Labor and Employment Update - Fall 2004

Court finds that Patient/Customer List Qualifies as a Trade Secret and Employee and Doctors Breached Duty of Loyalty by D iverting Patients

The Court of Common Pleas in Philadelphia recently ruled in Pollack v. Skinsmart Dermatology and Aesthetic Center, P.C., that a patient list qualifies as a trade secret and that defendants breached their duty of loyalty by using the patient list to contact patients and encourage them to switch to a new practice after they resigned from the plaintiff’s medical practice. Drs. Shawe and Badawy were independent contractors, treating patients through the Philadelphia Institute of Dermatology (owned by Dr. Pollack) (“PID”). In August 2002, Drs. Shawe and Badawy resigned from PID to start their own practice, Skinsmart Dermatology and Aesthetic Center (“Skinsmart”). They hired Natalie Wilson, a medical assistant at PID to work at Skinsmart. None of the defendants had a restrictive covenant preventing them from competing with PID.

Prior to their resignations, Drs. Shawe and Badawy directed employees of PID to make copies of appointment books and to print out portions of the database of PID’s patients. Ms. Wilson used this information to contact patients previously scheduled for PID and reschedule their appointments at Skinsmart. Drs. Shawe and Badawy also used the patient list to send out a mailing informing patients about Skinsmart. A substantial number of patients went from PID to Skinsmart resulting in profits of approximately $700,000.

To qualify as a trade secret, information “must be the particular secrets of the complaining employer, not general secrets of the trade in which he is engaged.” The patient list, consisting of 20,000 names, had been compiled by PID over numerous years and was subjected to reasonable efforts to maintain its secrecy. For example, not all employees or doctors at PID had access to the entire patient list. Neither Drs. Shawe and Badawy nor Ms. Wilson had access to the entire patient list. Furthermore, the confidentiality of patient information insures that it remain unknown to those outside of PID. Furthermore, PID had spent money for computers, software and employees to keep and maintain the patient list. Finally, there was no question that the patient list was the core component of PID’s practice.

The Court rejected the argument that the patient list was not a trade secret because it contained names which may not have exclusively belonged to PID. This argument “minimizes the additional efforts of PID in organizing and compiling the contact and other information for each patient.” Further, while that may impact the amount of damages owed to PID; it did not counter the finding that the patient list as a trade secret.

In addition to finding that defendants misappropriated trade secrets, the Court found that they breached the duty of loyalty they owed to PID. Ms. Wilson breached her duty by giving a copy of the patient list to Dr. Badawy while still employed at PID and by making phone calls to reschedule PID patients to Skinsmart. The doctors breached their duty of loyalty by taking patients from PID that they did not bring to the practice and by misappropriating PID’s trade secrets.

The fact that this case involves patient information, which by its very nature must be confidential, was only one factor in determining that the information qualified as a trade secret. More significantly were the steps taken by PID to protect the information and the fact that the patient list was a core component of PID’s business. The Pollack case appears to be a significant victory for employers. It reinforces employer’s protection of their confidential business information and reiterates the duty of loyalty employees, and under certain circumstances, independent contractors owe to their employer/principal.

Key Aspects of New Overtime Regulations

As you are most likely aware, new regulations concerning the Fair Labor Standards Act (the “FLSA”) became effective on August 23, 2004. These new regulations may impact whether certain employees are entitled to overtime compensation. It is imperative that all employers review their job classifications and compensation practices to insure that they are in compliance with state and federal law. Class action lawsuits under the FLSA are the most prevalent of the employment related class actions and have the potential for significant damage awards.

Generally, employees are entitled to receive overtime pay (1 and ½ times the regular hourly rate of pay) for each hour worked over 40 hours in a work week, unless they qualify under one of the exemptions defined by the FLSA. The new regulations clarify the standards by which employees may now qualify as exempt. In order to qualify as exempt under the so-called “white collar” exemptions, generally an employer must demonstrate that the “salary basis test” has been met, and based on the employees’ job duties, he or she comes within an exemption defined by the regulations. Pennsylvania employers must keep in mind, however, that Pennsylvania overtime statute follows the old federal tests to determine whether an employee is exempt. Employees who were not exempt under the old federal tests may still not be exempt in Pennsylvania even if they would be considered exempt under the new federal rules.

Under the salary basis test, an employee must receive a pre-determined salary regardless of the amount of time he or she works. The new regulations raise the minimum salary levels for exempt employees to $455 per week. In addition, they make significant changes to the rules governing the “salary basis” test for exempt employees. Specifically, they allow employers to impose unpaid disciplinary suspensions on exempt employees in daily rather than weekly increments. They specifically state that exempt employees may receive payments in addition to their salary, including overtime, without jeopardizing their exempt status so long as the employee satisfies the salary basis test. Finally, they establish a “safe harbor” provision which permits employers to correct improper deductions from the salary of an exempt employee in order to preserve that employee’s exempt status.

Below is a chart which summarizes the white collar exemptions under the new regulations.

1 Unlike the previous regulations which had the rigid 80/20 test, the new regulations define the term “primary duty” as the principal or most important duty that the employee performs. In addition, the new regulations set forth factors to be considered in analyzing an employee’s primary duty.

2 The new regulations specify ten factors to be considered in order to determine whether an employee exercises discretion and independent judgment.

3 Under the new federal regulations, the salary test does not apply to employees who own a 20% equity interest in a business and who are actively engaged in its management. Pennsylvania, however, does not recognize this exemption.

4 Pennsylvania does not currently recognize this exemption.

5 Under the Pennsylvania test, the employee must be employed (1) for the purpose of and customarily and regularly engaged more than 80% of his or her work time away from the employer’s place of business and making sales; or (2) in obtaining orders or contracts for services or for use of facilities for which a consideration will be paid by the client or customer. In addition the employee may not devote more than 20% of the hours worked to activities that are not incidental to and in conjunction with the employer’s own outside sales or solicitations.

The Labor and Employment Group represents and counsels employers in all aspects of the employment relationship, including EEO litigation, union avoidance, negotiations, arbitrations, executive compensation, corporate transactions, and non-competition/non-solicitation agreements, as well as compliance with federal and state laws such as the Family and Medical Leave Act, the Americans with Disabilities Act, the Health Insurance Portability and Accountability Act, the Fair Labor Standards Act and the Occupational Safety and Health Act.

This document is published for the purpose of informing clients and friends of Klehr Harrison about developments in the areas of labor, employment and benefits, and should not be construed as providing legal advice on any specific matter. For more information about this publication or Klehr Harrison, contact Charles A. Ercole, Chair of the Labor and Employment Group, at (215) 569-4282 or visit the firm’s Web site at www.klehr.com