Episode 33: Let’s Talk Compliance: What the July 3rd Ruling on FTC Non-Compete Ban Means for the Health Care Industry

In this episode, Benjamin Dryden, vice chair of Foley’s Antitrust & Competition Practice Group and David McMillan, managing principal of consulting and chief financial officer at PYA, discuss the recent July 3^rd ruling on the U.S. Federal Trade Commission’s (FTC) Non-compete Ban and how this will affect the health care & life sciences industry.

For more information regarding the “Let’s Talk Compliance” podcast series, please click here.

Please note that the interview copy below is not verbatim. We do our best to provide you with a summary of what is covered during the show. Thank you for your consideration, and enjoy the show!

Jana Kolarik

Hello, and welcome to the Let’s Talk Compliance podcast series on Health Care Law Today, presented by Foley & Lardner and PYA. I’m your co-host, Jana Kolarik, a partner in Foley’s Health Care Practice Group.

Angie Caldwell

And I’m your other co-host, Angie Caldwell, consulting principal with PYA. We’re excited to have you join us today. Before we begin our show, we want to remind you to subscribe to Health Care Law Today, either on iTunes or your preferred podcast app. Please visit healthcarelawtoday.com or pyapc.com.

For today’s show, Ben Dryden, the vice chair of Foley’s Antitrust and Competition Practice Group and David McMillan, PYA’s managing principal of consulting and chief financial officer, are discussing the July 3^rd ruling on the FTC’s Non-compete Ban and how this will affect the health care industry. I’m going to turn it over now to Ben and David to introduce themselves.

Ben Dryden

Thank you Angie and Jana. I am Ben Dryden. I’m a partner in the Antitrust & Competition practice group of Foley & Lardner LLP. I’m based in Washington D.C. My practice focuses on the antitrust issues that arise in mergers and acquisitions, as well as providing day-to-day and event-driven antitrust counseling for clients in the health care sector with a particular focus on antitrust issues involving labor and employment.

David McMillan

Thank you Ben. And I’m David McMillan, a principal with PYA located in Knoxville, Tennessee. Ben and I are happy to be with you here today to continue our previous conversation where we were talking in advance of the July 3rd ruling regarding the FTC’s Non-compete Ban. And so now we want to sort of unpack where we are on the other side of a recent court decision. So Ben, can you begin by telling us who made the ruling, what did we hear? And maybe unpack a little bit for us a summary of what we heard from the courts.

Ben Dryden

Happy to. So just to contextualize what the July 3rd ruling was, it was a preliminary ruling, and the idea is if you are challenging a regulation like the FTC’s Non-compete Ban, you can go into court and say, “I need emergency preliminary relief to be granted before the court reaches the ultimate merits of the case. In other words, before the court rules on every last issue that resolves the case in its finality, I need the court to issue emergency preliminary relief.” And that’s a fairly extraordinary remedy and it is a high barrier to make that showing to establish that you’re entitled to preliminary relief.

That’s what the plaintiffs did. They said this Non-compete Rule is going to impose irreparable injury on the business community by forcing businesses to expend money and compromise their ability to enforce or enter into non-compete agreements. So court, we need you to issue a preliminary injunction barring the enforcement or implementation of the Non-compete Rule before the court reaches the ultimate merits and issues a final decision that resolves every last issue in the case. So that’s what the July 3rd ruling was.

The ruling went before US District Judge Brown out of the Northern District of Texas in Dallas, and Judge Brown ruled that preliminarily, based on her review of the record so far, she believes it is likely that the plaintiffs who are challenging the Non-compete Rule are going to establish that the Non-compete Rule is unlawful. And the judge found two separate grounds for reaching that determination.

One, the judge said that just looking at the language of the FTC Act, the law that gives the FTC the power to take any action, she said the FTC Act does give the FTC some ability to make rules with respect to unfair methods of competition. But examining the history and the structure of the Act, she said, they can’t make substantive rules. They can’t define certain sets of business practices as substantively constituting unfair methods of competition. Rather, the FTC’s power to make rules of procedure are truly just procedural rules—“housekeeping rules,” she called them, rules of practice and rules of procedure—not actual rules defining what is or is not an unfair method of competition.

So in the first instance, the judge said, the FTC just does not have substantive rulemaking authority, which really is what the plaintiffs who are challenging this rule are trying to establish. They care about the Non-compete Rule, but they care more broadly that the FTC is not a legislature. The FTC should not be in the business of making substantive rules; rather, they’re a law enforcer. So on the big issue that the plaintiffs are trying to prevail on, it was a favorable ruling for the plaintiffs.

