Are nonprofit health care entities exempt from the Federal Trade Commission’s (FTC) Final Rule banning non-competes in worker agreements? The answer is not cut and dry. While the FTC’s authority generally stops at the doors of nonprofit entities, the FTC has warned in its Final Rule that it intends to vigorously enforce the ban wherever it can claim jurisdiction. The FTC has also emphasized this may include self-styled nonprofit and not-for-profit entities, which include most hospital systems in America.[1]

The FTC Act generally covers corporations, which are “organized to carry on business for its own profit or that of its members[.]”[2] According to the American Hospital Association statistics cited by the FTC’s Final Rule, 58% of all U.S. hospital systems claim tax-exempt status as nonprofits and 19% of all U.S. hospital systems identify as state and local government hospitals—the latter of which are also considered generally outside the FTC’s jurisdiction under the State Action Doctrine.[3] Accordingly, the majority of hospitals in America will likely claim exemption from the FTC’s Final Rule banning non-competes.

However, in its Final Rule, the FTC went out of its way to “dispel [the] misunderstanding” health care entities claiming tax exempt status as nonprofits are categorically beyond the FTC’s jurisdiction.[4]  Indeed, the FTC asserts that “[m]erely claiming tax-exempt status in tax filings is not dispositive.”[5]  Rather, the FTC states that it applies a double-layered approach by examining: (1) “whether the corporation is organized for and actually engaged in business for only charitable purposes”; and (2) “whether either the corporation or its members derive a profit.”[6] Under this approach, a corporation’s ‘‘tax-exempt status is certainly one factor to be considered,’’ but this status ‘‘does not obviate the relevance of further inquiry into a [corporation’s] operations and goals.’’[7]

In support for this approach, the FTC in its Final Rule cites to what it claims are longstanding FTC precedent and judicial decisions supporting this jurisdiction. For instance, the FTC notes that it has exercised jurisdiction over a physician-hospital organization—consisting of a 100 private physicians and one nonprofit hospital—claiming tax-exempt status as a nonprofit because such organization engaged in business on behalf of its for-profit physician members.[8] Similarly, the FTC has exercised jurisdiction over an independent physician association—consisting  of private, independent physicians and private, small group practices—claiming tax-exempt status as a nonprofit when such association was organized for the pecuniary benefit of its for-profit members by contracting with payers, on behalf of its for-profit physician members, for the provision of physician services for a fee.[9]

In addition, the FTC notes that Fifth Circuit and Ninth Circuit have held certain nonprofit hospitals and other related entities lose their tax-exempt status for partnering with and ceding their control to a for profit partner—effectively “conferring impermissible private benefit.”[10] Lastly, the FTC argues that the IRS has also rejected claims of nonprofit tax-exempt status for entities that pay unreasonable compensation, including percentage-based compensation, to founders, board members, their families, or other insiders.[11] Based on the foregoing, the FTC concludes that several nonprofit health care entities will be in many circumstances subject to the Final Rule’s purview.

Assuming it survives any legal challenge, the Final Rule will go into effect on September 4, 2024. However, several lawsuits—including one in the Northern District of Texas and another in the Eastern District of Pennsylvania—have already been filed questioning the constitutionality of the final rule under the Major Questions Doctrine, the Non-Delegation Doctrine, and the Chevron Doctrine. Should the Final Rule survive these challenges, any attempt by the FTC to exercise its jurisdiction over nonprofit entities will also likely face legal challenge.

In the meantime, nonprofit and not-for-profit entities, including nonprofit health care entities, should work closely with legal counsel to determine whether they are in fact impacted by the FTC’s non-compete ban given the FTC’s anticipated approach to determining non-profit status.

[1] 89 Fed. Reg. 38342, 38356.

[2] 15 U.S.C. § 44.

[3] 89 Fed. Reg. 38342, 38449.

[4] 89 Fed. Reg. 38342, 38356.

[5] 89 Fed. Reg. 38342, 38357.

[6] Id.

[7] Id.

[8] Id. (citing In the Matter of Preferred Health Servs., Inc., FTC No. 41-0099, 2005 WL 593181, at *1 (Mar. 2, 2005)).

[9] Id. (citing In the Matter of Boulder Valley Individual Prac. Assoc., 149 F.T.C. 1147, 2010 WL 9434809, at *2 (Apr. 2, 2010)).

[10] Id. (citing Redlands Surgical Servs. v. Comm’r, 242 F.3d 904, 904-05 (9th Cir. 2001) and St. David’s Health Care Sys. v. United States, 349 F.3d 232, 239 (5th Cir. 2003)).

[11] Id. (citing Fam. Tr. of Mass., Inc. v. United States, 892 F. Supp. 2d 149, 155-156 (D.D.C. 2012); I.R.S. G.C.M. 39, 674 (Oct. 23, 1987); and Bubbling Well Church of Universal Love, Inc. v. Comm’r, No. 5717-79X, 1980 WL 4453 (T.C. June 9, 1980)).