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On April 23, 2024, the Federal Trade Commission (FTC) finalized a rule to prohibit most non-compete agreements across the U.S. The decision, if enacted later this year, could significantly impact how ambulatory surgery centers (ASCs) retain their most important physicians and executives.

But the ban is already seeing some intense opposition, with more pushback expected. On July 3, Judge Ada Brown of the U.S. District Court for the Northern District of Texas temporarily blocked the FTC from enforcing the ban in part, arguing that the FTC lacks the statutory authority for such a broad rule. 

Now, a separate but related legal challenge has arisen in the Eastern District of Pennsylvania, where a broader injunction against the FTC’s non-compete rule is being sought. The Pennsylvania court’s forthcoming decision, expected by July 23, could potentially expand the scope of injunctive relief to a nationwide level.

To be sure, ASCs are watching the legal battles closely.

Non-compete agreements have traditionally been used by ASCs and most other types of companies to prevent employees from joining or starting competing businesses, thereby protecting trade secrets and maintaining competitive advantage. However, critics argue that these agreements stifle worker mobility and innovation. 

The emerging legal battle will likely influence how the rule is implemented nationwide, Matthew Wolfe, a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, told ASC News. 

“I think that you’re going to continue to see the growth of ASCs, particularly in larger metropolitan areas,” Wolfe said. “[If the ban is not blocked], you are also going to see additional competition with existing providers, health systems, hospitals, or pre-existing ASCs. So, any ASC operator is going to want to evaluate its entire toolkit for attracting and retaining its talent; that includes physicians and other providers, but it also includes administrators and executives.”

Impact on ASCs

In the health care sector, non-competes are common, with studies showing that up to 45% of U.S. doctors are bound by such agreements.

For ASCs, a ban on such agreements would likely complicate recruitment and retention efforts. Indeed, without these agreements, ASCs could face increased staff turnover and competition for their skilled professionals, sources told ASC News.

“There was a lot of pushback when the FTC proposed the new rule from health care organizations, [who said] it is an important part of their model,” Gillian McKean Bidgood, a partner with the law firm Polsinelli, told ASC News. “[Non-competes help ASCs] maintain their systems, including by not allowing providers to leave and go right next door and take a bunch of business with them.”

When the FTC was taking the public comments on its proposal to eliminate non-competes, it received well over 26,000 comments. The bulk of those, according to the commission, were in favor of terminating non-competes, though plenty of arguments were made on behalf of keeping them on the table.

The FTC rejected those arguments in its final rule slated to go into effect on Sept. 4. 

What’s more, FTC’s ban on non-compete could create an unbalanced playing field between for-profit and nonprofit health care entities, some believe. Generally, FTC’s jurisdiction skews more toward for-profit, though, in its final rule, the commission goes out of its way to say it could hold nonprofit organizations accountable as well in some cases.

“A ban on non-competes may have implications for the profitability of health care providers who have invested billions of dollars to expand services and provide outpatient options, such as ambulatory surgery centers and laboratories, that serve as lower-cost alternatives to hospitals,” Rosa Marina Morales, an attorney with Crowell & Moring LLP, told ASC News in an email. 

The ban includes exemptions for non-compete agreements between buyers and sellers in transactions. This provision ensures that sellers cannot immediately start competing businesses after a sale, protecting the value of the transaction. This is crucial for ASCs involved in consolidation or acquisitions.

“A big feature of the rule, if it goes into effect, is that, you know, there’s an exception that allows a non-compete when somebody is buying a business or selling a business, or selling their equity position in the business,” Bidgood said. “And we’ve already been seeing a lot of shifts toward more of a position ownership, at least partial ownership in ASCs. And I think that the FTC rule, if it goes into effect, will just continue that trend.”

While non-solicitation agreements are distinct from non-competes and not directly affected by the FTC’s ban, their use might become a gray area. These agreements prevent employees from poaching clients or colleagues, but could face increased scrutiny and potential challenges.

Yet so far, those agreements have not been challenged. 

“Not impacted by the FTC rule and not generally impacted by most state statutes, is a provision that would say, for some period of time after you leave, that you cannot solicit a group of employees to come with you,” Theresa Sprain, another partner with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, told ASC News. 

Preparing for the future

Regardless of the outcome of these legal challenges, ASCs should begin preparing for a future where non-compete agreements are either heavily restricted or entirely banned.

This includes revisiting and strengthening other contractual protections such as confidentiality, non-disclosure and non-solicitation agreements.

“If there’s ultimately a permanent injunction, we have to wait and see if the FTC is going to try again, proposing a different rule, or potentially going to Congress and asking Congress to make it clear what authority they have or don’t have,” Bidgood said. 

For ASC operators, the landscape is changing rapidly, and staying informed and adaptable will be key to navigating these regulatory shifts, Morales said. 

“If the ban goes into effect, employers may attempt to mitigate the risk of losing highly-trained medical staff and proprietary knowledge by seeking employment contracts with physicians and other highly-skilled personnel with longer terms and notice periods for termination, as fixed-duration employment agreements are not restricted so long as they do not have the effect of a non-compete,” she said. 

In addition, employers may attempt to seek non-solicitation and non-disclosure agreements, and restrictions on assignment of inventions.  Those are not restricted by the ban, to protect from the associated risks of banning non-competes for highly compensated and skilled medical personnel, Morales said. 

“Also, while the ban leaves intact existing non-competes with senior executives, as defined, it is not clear whether this would include all partners in a business, for example, physician partners in an independent physician practice, if they do not play a role in the operation of the practice,” she said.