors.

Affiliates of the US Chamber of Commerce, which filed the lawsuit in Texas against the FTC’s noncompete ban, were active this year in opposing legislation tackling contracts for health workers.

The Maryland Chamber of Commerce, for example, argued that noncompete agreements are “an important tool used for staff recruitment and they are critical to fostering innovation and preserving competition,” and that the legislation there “will likely create fewer workforce opportunities and reduce investment in employee education, training, and development.”

The Pennsylvania Hospital and Healthsystem Association opposed that state’s legislation, arguing that it would create unnecessary confusion as the federal policy was still being sorted out.

Chad Golder, the American Hospital Association’s general counsel and secretary, declined to comment on any state-level policy, deferring to state-level hospital associations. He noted, though, that the AHA welcomed Brown’s decision, arguing that the FTC “did not attempt to understand the disruptive impact” its rule “would have on hospitals, health systems, and the patients they serve.”

—With assistance from Chris Marr