QUESTION:
I saw in the August 22, 2024, edition of the HLE that the FTC regulations effectively outlawing restrictive covenants were invalidated by a district court in Texas.  Does that ruling apply in the entire country and did it have anything to do with the Supreme Court’s decision overruling the Chevron Doctrine?

OUR ANSWER FROM HORTYSPRINGER ATTORNEY HENRY CASALE:
The Federal Trade Commission issued final rules that were to go into effect on September 5, 2024 that would: (i) ban restrictive covenants in new employment agreements; (ii) permit a restrictive covenant in an acquisition; (iii) require employers to rescind covenants currently in effect; and (iv) not directly prohibit non-solicitation covenants, but a non-solicitation covenant would have been difficult to enforce under the final rules.

The FTC toiled mightily on these rules.  It was reported that the FTC received nearly 27,000 comments on the proposed rules.  According to a letter from the FTC that was sent to House Judiciary Committee Chairman Jim Jordan (R-Ohio), that was obtained by Bloomberg Law under the federal Freedom of Information Act, it was also reported that by late February 2024, the FTC had spent about $500,000 on this rulemaking effort and at that point, 47 agency employees, contractors, advisers and consultants had spent more than 6,000 hours on the rulemaking.

It is also interesting to note that the FTC was not alone in its opposition to restrictive covenants and that the Attorneys General from 18 states wrote a letter in support of the FTC’s proposed rules.

But all of that work was for naught, because after the rule was promulgated in final form, but before it could go into effect on September 5, 2024, as we reported on August 22, those rules were invalidated nationwide by U.S. District Court for the Northern District of Texas In Ryan LLC v. Federal Trade Comm’n, No. 3:24-CV-00986-E (N.D. Tex. Aug. 20, 2024).

Interestingly, the court did not discuss the demise of the Chevron Doctrine directly.  However, the district court cited the U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, No. 22-1219 (U.S. June 28, 2024), the decision that overruled the Chevron Doctrine, several times throughout its opinion.

The district court concluded that the text and the structure of the FTC Act did not confer substantive rulemaking authority on the agency with respect to unfair methods of competition and so the FTC exceeded its statutory authority in promulgating the non-compete rule.

In addition, the district court found the FTC’s “lack of evidence” as to why they chose to impose such a sweeping prohibition instead of targeting specific, harmful noncompete covenants, rendered the rule arbitrary and capricious and beyond the scope of the FTC’s statutory authority.

Yes, the district court had the authority to invalidate the rule nationwide.  However, this decision does not affect the FTC’s ability to challenge a restrictive covenant on a case-by-case basis, nor does it affect state law on restrictive covenants.  But since FTC actions are likely to be few and far apart, that leaves the issue of the enforceability of a restrictive covenant to be a matter of state law.

However, the state law on restrictive covenants varies from state to state.  You also need to be aware that many states are currently looking at this issue and reconsidering whether they want restrictive covenants to be enforceable in that state.

Case in point, Pennsylvania just passed a law called “The Fair Contracting for Health Care Practitioners Act” (also known as Act 74) which will go into effect on January 1, 2025.  This new law significantly changes the law in Pennsylvania with regard to the ability of an employer to enforce a restrictive covenant with a physician, CRNA, CRNP or PA.

For example, under this new law, an employer may enforce a noncompete covenant if the length of the noncompete is no more than a year, provided that the health care practitioner was not dismissed by the employer.  So, if the employer ends the employment relationship, the otherwise permitted one-year restrictive covenant is rendered unenforceable.

The new law does include an exception that permits a restrictive covenant in an acquisition.  The law also permits an employer to include a term in its employment agreements that will allow the employer to recover reasonable expenses that are directly attributable to the employee and are accrued within three years prior to separation UNLESS the employee’s separation from employment is due to dismissal by the Employer – apparently even if the dismissal is for cause.  The employer can also recoup costs that are related to relocation, training and establishment of a patient base, regardless of how the employment relationship ends.  But these costs must be amortized over a period of up to five years from the date of separation.  There is also a patient notice requirement that will prohibit a patient non-solicitation term.

As with any law the devil is in the details.  But, since January 1, 2025, will be here before you know it, employers in Pennsylvania need to change past practices in their new employment agreements in order to comply with this new law.  Employers in other states must constantly monitor this issue, as the current trend does not favor the enforcement of a restrictive covenant even if such a covenant may have been enforceable in the past.

If you have a quick question about this issue, please e-mail Henry Casale at hcasale@hortyspringer.com.

If you want to find more information on the demise of the Chevron Doctrine and its effect on Healthcare Compliance, please join Dan Mulholland, Henry Casale and Jerry Safran, Founder and CEO of YouCompli, for our September 30, 2024, webinar that is co-sponsored by HortySpringer, YouCompli and the Health Care Compliance Association, entitled: “What Does the Reversal of the Chevron Doctrine Mean for Healthcare Compliance?” To register, click here. 

 Also be sure to join Dan and Henry in Las Vegas at our Hospital-Physician Contracts and Compliance Clinic, November 14-16, where the FTC rule, Chevron and a whole lot more will be covered. For more information or to register, click here.