Non-Compete Ban by FTC vs. Pennsylvania – What Will Be the Outcome?
Employment alert by Lamb McErlane attorneys Vasilios J. Kalogredis, Esq. and Sonal Parekh, Esq.
Last week, we published an article discussing the Federal Trade Commission’s (“FTC”) final rule implementing a nationwide ban on noncompetes, subject to a few exceptions. However, one week prior to the passing of the final rule, on April 17, 2024, House Bill 1633 (“HB 1633”) was passed by the Pennsylvania House of Representatives, which prohibits the enforcement of noncompete covenants entered into by health care practitioners and employers. First introduced on August 29, 2023, HB 1633 (as amended), if passed and signed into law, will represent the first law limiting noncompetes in the health care industry in Pennsylvania. With broader restrictions, if Pennsylvania’s HB 1633 is passed, and no changes are made to the FTC’s final rule, employees in Pennsylvania can expect greater protections going forward.
A noncompete covenant, or restrictive covenant, prohibits a current or former employee (or contractor in some cases) from competing against their current or former employer within a particular geographic area for a specified period of time. In the health care field, these covenants are often burdensome in both geography and duration. Multiple arguments have been made indicating that cumbersome noncompetes only further exacerbate the ongoing staffing shortage plaguing the health care industry.
The General Assembly of Pennsylvania, in introducing HB 1633, focused its concern on noncompete clauses of consolidated hospital systems that stretch over broad geographic regions. Because of the geographic range covered by the hospital systems, a noncompete from that hospital system could effectively prevent health care practitioners from practicing in large areas of the Commonwealth. With approximately seventy-five percent of physicians being employed by hospitals, health care systems or corporate entities, the General Assembly took the position that noncompete covenants in health care (i) inhibit competition that benefits employees and patients and (ii) can deter needed healthcare practitioners from wanting to practice within the Commonwealth.
Pursuant to HB 1633, the Fair Contracting for Health Care Practitioners Act (the “Act”) makes noncompete covenants imposed by employers void and unenforceable as contrary to public policy. For noncompete covenants imposed by employers that are entered into or amended prior to the effective date of the Act, the covenants would be rendered void and unenforceable upon the renewal of a health care practitioner’s license, registration or certification within the Commonwealth. The Act provides an exception to this rule if: (i) the primary health care facility or office where the health care practitioner is employed is located in a county of the sixth, seventh, or eighth class[1]; (ii) the geographic restriction is less than a 45-mile radius from the primary health care facility or office; and (iii) the length of the noncompete covenant is no more than two years. The General Assembly reasoned that most rural areas of Pennsylvania can be considered “health care deserts in which patients must travel two or three hours for their basic health care needs.” Accordingly, this would likely account for the General Assembly’s approval of a 45-mile radius limit.
It is important to note that the Act does not relate to independent contractors. Though independent contractors are not specifically mentioned in the Act, the Act makes clear that the noncompete covenant would be made unenforceable by the employer, which by definition does not relate to independent contractors[2].
The Act requires that, within 90 days of a physician, certified registered nurse practitioner, or physician assistant parting from an employer, the employer must notify the health care practitioner’s patients (that were seen within the past year and who have an ongoing outpatient relationship with the practitioner) of: (i) where the health care practitioner will be rendering services in the future (if known); and (ii) how the patient may continue as a patient of the health care practitioner, or be assigned with a new health care practitioner within the existing employer.
The Act will take effect immediately if passed. Notifications required by the Act will be scheduled to take effect 30 days thereafter.
As mentioned in our previous article, the FTC permits exceptions from the noncompete ban for (i) senior executives who already have a noncompete in place; (ii) pursuant to a bona fide sale of a business entity; and (iii) nonprofit companies, which includes many of the hospitals and some of biggest health insurers in the United States. HB 1633, on the other hand, does not provide exceptions for, but rather remains silent on, these categories.
However, if Pennsylvania passes HB 1633, it will permit for a stronger ban on noncompetes in Pennsylvania. Because HB 1633 is narrower (or stricter) in scope, it will not be preempted as it relates to nonprofit hospitals and health systems. Given that the General Assembly noted its intent to have the noncompete covenant apply to hospitals and health care systems with over broad geographic regions, it may be possible to expand the reach of the FTC’s noncompetes to include such health systems and hospitals within the Commonwealth of Pennsylvania.
It will be interesting to see how the bans on noncompetes unfold as the FTC’s final rule faces numerous newfound challenges to its constitutionality and while HB 1633 makes its way to the Pennsylvania Senate. We will continue to monitor the status of these legal changes and provide periodic updates throughout. Stay tuned for more!
If you have any questions regarding noncompetes, compliance, or other health law matters, please feel free to contact Bill Kalogredis, Esq. or Sonal Parekh, Esq.
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[1] Pennsylvania county classes are divided according to the populations residing within the counties belonging to each class. The Sixth, Seventh, and Eight classes consist of the least populated counties. Major cities in Pennsylvania, such as Philadelphia and Pittsburg, would fall within lower county classes (i.e., First or Second class). A summary of each Pennsylvania county class can be found on the Pennsylvania Courts website here.
[2] Independent contractors, here, may be considered to be “self-employed.”
Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for almost 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.
Sonal Parekh, Esq., is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.
*This alert is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.
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