backFTC Noncompete Rule Vacated by Texas Judge – If September 4, 2024, was circled on your calendar as the start of the federal government’s anti-restrictive covenant push into private employment contracts, hopefully it was in pencil. Last week, Judge Ada E. Brown of the Northern District of Texas granted summary judgment in favor of plaintiff Ryan, LLC, and in so, doing struck down the Federal Trade Commission’s (FTC) Noncompete Rule, which sought to outlaw noncompetition agreements nationwide and was set to go into effect shortly after Labor Day.
Judge Brown’s ruling in Ryan, LLC v. FTC goes a significant step further than her July 3, 2024 ruling, where the former Texas Court of Appeals judge and 2019 appointee to the Northern District of Texas granted Ryan’s motion for preliminary injunction. That ruling, while significant, only enjoined enforcement of the Noncompete Rule as against Ryan, but had no effect on the other approximately 30,000,000 Americans (as estimated by the FTC) whose employment is subject to some form of restrictive covenant. In contrast, Judge Brown’s August 20, 2024 order – just two weeks from when the Noncompete Rule was set to go into effect – wholly vacates on a nationwide basis the FTC’s controversial rule, which it first proposed in January of 2023 and announced in April of this year.
“Congress in 1964 enacted the APA as a check upon administrators whose zeal might otherwise have carried them into excess not contemplated in legislation creating their offices,” reads the first line of the Court’s analysis – quoting the Supreme Court’s recent Loper decision – and quickly sets the stage for the analysis that followed. (Memorandum Opinion, 12) (citing Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2247 (2024)). With the primary legal issue being whether the FTC could promulgate substantive (and not just procedural) rules to prohibit “unfair methods of competition,” at which the Noncompete Rule is directed, the Court focused on the text of the FTC Act (15 U.S.C. § 41). Section 6 (15 U.S.C. § 46) of the Act authorizes the FTC “to make rules and regulations for the purpose of carrying out the Act,” which purposes include, as relevant here, Section 5’s language restricting persons from (a) using unfair methods of competition in or affecting commerce, and engaging in (b) unfair or deceptive acts or practices. 15 U.S.C. § 45.
Concluding Section 6 was not itself an affirmative grant of substantive rulemaking authority (both expressly and because it did not impose penalties for its violations, a typical characteristic found when Congress grants substantive rulemaking authority), the Court noted that in Section 18 (15 U.S.C. § 57a) of the Act, Congress expressly granted the FTC rulemaking authority over “unfair or deceptive acts,” but not the “methods of competition,” and therefore, extending this same rulemaking authority to the “methods of competition” would impermissibly render the language in Section 18 superfluous. (Memorandum Opinion, 16).
Citing Loper throughout, the Court concluded the Noncompete Rule “must be set aside,” precluding it from taking effect on September 4, 2024. Judge Brown thus prevented nationwide rollout of the Noncompete Rule, echoing a trend that the Northern District of Texas does not shy away from rulings that have widespread implications; just a few days prior and down the road in Fort Worth, Judge Pittman ruled in favor hospital-litigants represented by King and Spalding in Baylor All Saints Medical Center, et al. v. Becerra. Appointed contemporaneously with Judge Brown in 2019, Judge Pittman vacated a Medicare regulation that sought to cut Medicare DSH payments to those hospitals, a decision with significant impact not only on this group of clients, on but hospitals throughout the country.
It is uncertain whether the FTC will appeal the decision to the Fifth Circuit Court of Appeals. The constraints on administrative authority and a shifting political landscape in light of the Loper decision could give the agency pause as it considers its next steps.
Nonetheless, while the FTC considers the future of its Noncompete Rule, employers can breathe easy knowing that any restrictive covenants contained in agreements with their employees, otherwise governed by and recognized as valuable protections of legitimate business interests under applicable state law, will not vanish on September 4, 2024.
Reporter, K. Tyler Dysart, Atlanta, +1 404 5723 532, tdysart@kslaw.com.
OIG Issues Favorable Advisory Opinion Regarding Proposed Patient Assistance Program Operated by a Nonprofit Grant-Making Organization – On August 20, 2024, OIG issued Advisory Opinion No. 24-07 in which it responded to a request for an advisory opinion regarding a nonprofit grant-making organization’s (Requestor) proposal to fund a patient assistance program (PAP) within the context of the federal Anti-kickback statute (AKS) and the beneficiary inducements civil monetary penalty law (Beneficiary Inducements CMP) (the Proposed Arrangement).