The judge also said, even looking specifically at the Non-compete Ban, that ban is likely to be arbitrary and capricious, meaning the agency didn’t properly consider other alternatives and it didn’t engage in a sufficiently reasoned decisionmaking to support a broad categorical ban on non-competes from coast to coast.

So based on those two preliminary findings, the judge said the plaintiffs are likely to succeed on the merits in this case. “I find preliminarily that the plaintiffs are probably going to win this case.” But having reached that preliminary determination, that’s just one part of the puzzle. The court then has to pivot to, okay, so what’s the remedy for that? What can the court in a preliminary order do to prevent further implementation of this rule? And the court said that the plaintiffs had not made a sufficient showing at this preliminary stage to justify broadly invalidating the Non-compete Ban for every single business in the country. Rather, the judge said, “I find that the plaintiffs are likely to prevail, so I’m going to prevent the FTC from enforcing the non-compete Rule or implementing the Non-compete Rule with respect to the plaintiffs.”

So what that means in practice is, one of the plaintiffs is the US Chamber of Commerce. The court’s order prevents the FTC from suing the US Chamber of Commerce in the US Chamber of Commerce’s capacity as an employer of employees, some of whom are presumably bound by non-competes. So if, say, some employee of the US Chamber of Commerce has a non-compete agreement and the Chamber of Commerce tries to enforce that, the FTC is enjoined from going after the Chamber of Commerce for enforcing a non-compete against the Chamber of Commerce employee. But for any run-of-the-mill business in the country that may or may not even be a member of the US Chamber of Commerce, the court’s order does not apply to that company. The court’s order only applies to the plaintiffs in this case.

Now that could certainly change, and in fact we’re recording this on Thursday, July 11th, just yesterday, Wednesday, July 10th, the plaintiffs moved the court for reconsideration to say no, this was not the proper remedy. The proper preliminary remedy needs to be more broad. It needs to be universal. It’s got to be a preliminary remedy staying the implementation of the Non-compete Ban with respect to every business in the country because otherwise what are we achieving here? But as it stands right now, the court’s order only applies to the named plaintiffs in that case. It’s a pretty surprising turn of events.

David McMillan

That is interesting, Ben. So if I could quickly summarize, and you keep me honest here in my summary, that number one, this was a temporary ruling. Is that a correct statement?

Ben Dryden

It’s temporary. It’s pending a final decision on the merits, which the court has said will come on or before August 30th.

David McMillan

Okay. Secondly, the judge ruled that the FTC can’t make substantive rules, right?

Ben Dryden

Correct.

David McMillan

And as a result, the plaintiffs are likely to prevail on the merits of their case and therefore they enjoined the FTC from suing the US Chamber of Commerce from pursuing any non-competes it may have with its employees until such time that the ruling is final. So if you’re not the US Chamber of Commerce, you’re still sitting with an FTC ban that has not been struck down yet by the courts. But if you were in Vegas laying odds, this temporary ruling tends to suggest that it will be struck down when the court gets around to issuing its final ruling. We don’t know that for certain, but it seems that’s the way the compass is pointing. I know I’m not going to put you on the spot to make that prediction, but can you just give the listeners any thoughts from your perspective about whether you believe the court will respond to this latest, latest motion filed by the plaintiffs and or where we go from here?

Ben Dryden

Yeah, so a couple of reactions. One is I agree that the compass is pointing in the direction of the court ultimately issuing a broader ruling than the narrow ruling that issued on July 3rd. It’s still unclear whether a broader ruling would apply truly universally, and if it would be a categorical order that the Non-compete Rule is no longer in effect and the remedy would be vacating the Non-compete Rule in its entirety with respect to any business or any employee in the entire country. That’s certainly what the plaintiffs want to get. But there’s some footnotes and discussions and just reading between the lines in the court’s opinion, they stake out the possibility of a slightly narrower middle ground whereby the court might just order that the Non-compete Rule is vacated with respect to companies that are bona fide members of the plaintiffs.

