In January 2023, the Federal Trade Commission released a proposed rule that is making waves in the business and legal communities. The proposed rule would make it illegal for employers to enter into noncompete agreements with workers in most circumstances and would also require employers to rescind existing noncompete provisions.

The FTC is currently accepting public comments about the proposed rule and conducting listening sessions and the FTC has asked for feedback on ways in which the final rule may be narrowed or expanded.     

Holden Brooks, Partner at McGuireWoods Antitrust Group, sits down with McGuireWoods’ Geoff Cockrell to explore the potential ramifications of a noncompete ban, potential legal challenges to the rule and the scope of the FTC’s rulemaking authority, what to watch in the ongoing debate surrounding the scope of the rule, and what alternative tools to consider in order to protect your business interests in the event that the rule goes into effect. 

Featured Guest

Name: Holden Brooks

What she does: As a Partner in McGuireWoods Antitrust Group, Holden focuses on mergers, complex litigation, civil and criminal enforcement, and counseling across several industries with a focus on Healthcare.

Organization: McGuireWoods

Words of wisdom: “[The FTC] are charged with this and they have a real responsibility to pursue this. So I think this is sort of the best part of democracy, in a way. We have an opportunity to speak up, to deliver thoughtful comments to this body, and to also have our courts consider whether this is the way that things should play out, whether this is the right way to make policy.” 

Connect: LinkedIn 

Notes From the Professor’s Corner

Top takeaways from this episode

• Most workers would be affected by the potential rule.  This includes sophisticated, high-earning employees with a great deal of leverage in employment negotiations as well as lower-wage workers with no leverage.  Watch for some narrowing in the final rule in this area.
• There will be substantial legal challenges.  Many groups have promised to bring legal challenges to the rule if it is adopted, which could delay the need to comply with the rule for a substantial period of time.  Watch for these to go right up to the U.S. Supreme Court.
• What constitutes a noncompete?  One area to watch as the rule is finalized is what the FTC will consider to be a noncompete covered by the rule.  Will it only be traditional restrictive covenants that are affected, or “de facto” noncompetes as well?

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is the Professor's Corner, a McGuireWoods series, exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods's partner Geoff Cockrell as he and specialists share real world insight to help enhance your knowledge.

Thank you for joining another episode of the Corner series where we talk through trends, developments and granular issues that impact healthcare investing by private equity funds and other investors. I'm your host, Geoff Cockrell, partner at McGuireWoods. I'm thrilled to be joined by my partner, Holden Brooks, for us to discuss an interesting and significant development as it relates to enforceability of non-compete provisions in employment relationships and it has impact in the context of deals. But Holden, maybe introduce yourself and then walk through kind of the broad scope of what this proposed rulemaking is looking like.

Sure. So I am a partner in McGuireWoods Antitrust Group. I have spent the better part of my career doing healthcare antitrust. When I haven't been doing healthcare antitrust, I've been doing private equity work, advising private equity clients on antitrust risk in the M&A context. Geoff, as you know, this has really set off a bomb in the legal world, right? This FTC proposed rule that came down in early January. Folks on the business side who have these non-compete provisions in their employment contracts are really trying to figure out how to approach this, and so are people who are in the PE context who have to think about the value impact of these non-compete clauses in the deals that they're contemplating.

Holden, as a deal person, I know it's one rule and there's some exceptions to it, but I think about it in two different contexts, especially in the context of investing in healthcare provider services businesses. One is the going forward relationship that a business will have with employed physicians. Those may be physicians that were a part of a business that sold to the private equity platform, or they may be new people coming along. That's one context.

The other context is in the setting of the sale of the business, the original sale of the business to the private equity fund, where in that context you're looking at something a little different as a buyer, in particular, a lot of the value in a business is the go forward goodwill and efforts of those particular doctors. If they could sell at a significant purchase price and then potentially immediately compete, it could really impair the value in the context of a transaction. So Holden, can you give how that rule would apply in those two different contexts?

Sure. So at a very, very high level, this is really a rule that is rooted in the Federal Trade Commission's perspective that there really isn't any pro-competitive upside to these non-compete provisions in employment contracts, whether we're talking about low wage franchise sandwich restaurant employees, or we're talking about highly compensated physicians. They just are proceeding from this place where they do not see any pro-competitive upside or justification for these clauses.

So folks who have businesses that have these clauses baked into all of their employment contracts, and those folks are going to have to think about potentially if this proposed rule does become final, and that's a big if, we're expecting legal challenges to both the FTC's rulemaking authority and to the nature and the contours of the proposed rule itself. They're going to have to think about how do I pivot and use other tools like non-disclosure agreements, et cetera, in this business where I really rely on these clauses in my contracts. There's also going to be a requirement to waive these provisions as they exist in contracts.

So there's going to be two components of the rule really, which is that people are going to have to think about living without and people are going to have to think about how they are going to go about rescinding these non-competes and waiving them in existing contracts. In the deal context specifically, the FTC knows that they need to have a slightly different approach. What's in the proposed rule right now is that you can put non-compete restrictions into deal documents essentially that restrict the sellers after closing from competing with the acquired business where the sellers have an equity interest of 25% or more.

