Generally, Pennsylvania Courts will respect a non-compete covenant between an employer and an employee if: (1) it is incidental to a contract for employment, (2) it is supported by adequate consideration and (3) the scope of the covenant must be reasonably limited in time and territory and must be designed to protect a legitimate business interest of the employer. Historically the courts have recognized only three such “legitimate business interests” entitled to protection: confidential information, customer relations and specialized training of the employee. Notwithstanding that, such covenants are not always favored by courts because they are often unfair to the employee and (what is sometimes less obvious) unfair to the customer who wishes to continue a relationship with a departing employee only to have that relationship blocked by the former employer.
Aware of these potential problems, the Pennsylvania Legislature has two bills pending before it that would address the enforceability of some or all employee non-compete covenants.
The more general of these bills to be introduced was HB 1938 of 2017 known as the “Freedom to Work Act.” This bill defines a “covenant not to compete” as an “agreement between an employer and employee that is designed to impede the ability of the employee to seek employment with another employer,” and, subject to certain exceptions, such an agreement is “illegal, unenforceable and void as a matter of law.” The exceptions, to which this ban is not applicable, are “a covenant not to compete that is reasonable and involves an owner of a business that sells the business . . . a covenant not to compete that involves a dissolution or disassociation of a partnership or a limited liability company . . . or a covenant not to compete that is reasonable, in effect prior to the effective date of this section and may not be renewed.”
Notably this bill, if it became law would apply to any resident of Pennsylvania and would be “exclusively decided by a State court within this Commonwealth” (it is not entirely clear whether this would be enforceable). Even more notably, if it were to become law, this bill would allow an employee to “receive an award of attorney fees after prevailing in a suit against an employer related to the enforcement of a covenant not to compete” and “such an employee would “(b)e entitled to damages, including punitive damages, after prevailing in a suit against an employer related to the enforcement of a covenant not to compete.”
The proposed legislative findings put forth to justify passage of the bill are quite extensive and include:
- The protection of businesses so that “they can hire the employees of their choosing;”
- Lowering the unemployment rate and providing individuals the opportunity to make a living wage, maximize their talents and provide for their families;
- Increasing wages and benefits for Pennsylvania workers;
- Promoting innovation, entrepreneurship and business expansion;
- Promoting unrestricted trade and mobility of employees; and
- Providing that workers are not forced to decide between staying in jobs they are overqualified for or leaving Pennsylvania for better opportunities.
This bill was referred to the Pennsylvania House’s Labor and Industry Committee in November of last year. To date, no further action has been taken on it.
The second pending bill is more specific and applies to non-competes between employers and medical professionals. The “Health Care Practitioner Noncompete Agreement Act” (HB 788 of 2017) was referred to the House of Representative’s Professional Licensure Committee in March of last year. The proposed legislative findings for this bill are, as one would expect, more targeted and include the following:
- “Research studies have found that health care practitioner shortages have reached alarming proportions in the United States and, in particular, this Commonwealth;”
- “An increasingly aging population is creating a greater need for health care practitioners;”
- “Continuity of care for patients is a fundamental goal for health care practitioners and public health officials alike.”
- A noncompete prohibits a health care practitioner from rendering care to a patient even if the covenant is for a limited period of time or geographic range
If passed into law, HB 788 would declare a health care practitioner’s noncompete to be “deemed contrary to public policy” and “void and unenforceable” to the extent it restricts movement of a practitioner to a new employer or restricts a practitioner from practicing within a given geographic area. This bill would also require an employer to give patient contact information to the departing practitioner and would allow the departing practitioner to provide a limited notice to former patients.
Both of these bills have been pending for some time and there is no assurance of passage in either case, but both would shake-up the Pennsylvania employment law and health law landscape in major ways. HB 788 would also provide substantial peace of mind to Pennsylvania’s patients and health care consumers.
– Rod Fluck