So the plaintiffs are, there’s one individual business, it’s a tax preparation firm in Texas. That tax preparation firm is going to be able to enforce its non-competes. Other than that one specific business, the plaintiffs are the US Chamber of Commerce, the Business Roundtable, the Texas Association of Business, and the Longview, Texas Chamber of Commerce. It is possible that the court might order that the Non-compete Ban is only vacated with respect to companies that are bona fide members of those four trade organizations. And I will abstain from handicapping what the likelihood is of that outcome. But there is a possibility that businesses, to take advantage of an ultimate decision, will need to, if they’re not currently members of, say, the US Chamber of Commerce, they might have to join and become dues-paying, bona fide members of the US Chamber of Commerce to take advantage of a broader ruling. But we’ll know more at the latest by August 30th. Between then and now, the court, as I’ve mentioned, has been asked to, on an expedited basis, reconsider its ruling and the plaintiffs have asked for a decision by Wednesday, July 17th on whether to amend the scope of the preliminary order.

It’s also possible that the Fifth Circuit gets involved and this case gets appealed, because a preliminary injunction can be appealed even while there’s still litigation going on at the trial court. So this can still go in several different directions.

The other piece to this is there’s another lawsuit pending in Pennsylvania where there was a hearing just yesterday before Judge Hodge. And Judge Hodge is a Biden appointee, whereas Judge Brown in Texas was a Trump appointee. Judge Hodge at the hearing seemed fairly skeptical of the plaintiff in that case’s arguments challenging the Non-compete Rule. So there is a distinct possibility that we have one federal court, in Texas, that issues a relatively broad ruling, invalidating or enjoining the enforcement of the Non-compete Rule. But then we have the conflicting decision from another federal court, in Pennsylvania, saying that the Non-compete Rule is valid. And this is a chaos scenario that creates a lot of uncertainty for a lot of businesses.

David McMillan

Wow, that’s really interesting. Thanks for sharing that additional context, Ben. At the risk of definitely getting outside of my lane, not being an attorney, I wanted to go back for just a moment to the statement in the ruling about the FTC not having the authority to make substantive rules.

Ben Dryden

Sure.

David McMillan

You mentioned in your comments the FTC can’t create legislation. Many of us have been reading about some of the decisions being handed down in various courts across the country since we last spoke. One, of particular import was the Supreme Court’s decision recently as they contemplated the impact of the Chevron decision from 1984. So, is there any linkage between that statement made by Judge Brown that the FTC can’t make substantive rules, in essence can’t put itself in the position of creating legislation, and what we’re trying to process in light of the Supreme Court’s decision, which happened after our last podcast as well, with respect to that 1984 Chevron precedent?

Ben Dryden

There’s absolutely a connection there. In fact, the Supreme Court’s decision reversing the Chevron framework, that decision was Loper Bright Enterprises vs. Raimondo. The judge in Texas cited that decision even though the ink was barely dry on the decision, the judge cited that as authority to help support her conclusion that the FTC does not have substantive rulemaking authority. I’ll say it’s an indirect connection.

The concept of Chevron is if the Congress passes a law that is ambiguous and an executive agency is charged with administering or interpreting that law, then Chevron gave that executive agency the ability to make reasonable inferences and interpretations of any ambiguity in the congressionally enacted legislation. That’s an issue here, because what we’re talking about is a statute that has a relatively vague provision in it that gives the FTC the ability to adopt rules of practice and procedure.

And so, there was always an atmospheric argument that if there’s some ambiguity in whether Congress has given this power to the FTC, then that ambiguity, it is reasonable for the FTC to interpret that ambiguity in the way that the FTC finds will best serve its purpose of preventing unfair methods of competition. But it’s an ancillary issue, and the court really didn’t have to make a Chevron determination, because the court just looked at the statute and said, “Hey, I’m reading the statute just as a judge reading a statute, and there’s not an ambiguity in here for me to interpret. Just based on the clear structure of the statute the FTC does not have the ability to just write laws for itself.” And so the court wasn’t squarely faced with the Chevron issue, but these things are all very interconnected.

David McMillan

Interesting. Thank you for connecting those two dots for many of us who were struggling to keep up with what’s coming down from our judiciary branch right now and trying to navigate, especially in our world of health care, which as we all know has a substantive body of regulation within which to navigate. It helps us all to better understand what we’re hearing. As we move from this initial ruling to what’s next, do we have any advice to give our listeners that will help them navigate the here and now? It’s easy enough for us to say, well, the latest motion expects or asks for some clarification by the 17th, and that Judge Brown said that they would have the complete ruling done by the 30th. And it’s easy enough for us to say, oh, that’s just a couple of weeks or six weeks away. But in the meantime, employment situations, employment matters come and go daily and folks are being recruited and hired and folks are leaving and the world continues to turn.

So is there any advice or thoughts that you would want to share with our listeners as they try to navigate this very uncertain time they find themselves in as an employer?