I was on a call the other day with an FTC official where somebody specifically raised the question of where this 25% threshold came from, and does it make sense, and specifically does it make sense in the physician context where you and I know that there are many groups where the selling physicians have less than a 25% interest, but the buyer still have a really sort of mission critical interest in securing some kind of non-compete there.

The FTC has solicited comments on this rule, and specifically on that 25% equity threshold. They know that they need to get it right and they know that they need to hear from stakeholders in specific industries to see how this proposed rule and these restrictions will play out in that industry. So right now, the proposed rule, if it went into effect tomorrow, you could impose a non-compete on selling physicians if they had a 25% equity interest or greater, but you could not impose that non-compete on physicians that had a lesser equity interest.

To me, looking at this knowing that there are some very real legal challenges that are going to be brought to whether or not this kind of sweeping rulemaking is within the authority of the FTC and other legal challenges, as I look at the landscape of the proposed rule, it would seem that we're likely to end up in a scenario where there's some extended period of time where there's uncertainty as to where that's going to land which is unfortunate in the deal context.

To me as a deal person, I added up that on the kind of go forward employment context, that deal makers are going to have to just live with the expectation that there's not going to be those non-competes available. These challenges are going to work themselves out, but at a minimum, the federal government just put out a hundred pages of policy rationale for why they are a bad idea, and then separating whether or not they are right on that. That hundred pages is now out there and the enforceability of any non-compete in any context just got harder.

So I think deal makers need to live with that possibility going forward, which isn't going to be the end of the world. I mean, California has pretty hard prohibition against non-competes, and people navigate around them rely on rollover. You make it a better place for them to not want to leave. You can still do deals. The harder context is this rule on the sale of business, which I think the buyer has the better side of the argument in that context from a policy perspective.

To me, the most important thing that comes through this rule process as they kind of absorb comments and think about it is that the rule that gets published at the end of this process, recognizing there's going to be challenges and all these other things, but the rule that gets published ultimately needs to be a landing spot that deal people can live with. To me, that 25% notion is thinking about it wrong.

The better way to think about it would be if a seller is receiving material consideration in the deal, and we can talk about what material consideration would really mean, but if they're getting material consideration, then the safe harbor to allow a non-compete in that sale of business context should apply. That material consideration would keep you from doing kind of silly things like giving every employee one share or stuff like that, but make it real. But if the ultimate rule that is published has something like that, then even if those challenges to the overall rulemaking don't go anywhere, we'd still have a rule that you could still do deals in.

So that to me is the most important thing as we're watching this process unfold. Holden, how would you handicap that process? Do you think they're going to be responsive to some of these transactional deal concerns? Or are they going to be more rigid?

I think they are going to be responsive, to be honest with you. I mean, the way I think people should be looking at it now is that there is an asteroid headed for Earth, right? As we go through the comment period, as the FTC takes into account comments from various sectors and industry groups, et cetera, I think we're going to see some of these more brazen components of the rule sort of fall away, right? The FTC has already acknowledged, they've put out some alternatives that they want comments on, so they've already acknowledged that they need the input of people who are really doing business in this country to come up with the right contours for this rule.

So I think that the smart play right now is to monitor the comments. I will say that in the physician practice, there's at least one or two really, I think, thoughtful comments that have been put out there that talk about why this rule would be really destructive in the physician practice sale context. That the ability to sell a practice with a non-compete that will make your practice attractive to a buyer is really critical for maintaining the stability of community-based practices as an alternative to hospital-based care and acquisition of physician practices by health systems, for instance.

So I think there's some really thoughtful arguments that will be made. I think you will see a more nuanced considered rule at the end of the day. At the same time, I do think that the main purpose of the rule was to get people to be more thoughtful about these non-competes, to really think about whether they need these restrictions, how to narrowly tailor them so that they are hewed more closely to the business justification that they're designed to correspond to or the interest that they're going to protect.

So I think that watching how the process is unfolding and thinking about how you can be smart about making these provisions that you're putting in in the meantime more defensible is really the way to go.

Some of the comments that have come in have, as you noted, have been interesting. There's thousands and thousands of them and a lot of them are just individuals venting on the application of a non-compete in a particular setting. Setting aside some of that anecdotal comments, there have been some that have challenged kind of the idea that non-competes are definitionally kind of anti-competitive. More interesting ones has been offering the idea that physician group consolidation is necessary to balance some of the negotiating powers that physicians have with payers.

There's a lot of discussion around kind of the power of larger physician practices, but probably not enough discussion of the power of large payers and balancing some of those negotiation dynamics could actually have pro-competitive impact. So there's a lot of discussion around the core philosophical approach. One other note that where this could go on the specific employment side is that there's been some discussion that there could be a compensation threshold that would apply differently.

