Trade Secret Protection & Restrictive Covenants

In late July 2024, a Pennsylvania federal judge declined an employer’s request to enjoin the Federal Trade Commission’s non-compete Rule, which imposes a comprehensive ban on non-competes with most employees. This ruling is the latest court that declined to stop the FTC near-total ban on non-compete agreements, which is still set to take effect on September 4, 2024. Despite this, other federal courts will have more opportunities before September 4th to stop the FTC’s ban, so stay tuned. In this case, ATS Tree Services LLC v. Federal Trace, a tree-care company with twelve employees, who required its employees to sign non-compete agreements, sought to stop the FTC’s non-compete prohibition Rule. The tree company’s agreements prohibited the employees from working for direct competitors following separation in the geographic area the employee worked for one year.The court denied the injunction for two reasons: a lack of “irreparable harm” and an unlikelihood of winning the case on the merits. As to irreparable harm, the Court ruled that costs of compliance with the Rule – such as the expenses of sending out notices, attorney’s fees, and having to scale back specialized training – were nothing more than minimal costs, and were not sufficient to justify an injunction. The Court also felt that the risk of losing employees was merely speculative and a “risk” of irreparable harm is not enough. Perhaps more significant is the second part of the Court’s analysis, which concluded that the tree company was not likely to be successful on the merits of its claim that the FTC was acting outside of its authority. The Court found it “clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.” Further, the Court found that it has been well-demonstrated that Congress intended “to retain the existing authority empowering the FTC to prevent unfair methods of competition, and the discretion to determine the appropriate mechanisms to accomplish that directive.” In reaching this finding, the Court relied upon the FTC’s historical substantive rulemaking and Congress’s inaction of limiting the FTC’s substantive authority in the past, despite the opportunities to do so. Finally, the Court ruled that overlapping jurisdiction between state and federal governments in in this area also does not preclude the FTC from issuing rules to prevent unfair methods of competition. This is so, according to the Court, because parallel state laws are not entirely preempted, and conflicting state laws are rightfully preempted as the FTC is empowered to prevent “unfair methods of competition.” As of now, the Rule will take effect on September 04, 2024. Yet, as we have explained, several other legal challenges are pending, and one of more of them is expected to be decided before September 4th. So, an injunction or hold on the FTC’s Rule may still happen before the deadline. Our firm has issued a number of prior alerts on FTC’s Non-Compete Rule. Please see: ...

Partner Thomas Muccifori, chair of Archer’s Trade Secret Protection & Restrictive Covenants Group, was interviewed by Bloomberg Law about conflicting court rulings on the Federal Trade Commission’s ban on noncompete agreements and the growing pressure for employers to scale back.In the article, Tom provided insight about the growing scrutiny and public awareness surrounding noncompete agreements, saying, “companies are now being more judicious about which employees need to sign them, as well as how the restrictions are drafted.” He added, “we’re definitely seeing courts now scrutinize” the details of “each noncompete agreement more closely."To read the article, click here....

Governor Josh Shapiro has signed the “Fair Contracting for Health Care Practitioner’s Act” (“the Act”), Pennsylvania’s first statute imposing limitations on the use of non-competes in the Commonwealth. Pennsylvania joins the growing list of a dozen states which have enacted legislative bans or limitations on healthcare provider non-competition agreements in recent years.The Act, which becomes effective January 1, 2025, represents the legislature’s response to the current trend of health system consolidation and direct health care practitioner employment, and is a seismic shift in the enforcement of non-compete covenants entered into between Pennsylvania employers and healthcare practitioners. Subject to certain exceptions, a “noncompete covenant” entered into after January 1, 2025 is “deemed contrary to the public policy and is void and unenforceable by an employer.” A “noncompete covenant” is defined as an “agreement that is entered into between an employer and a healthcare practitioner in this Commonwealth which has the effect of impeding the ability of the healthcare 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.” A “healthcare practitioner” is defined under statute and includes a medical doctor, a doctor of osteopathy, a certified registered nurse anesthetist and certified nurse practitioner, and a physician’s assistant.The Act does provide several specific exceptions. First, an employer may enforce a noncompete covenant if the length of the noncompete covenant is no more than one year, provided that the healthcare practitioner was not dismissed by the employer. Second, a noncompete covenant can be enforced as to a healthcare practitioner in ”(a) the sale of the healthcare practitioner’s ownership interest in, or all or substantially all of the assets of, the business entity; (b) a transaction resulting in the sale, transfer or other disposition of the control of the business entity; or (c) the healthcare practitioner’s receipt of an ownership interest in the business entity. However, a preexisting noncompete covenant may be rendered void and unenforceable if a healthcare practitioner is not a party to the sale, transfer or other disposition. Third, an employer may enforce contractual provisions that allow the employer to recover reasonable expenses from a healthcare practitioner, if the expenses are: (a) directly attributable to the healthcare practitioner and accrued within the three years prior to separation, unless separation is caused by dismissal of the healthcare practitioner; (b) related to relocation, training and establishment of a patient base; or (c) amortized over a period of up to five years from the date of separation by the healthcare practitioner.To ensure continuity of care between patients and providers, the Act requires employers to notify patients of a departing healthcare practitioner within 90 days following the departure of a healthcare practitioner from an employer. The employer must notify the healthcare practitioner’s patients seen within the past year of (a) the healthcare practitioner’s departure; (b) how the patient, if desired, may transfer the patient’s health records to the departed healthcare practitioner; and (c) that the patient, if desired, may be assigned to a new healthcare practitioner within the existing employer, to continue receiving care there.Archer's Labor & Employment Group will continue to monitor the impact of the Act when it takes effect in 2025 and thereafter, as the Act specifically mandates that by December 31, 2027, the Pennsylvania Health Care Cost Containment Council perform a study on the effects of the Act, and report its findings. For any questions, please reach out to Peter Frattarelli, Chair of the Labor & Employment Group, at 856.354.3012 or pfrattarelli@archerlaw.com, Thomas Muccifori, Chair of the Trade Secret Protection & Restrictive Covenants Group, at 856.354.3056 or tmuccifori@archerlaw.com, or Lisa Albright, Partner in the Healthcare Group, at 609.580.3710 or lalbright@archerlaw.com.DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought. ...