Ben Dryden

Yes. A few practical pointers come to mind. And this all comes from just the high-level lay of the land that we seem to be drifting in a direction that will result in a relatively broad order vacating the FTC’s Non-compete Ban. But we don’t know that that’s going to be the case. And the scope of the ultimate remedy really is unclear and businesses should care not only about, “Am I going to get sued by the FTC for an unfair method of competition?,” but what businesses really care about is, “If I have a non-compete with my employee and my employee breaches that, can I successfully enforce my non-compete against that employee? Or, is that employee going to be able to tell a court that the non-compete agreement is void for public policy because the Federal Trade Commission has found it to be an unfair method of competition?”

So I unfortunately think that businesses need to assume that there’s going to be some holes in the ultimate order that the court adopts. And we can’t just assume that this Rule is going to be broadly invalidated. It really might be broadly invalidated; that’s a distinct possibility. But until we see it in writing, we need to assume that some vestige of the FTC’s Non-compete Ban is going to survive.

So what do you do with that? I have a couple ideas. One is the first thing that would be required if the Non-compete Rule is to stand, either in whole or in part, the first action that’s required is that businesses are required under the FTC’s Non-compete Rule to affirmatively notify current and former employees who are subject to non-compete agreements and give them notice that their non-compete agreements are no longer going to be enforced. So that notice has to be made by September 4^th, 2024.

The court, again, will issue an order no later than August 30^th, so a few days before the deadline to give notice. But it’s going to take some time to just compile the contact list to figure out who are the employees, the current and former employees who are subject to non-compete agreements, and what is the last known mailing address or email address or cell phone number to allow us to give the notice to those employees if it turns out that we are required to give that notice. So I would say between now and let’s say August 30^th, businesses should start to undertake that effort to compile the information of who are the employees who are subject to non-competes and what is their last known contact information? I wouldn’t send out any notice until after August 30^th, let’s see what the court’s ultimate ruling is, but it’s going to take some time to compile that information. So we should get the ball rolling on that information compilation now.

The other thing I would say is, and again this is something that could probably wait until after August 30^th but before September 4^th, is businesses might need to join the US Chamber of Commerce. If it turns out that the judge’s order only applies to bona fide, dues-paying members of these plaintiff associations, then that’s going to mean if you want to enforce your non-compete agreements, you have to be a bona fide, dues-paying member of the US Chamber of Commerce. So I’m not going to say write a check to the Chamber of Commerce immediately, but be prepared to do so in short order after August 30^th if that’s the direction that the court takes.

The last point that I would make — and this is just, there’s so many issues to unpack in the Non-compete Rule. This is one we haven’t spoken about yet, but there’s a big exception in the Non-compete Rule that is relevant to this audience, the listeners of this podcast, which is that due to probably an historical accident, the Federal Trade Commission doesn’t have jurisdiction to prevent unfair methods of competition against bona fide nonprofits.

And so, to the extent listeners of this podcast represent a not-for-profit health care system, that not-for-profit health care system falls outside the FTC’s jurisdiction on this issue. Now sometimes there’s some wrinkles to that or complications to that. The classic example is you have a not-for-profit health care system that’s the parent organization, but it has set up a for-profit medical group subsidiary, which is the vehicle for employing physicians or other caregivers. If there’s a for-profit legal entity that is the employer of record, then that for-profit legal entity probably is subject to the FTC’s jurisdiction. And the Non-compete Rule probably will apply to that entity. But for listeners who represent or are members of true, bona fide not-for-profits, where every employer of record within the corporate hierarchy is a bona fide not-for-profit, you can sit tight because the Non-compete Rule doesn’t apply to those types of organizations, due to an historical error in how the FTC Act was drafted.

David McMillan

Well, that is a fascinating tidbit and likely very important for a number of our listeners; to make sure that they comprehend that and understand it. And just to reiterate the point, just because the parent corporation is nonprofit, the exception that prevents the FTC from having jurisdiction over nonprofits would not extend to any for-profit subsidiary of that nonprofit, to the extent that for-profit subsidiary was an employer of record. Should the FTC ban on non-competes be upheld through the judicial process, that for-profit subsidiary would still be subject to that ban. I just want to make sure that I said that correctly and so that our listeners hear that a couple of times.

Ben Dryden

Yeah, you said that correctly. I should say that the parameters of where the FTC’s jurisdiction begins and ends with respect to nonprofits and for-profits is very hazy. And so I think the line that if it’s a bona fide not-for-profit parent, but it has a for-profit subsidiary, I think that line is sound. That’s certainly the position that the FTC has taken publicly that, in that case, the FTC does have jurisdiction over the for-profit subsidiary. But these issues have not really been litigated and there’s sometimes unique facts and unique cases that need to be considered.

