As anticipated, 2024 continues to bring increased scrutiny of restrictive covenants by employers. At both federal and state levels, noncompete agreements are being disfavored more than ever, with Pennsylvania being the latest to act against them.

On July 17, 2024, Governor Josh Shapiro signed into law legislation (HB 1633) entitled “Fair Contracting for Health Care Practitioners Act.” The Act seeks to negate the effects of noncompetes within the health care industry which “inhibit competition that benefits employees and patients and can deter needed health care practitioners from wanting to practice in Pennsylvania.” Effective Jan. 1, 2025, pursuant to the Act, certain noncompete covenants within employment contracts for certain health care practitioners will be barred.^[1] Specifically, “a noncompete covenant entered into after the effective date of this subsection, [will be] deemed contrary to the public policy and [hence] void and unenforceable by an employer.”^[2]

Pursuant to the Act, noncompete covenants “impeding the ability of the health care practitioner to continue treating patients or accepting new patients, either practicing independently or in the employment of a competing employer after the term of employment” will be void and unenforceable for the following health care practitioners:

• Medical Doctors
• Doctors of Osteopathy
• Certified Registered Nurse Anesthetists
• Certified Registered Nurse Practitioners
• Physician Assistants

However, the Act provides that an employer may enforce a noncompete covenant as long as the noncompete’s duration “is no more than one year,” and the health care practitioner voluntarily terminated employment with the employer. The employer may not enforce a noncompete covenant if the employer dismissed the health care practitioner, even if the duration of the noncompete is less than one year.

It is important to emphasize that the Act does not:

• Prohibit an employer from enforcing a contract provision that allows the employer to recover reasonable expenses from a health care practitioner for expenses that are:
  • Directly attributable to the health care practitioner and accrued within three years prior to separation^[3]
  • Related to relocation, training and the establishment of a patient base
  • Amortized over a period of up to five years from the health care practitioner’s date of separation
• Void or render a noncompete covenant unenforceable if it was entered into with a health care practitioner who has an interest in a business entity as a direct result of:^[4]
  • The sale of an ownership interest or all or substantially all of the assets of the business entity
  • A transaction that results in the sale, transfer or other disposition of the control^[5] of the business entity, including by merger or consolidation
  • The health care practitioner’s receipt, by purchase, grant, award, issuance or otherwise, of an ownership interest in the business entity

The Act additionally imposes patient notification requirements upon the employer that must be provided within 90 days of the health care practitioner’s departure. Specifically, the employer must notify those patients seen by the health care practitioner within the past year of:^[6]

• The health care practitioner’s departure
• The process through which the patient may transfer health records to the departed health care practitioner or another health care practitioner of the patient’s choosing
• The patient’s reassignment to a new health care practitioner within the existing employer should the patient elect to continue receiving care from the employer

At the federal level and as discussed in a prior post on April 23, 2024, the Federal Trade Commission (FTC) held an open meeting at which it voted to finalize and promulgate its long-anticipated rule that, with only limited exceptions, prohibits employers from using noncompete clauses and effectively bans noncompetes nationwide. The Final Rule demonstrates the FTC’s adverse posture toward any agreement that could in essence restrict competition within the labor market, and is currently set to become effective as of Sept. 4, 2024. However, the Final Rule does not apply to nonprofit health care organizations, in particular, those that have been recognized by the IRS as tax-exempt under Section 501(c)(3) of the Internal Revenue Code.

As discussed in a prior post, many other states are moving to not only restrict or prohibit the use of noncompetes,^[7] but take it a step further and attempt to fill what they consider to be a “gap” left by the FTC’s Final Rule and extend the noncompete prohibitions to the nonprofit health care organizations that are otherwise exempt from the FTC’s Final Rule.

Pennsylvania is now following suit and extending the FTC’s noncompete prohibitions to health care practitioners. Pennsylvania’s actions follow the trend among other states (and the federal government) to significantly limit noncompetes but take it a step further. Pennsylvania’s extended reach covers the “gap” left within the FTC’s Final Rule and seeks to restrict the use of noncompete covenants within the health care industry in order to improve patient access and care, encourage job mobility and competition, and not only attract qualified and competent health care practitioners, but successfully retain them.

These legislative initiatives seeking to limit the enforceability and viability of noncompetes is expected to continue and as a result, employers are encouraged to diligently monitor the rapidly evolving terrain and assess any current noncompetes for compliance. The Health Law Observer will continue to monitor further developments as they relate to the future of noncompetes.

[1] The Act additionally requires the Health Care Cost Containment Council to perform a study of the effects of the Act and report on its findings.

[2] The Act defines “Employer” as “[a] person or group of persons that employ a health care practitioner at a health care facility or office.” The Act further defines “Primary health care facility or office” as “[t]he office, facility or location where a majority of the revenue derived from a health care practitioner’s services is generated.”

[3] It is however important to note that an employer can only recover such reasonable expenses directly attributable to the health care practitioner if the health care practitioner voluntarily terminated employment with the employer.

[4] However, a preexisting noncompete covenant may be rendered void and unenforceable if the health care practitioner is not a party to the sale, transfer or other disposition.

[5] The term “control” means “the possession, directly or indirectly, of the power to direct the management and policies of a business entity, whether through the ownership of voting securities, by contract or otherwise.”

[6] The Act specifically provides that the patient notification requirement is only applicable to those health care practitioners with “an ongoing outpatient relationship with the patient of two or more years.”

[7] For example, several states have enacted new laws that broadly limit the use of noncompetes, while other states have raised the minimum salary threshold for them and/or restricted the use of them to certain employees within particular sectors. As a result, employers need to diligently monitor the terrain, as the trend is expected to continue throughout 2024.

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