Factual Background
Requestor does not furnish any items or services for which payment may be made under a Federal health care program. Requestor‘s mission is to improve the health and wellbeing of residents of the former service area of the hospital (the Service Area). Under the Proposed Arrangement, Requestor would establish a PAP through which it would subsidize certain diabetes drug cost-sharing obligations for low-income Medicare enrollees in the Service Area who qualify to be a participant in the PAP based on Requestor’s eligibility criteria (the Participants). The PAP would pay for the Participants’ Medicare Part D cost-sharing obligations (i.e., deductibles, copayments, and other cost sharing) for prescription medications prescribed for the treatment of diabetes, including insulin (Covered Drugs).
Requestor does not solicit donations from any specific individual or entity. It does, however, occasionally receive donations from the public in the regular course of business, including via a “Donate” section of its website. Requestor does not solicit and has not knowingly received donations from any person affiliated with any of the following types of entities (each, a Pharmaceutical Entity): (i) pharmaceutical manufacturers or distributors; (ii) drug wholesalers; (iii) pharmacy benefit managers; (iv) group purchasing organizations; (v) pharmacies; or (vi) entities owned or controlled by, or that have an ownership or control interest in, any of the foregoing types of entities. Before implementing the Proposed Arrangement, Requestor would add a requirement on the “Donate” section of its website to require all donors to certify that the donor is neither a Pharmaceutical Entity nor donating on a Pharmaceutical Entity’s behalf. Requestor would not accept any donations from a donor that could not make these certifications. Requestor also certified that (i) none of its board members or corporate officers have a financial relationship with a Pharmaceutical Entity, and (ii) Requestor is not owned or controlled by, nor have an ownership or control interest in any Pharmaceutical Entity.
To be eligible for assistance under the PAP, Participants would need to meet the following criteria:
- reside in the Service Area;
- be enrolled in a Medicare Part D plan;
- not have secondary insurance coverage (such as Medicaid or commercial insurance);
- have a household income below 400% of the Federal Poverty Level; and
- have a diabetes diagnosis with a treatment regimen prescribed by a licensed health care practitioner.
Participants would need to submit an enrollment application to Requestor that would include providing proof and an attestation that they meet these eligibility criteria. A Participant’s eligibility would not be contingent on the selection of a particular treating provider or pharmacy and would not be contingent on the use of a particular drug.
Under the Proposed Arrangement, Participants would be able to obtain Covered Drugs at any pharmacy of their choosing. Requestor would designate particular pharmacies as “participating” pharmacies (Participating Pharmacies), and those pharmacies would provide certain conveniences to Participants as compared to other pharmacies (Non-Participating Pharmacies). When a Participant obtains a Covered Drug at a Participating Pharmacy, the Participant would not be prompted to pay cost sharing for the medications out of pocket at the point of sale. Instead, the Participating Pharmacy would submit a claim to Requestor for reimbursement of the Participant’s cost-sharing amount and would not charge the Participant for this amount. In contrast, when a Participant obtains a Covered Drug at a Non-Participating Pharmacy, the Participant would be prompted to pay their cost-sharing amount for the medications to the Non-Participating Pharmacy. In such instances, the Participant would submit a claim for reimbursement of such amount to Requestor. Requestor anticipates that it would reimburse Participants for these cost-sharing amounts in an average of approximately thirty days after receiving each reimbursement request.
Legal Analysis
OIG determined that the Proposed Arrangement could potentially generate prohibited remuneration under the AKS and the Beneficiary Inducements CMP. However, OIG stated that it would not impose administrative sanctions on Requestor in connection with the Proposed Arrangement for the following reasons:
- With respect to the cost-sharing subsidies, OIG has long recognized that PAPs can provide important safety net assistance to patients, especially patients who cannot afford their cost-sharing obligations for prescription drugs.
- OIG supports efforts of charitable organizations and others to assist financially needy enrollees as long as the assistance is provided in a manner that does not run afoul of the AKS or other laws.
- The design of the Proposed Arrangement reduces the likelihood that the cost-sharing subsidies would steer Medicare enrollees to a particular product based on the availability of the subsidy.
- Eligibility for financial assistance under the Proposed Arrangement would be based on a good-faith determination of financial need.
- Steering concerns are mitigated because (i) other important convenience factors, including location, availability, and medication management considerations, also could inform a Participant’s choice of pharmacy; (ii) Requestor chose the initial Participating Pharmacies based on objective criteria (e.g., the pharmacy being located within the Service Area) and would consider the same objective criteria when adding any additional pharmacies as Participating Pharmacies after the launch of the Proposed Arrangement; and (iii) the ultimate dollar value of the cost-sharing subsidies for Covered Drugs would not differ based on the pharmacy a Participant chose.
Advisory Opinion No 24-07 is limited in scope to the parties of the Proposed Arrangement. However, this opinion provides guidance as to how OIG might respond to similar requests. The opinion is available here.
Reporter, Michelle Huntsman, Houston, +1 713 751 3211, mhuntsman@kslaw.com.