Article by Gabriela Jones, Law Clerk
Restrictive covenants, i.e.,non-competition and non-disclosure clauses are used by employers to shield protectable business interests.[1] A non-competition covenant precludes the former employee from competing with his prior employer for a specified period and within a precise geographic area. Id. Restrictive covenants are historically not favored, as they are viewed as a restraint on the ability of an employee to work in that geographic area.[2]
Current Pennsylvania law will enforce restrictive covenants only if they are: (1) ancillary to an employment relationship between an employee and an employer; (2) supported by adequate consideration; (3) the restrictions are reasonably limited in duration and geographic extent; and (4) the restrictions are designed to protect the legitimate interests of the employer.[3] However, the applicability of Pennsylvania law regarding restrictive covenants is at risk because of the Federal Trade Commission’s recent ruling on the Non-Compete Clause Rule.
The FTC adopted the Non-Compete Clause Rule, or “The Final Rule,” operating as a comprehensive ban on all new non-compete clauses with all workers, including senior executives, effective September 4, 2024. The primary rationale behind the adoption is based on the FTC’s own “expertise [and] careful review and consideration of the entire rule-making record- including empirical research on how non-competes affect competition and over 26,000 public comments.” The FTC reasons that non-compete clauses are an unfair method of competition violating Section 5 of the FTC Act.[4] The adoption of the new rule will lead to an estimated 1) reduction of $74-$194 billion in spending on physician services over the next decade; 2) 2.7% increase in new firm formations; 3) increases of more than 8,000 new businesses created per year; 4) a rise in patents and innovation; and 5) higher worker earnings per year.
The FTC ruling affects existing non-compete clauses, i.e., entered before September 4, 2024, differently as to whether the employee is a regular worker or a senior executive. For workers who are not senior executives, existing non-competes are no longer legally enforceable after September 4th, 2024. Employers must comply with the notice requirement to inform such workers that the existing non-compete is no longer enforceable.[5] For senior executives, existing non-compete can remain in force, so long as the effective date is prior to the effective and they fall within the definition of senior executive. The FTC affirms non-compete clauses with senior executives are not exploitative or coercive based on the nature of the role and subsequently less likely to be subject to the acute ongoing harms of the clause itself that other workers experience.
How does this affect medical malpractice litigation? Restrictive covenants are prevalent in employment agreements for medical practitioners. The installation of the FTC’s new ruling threatens the enforceability of the many restrictive covenants that are currently in place for practitioners. This increases litigation concerns for employers who retain active contracts within the field. At this moment, the legal community does not fully understand the extent of the implications of this rule. Until the new rule becomes effective, there is little understanding regarding the legal implications, the court’s response, and the upcoming legislative activity on the matter. The FTC has created a unique and frustrating circumstance for companies attempting to continue enforcing existing contracts, especially if in active litigation. As September rapidly approaches, unfortunately, the only thing left for attorneys to do is wait, learn, and adapt in support of their clients through these upcoming unprecedented changes.
[1] Hess v. Gebhard & Co. Inc., 808 A.2d 912, 917 (Pa. 2002).
[2] Omicron Sys., Inc. v. Weiner, 860 A.2d 554, 559–60 (Pa. Super. 2004) (citing Hess, supra.).
[3] Socko v. Mid-Atl. Sys. of CPA, Inc., 126 A.3d 1266, 1274 (Pa. 2015) (internal citations omitted).
[4] Section 5 prohibits unfair or deceptive acts or practices in or affecting commerce as applied to all persons engaged in commerce.
[5] Non-Compete Clause Rule, 89 Fed. Reg. 89, 955 (May 07, 2024).