The other situation that comes up with some regularity is you have a bona fide, not-for-profit health care system that contracts with a staffing company, and the staffing company is actually providing locums or traveling nurses or what have you. If the staffing company is a for-profit — which, they all are for-profits — in that case it could be a not-for-profit hospital, but the doctor’s employer is the for-profit staffing company, and in that case, the non-compete agreement between the staffing company and the doctor or the nurse or whoever is presumably subject to the FTC’s authority.

David McMillan

Interesting. Thank you for that clarity as well because as we all know, especially since the pandemic, the use of staffing companies such as travelers for clinical caregiving has increased dramatically. And so I’m sure a lot of our listeners find themselves in that particular circumstance. So Ben, anything else that we want to make our listeners here aware of as we continue to wait for the courts to clarify this temporary or initial response that we received on July 3^rd?

Ben Dryden

I don’t know how satisfying of a conclusion this is going to be for listeners, but we are really in a chaos scenario here where it seems quite plausible that we’ll have one decision from one federal court that conflicts with another decision from another federal court. The one federal court that is likely to rule that the Non-compete Ban is illegal, it’s unclear what remedy is going to be imposed there and how many businesses will be able to take advantage of that remedy. So this remains a fast-moving situation where there’s briefing, there could be emergency appeals or could well be a conflict between one court and another court. So this is one to just really stay tuned on, but we unfortunately do have to assume the worst and be prepared for the possibility, even if it’s a small possibility, but be prepared for the possibility that this Non-compete Rule gets implemented come September 4^th.

David McMillan

So just to remind our listeners, if you’re an employer who would otherwise be subject to the FTC’s Non-compete Rule, it’s best to go ahead and be making that listing of current and former employees and their last known point of contact. Having that pulled together just in case you do need to make that notification to be compliant with whatever decision comes down with respect to the ban. So that was good advice and I wanted to repeat it for our listeners as they think about the next few weeks and what they need to be doing.

Ben Dryden

That’s right.

David McMillan

Well, in our first episode, Ben, you made the comment that, prior to this ruling, employers were faced with this patchwork of state law for those employers who have employees in multiple states, and that those employers have to navigate this patchwork of state regulation as it relates to non-competes or other types of restrictive covenants and employment agreements. It sounds like all we’ve done is added another layer of uncertainty and patchwork at the federal level to that existing state regulation. And so, like a lot of difficult situations, this seems to be getting more complex before it gets easier. We’ll hope that there’s something easier on the other side of August 30th, but we’ll prepare as if there isn’t. Is that a fair statement?

Ben Dryden

That’s fair. What I’ll say is the only solution to the complexity and the patchwork and there being 46 different sets of rules across the country, the only solution there is a federal solution, a uniform rule of non-competes. And so it’s a question whether the FTC is the proper source of that rule or instead whether that rule needs to come from Congress. And I think just to tie everything up, given what the Supreme Court said in the Loper Bright case, if there’s a solution to be had here to achieve federal uniformity on non-competes, the onus is on Congress to make that happen.

David McMillan

Well, that’s well said, Ben. And so for our listeners, we hope you’ll stay with us. Ben and I will be back as we hear more from our judicial system and as we learn more about the forthcoming decisions. As Ben has already referenced, we’ll be back to unpack that with you as those are known. We hope that you will join us again to hear Ben’s perspectives on those new rulings. Obviously, he is an expert whose counsel in this area is valuable, and we’re happy to have the opportunity to provide these particular installments of Let’s Talk Compliance in the midst of what Ben referred to as chaos. So stay tuned. We’ll be back with you just as soon as we have some more clarity. We thank you for listening again today, and now we’ll turn this back over to Angie and Jana. Thanks so much, Ben.

Ben Dryden

Thank you.

Jana Kolarik

Thank you, Ben and David for another great discussion. We appreciate you taking the time to join us today. We want to thank our listeners for joining our Let’s Talk Compliance podcast series with Health Care Law Today, your connection to timely legal updates in the health care and life sciences industry. We encourage you to subscribe to this podcast, and visit Foley’s Health Care Law Today blog at healthcarelawtoday.com, and pyapc.com. If you liked this show, don’t forget to subscribe and be sure to rate us five stars. Until next time, I’m Jana Kolarik at Foley & Lardner.

Angie Caldwell

And I’m Angie Caldwell with PYA. Thanks so much for listening.