Meaning, to your point, if you're making the sandwiches, the idea that you couldn't compete with Subway make less sense than a more highly compensated person who's making a more coherent choice of trading their effort for consideration. There's some possibility that one of the carve outs to the application of the rule generally could be a compensation level carve out. Holden, do you think that's a realistic possibility? I know that's a more nuanced idea.

I do think that that's a possibility, and that is one of the alternatives that the FTC has sort of thrown out there for comment. If you look at where this rule came from, if you go all the way back to the executive order that President Biden issued in the summer of 2021, he says in that order like, "Hey, FTC, DOJ, I really need you to take these non-competes seriously. Come up with a way to reduce the abuse of these provisions."

The enforcement actions and litigation, et cetera that we see in this area really does look to try and protect the mobility of lower wage workers, of fast food workers who they have no leverage against these larger employers. They need these jobs, they sign these contracts. They don't realize that it means that if somebody else is offering, another fast food place is offering $1.50 more an hour down the street, they would not have that opportunity be available to them because of this contract they signed.

That's a totally different scenario than, and I think the FTC would acknowledge this too, that's a different scenario than someone who is highly compensated, very sophisticated, is able to consider the impact of a non-compete who has some leverage with the entity that they are, the employer entity that they are negotiating with at the time, accepting a non-compete in exchange for the position that they are going to be in. So I think that that is a space where there can be more play. I think there will be some nuance there.

One thing I do want to kind of caution our listeners about is that the FTC and the DOJ and states attorneys general have a history of having a different perspective on the impact of non-competes in the healthcare space. So there is a history going back many years of the FTC and DOJ expressing some support for and sympathy for physicians who are complaining about being subject to non-competes because they allege that there is a patient relationship impact, there is a relationship to healthcare delivery in the community.

So I do think that that is one area where I think that we need to be really smart just as a sector about the feedback that we're giving because the FTC and DOJ, I think, arrive at the question of whether or non-competes should apply to physicians or not or how they should apply with some skepticism about the need for these provisions from a business perspective balanced against what they may perceive as some care delivery consequences.

Absolutely, and those are all fair considerations. I just think folks need to recognize that in the deal context, we do deals, and California's a good example, we do deals in California all the time. A well-run physician related business can still thrive. It puts more pressure on making it a workable economic relationship on a go forward basis such that you're not leaning so heavily on the impact of these non-compete provisions and you're leaning more into making this a place where physicians want to stay and work and can thrive, and the economics are set up in a way where you don't need the power of a non-compete to make somebody want to stay.

So I think that the idea of provider services transactions going forward can completely thrive regardless of how this rule lands, as long as they land on a decent outcome for the sale of business because the specter of buying let's say a five physician practice, so it's each under 25%, the idea that they could walk out the door right after you wrote them a pretty significant check is a bit intimidating.

So I think as long as that lands cleanly, the business of doing deals in healthcare provider services will continue. It's also worth noting that there's lots of discussion around whether or not doing this sort of thing through rulemaking is a good idea, whether or not they have the authority to do it as one question, whether or not it's a good idea as another, the specter of national policy on some of these topics swinging based on presidential elections and a new administration, all of that stuff is a bit of a clumsy way to go about making national policy. Have you seen much discussion on some of those macro critiques, Holden?

Oh, 100%. I have recently been in a room with folks from the FTC, or listened to their remarks, that make it clear that they feel that they have a mandate and that the way that they fulfill their mandate is through rulemaking. They have set themselves up in the past couple of years, it's sort of no secret that this is how they were going to go about this kind of thing to make it easier for them to promulgate rules. So it's not a surprise that they are sort of going for it and this is a real change. It is a very new and radically different approach to how to fulfill this competition protection mandate.

So I think that there's a lot of discussion about how those legal challenges will play out, but this is an FTC that really believes very strongly in what they're doing. They really believe very strongly that they have an obligation to exercise their power in sort of what I'll just call a maximalist way. I don't know if that's the best word, but that they are charged with this and that they have a real responsibility to pursue this. So I think this is sort of the best part of democracy in a way.

We have an opportunity to speak up, to deliver thoughtful comments to this body and to also have our courts consider whether this is the way that things should play out, whether this is the right way to make policy. Because even the FTC acknowledges that this is going to have a massive impact on our economy, billions of dollars, millions of people, and it would be something that would be fairly cataclysmic in terms of the way that we do business. It would be a real shake up.

The Supreme Court has weighed in fairly recently on whether or not these sorts of major decisions should occur through sweeping regulation. So it'll be interesting to see how that plays out as well. But Holden, thank you for joining this episode. I might bring you back as some of these developments unfold. It'll be interesting to watch and see how it lands. I think deal making's going to proceed and it's going to be okay, but this'll be a bit of a bouncy ride on this topic for a little bit. But Holden, thanks again for joining this episode. It's always great to have you.

Happy to be here, Geoff. Thanks so much.

Thank you for joining us on this installment of the Professor's Corner. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment.

The views, information or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.