The Evolving Landscape of Restrictive Covenants in Pennsylvania

The Evolving Landscape of Restrictive Covenants in Pennsylvania

Disclaimer: This article is for informational purposes only and is not legal advice. Reading it does not create an attorney–client relationship. Todd Nurick and Nurick Law Group are not your attorneys unless and until there is a fully executed written fee agreement with Todd Nurick or Nurick Law Group.

Introduction

Restrictive covenants—such as non-compete and non-solicitation clauses—are a rapidly evolving area of Pennsylvania law. Todd Nurick of Nurick Law Group has closely followed these developments, particularly the recent statutory reforms affecting healthcare professionals. In this article, we examine how Pennsylvania courts continue to apply traditional tests for enforceability while also adapting to significant new legislative changes.

Enforceability of Restrictive Covenants in Pennsylvania

Pennsylvania courts apply a four-factor test—remembered by the acronym ACRE—to determine enforceability:

1. Ancillary: The covenant must be incidental to a legitimate relationship, typically employment or the sale of a business.

2. Consideration: For existing employees, continued employment alone is insufficient. There must be fresh consideration, such as a promotion, bonus, or other tangible benefit.

3. Reasonable Terms: Covenants must protect legitimate business interests—such as goodwill or trade secrets—and be limited in geographic scope and duration (one to two years is generally considered reasonable).

4. Equitable to Enforce: Courts consider fairness, including whether an employee was terminated without cause or faced unpaid wages.

Pennsylvania also applies the “blue pencil” rule, allowing courts to modify overly broad agreements rather than strike them down entirely.

A Significant Shift: The Fair Contracting for Health Care Practitioners Act

As of January 1, 2025, Pennsylvania’s Fair Contracting for Health Care Practitioners Act dramatically alters enforceability of restrictive covenants in the healthcare sector:

• Non-competes longer than one year are unenforceable for physicians, physician assistants, nurse practitioners, nurse anesthetists, and osteopathic physicians in contracts entered into after January 1, 2025.

• If the practitioner voluntarily resigns, a non-compete of one year or less may still be enforceable.

• Employers may still enforce reimbursement clauses for training or relocation costs incurred within three years prior to voluntary separation, amortized over up to five years.

• The Act does not apply to restrictive covenants in connection with the sale or transfer of a business or equity interests.

• Employers must notify patients within 90 days of a practitioner’s departure if the practitioner provided care for at least two years, including instructions on records transfers and continued care options.

National Trends and Federal Developments

Pennsylvania’s reforms align with a broader national trend toward limiting non-competes, especially in healthcare and lower-wage employment. At the federal level, the FTC proposed a near-universal ban on non-compete agreements in April 2024, though enforcement has been delayed due to ongoing court challenges.

What Employers and Practitioners Should Know

For Employers

• Review and update healthcare employment agreements immediately to ensure compliance.

• Prepare patient notification protocols in anticipation of practitioner departures.

• Structure expense reimbursement provisions carefully to comply with the new law.

For Healthcare Practitioners

• Carefully review restrictive covenants before signing new contracts after January 1, 2025.

• Seek legal review of older agreements that may now be unenforceable.

For Other Industries

• While the healthcare-specific reforms are notable, the ACRE and blue-pencil standards continue to apply broadly to restrictive covenants in Pennsylvania. Businesses in other sectors should watch closely for future legislative changes.

Conclusion

Pennsylvania law on restrictive covenants is in flux. While courts continue to apply traditional ACRE and blue-pencil principles, the Fair Contracting for Health Care Practitioners Act marks a pivotal statutory reform. Employers and practitioners alike should take proactive steps to understand how these changes affect their rights and obligations.

Sources

• High Swartz LLP, “Restrictive Covenant Enforcement in Pennsylvania”

• Littler Mendelson, “Pennsylvania Enacts Law Banning Certain Non-Compete Agreements in Healthcare”

• Foley & Lardner LLP, “New Limits on Non-Competes for Pennsylvania Health Care Practitioners”

• Margolis Edelstein, “Covenants Not to Compete in Pennsylvania”

• Morgan Lewis, “Pennsylvania Restricts Non-Compete Agreements for Health Care Workers”

• Federal Trade Commission, Proposed Rule on Non-Compete Clauses (2024)