Non-compete agreements (non-competes), also referred to as a “restricted covenants,” are employment contract provisions restricting one party from competing professionally with another party, usually within a specified geographical area and/or time period following the conclusion of the physician’s employment or the sale of the physician’s medical practice. The American Medical Association (AMA) opposes non-competes, finding that they, “restrict competition, disrupt continuity of care, and potentially deprive the public of medical services.”1
By way of background, there are three common types of restrictive covenants. They are:
- agreements not to compete with the former employer;
- agreements not to solicit the former employer’s patients, employees or both; and
- agreements not to use or disclose certain confidential information of the employer.
From the employer’s perspective, the goal of a non-compete is to prevent the physician from leaving employment and taking patients and staff with them to a competing practice. Often physicians do not realize the extent to which these contractual provisions restrict their bargaining power and future employment opportunities until they consider leaving their current employer to practice elsewhere. It is critical that physicians understand what a non-compete is, and the potential effect on future employment prior to signing a contract containing a non-compete clause. As with any contractual provision, it is advisable to have an attorney review all contract language prior to entering into an employment agreement.
State law generally governs non-competes and those laws vary, particularly with regard to whether and when non-compete clauses are enforceable. For example, several states prohibit non-compete agreements in employment agreements outright. In other states, courts evaluate non-competes on a case-by-case basis and modify the terms of the non-compete if determined to be overbroad (i.e., too large of a geographical area or unreasonable length of time), and other states have laws that specifically relate to physician non-competes. For example, Connecticut law, rather than prohibiting physician non-competes outright, limits the permissible duration to one year and the geographical scope (up to 15 miles from the “primary site where such physician practices”). Further, Connecticut law makes physician non-competes unenforceable if the physician’s employment or contractual relationship is terminated without cause.2 Compare that with New Mexico, which recently expanded its outright non-compete prohibition against medical professionals to include certified nurse practitioners and mid-wives.3 Moreover, numerous states have recently proposed legislation designed to limit the use of non-compete clauses within their state. Thus, it is important to contact your local attorney to determine how non-compete clauses are treated in your state, prior to entering into any contractual agreement.
Typically, litigation regarding non-competes involves attempts by medical practices to enforce them against departing physicians, usually by filing temporary injunctions requesting that the court prohibit the physician’s new employment. To prevail on a request for injunctive relief, the employer needs to show:4
- a likelihood of success on the merits of its assertion that the employee breached the non-compete agreement;
- that the employee’s work for the competitor will harm the employer in a way that cannot be adequately compensated through monetary damages;
- that the harm caused to the employer outweighs the inconvenience to the former employee if the non-compete agreement were to be enforced; and
- that enforcing the non-compete agreement would further, rather than undermine, the public interest.
Physician non-competes, unlike those found in a typical business setting, can impact the public interest, particularly if the physician is a specialist, like a psychiatrist, and the geographic area outlined in the non-compete is an underserved area with a shortage of psychiatrists. In these instances, courts would be less likely to enforce the non-compete as drafted.
Keep in mind that when determining whether to enforce a specific non-compete agreement, courts will consider the specific circumstances of each situation and look at whether the agreement is:
- necessary to protect a legitimate business interest;
- reasonably limited in time, geographic scope and other practice restrictions; and
- consistent with law and public policy.
Non-compete agreements have become increasingly prevalent in physician employment arrangements and state laws vary in terms of how these clauses are viewed. Obtain legal guidance prior to entering into such an agreement, or prior to exiting an employment arrangement where a non-compete clause is applicable.
RISK MANAGEMENT TIPS:
When hiring or seeking employment and presented with a non-compete to sign, keep in mind the following.
- It is always easier to negotiate any contractual terms before you enter into an agreement than to try to litigate afterwards.
- If the employer has satellite offices covering a large area, the psychiatrist should negotiate to make sure the geographic limitations apply only to the office where he/she typically works.
- Courts will tend not to enforce a non-compete when doing so may cause patient harm, especially in medically underserved areas.
- Courts will often refuse to enforce a non-compete clause if the employee was fired without good cause.
- Some states require that the employer provide the physician with an option to buy his/her way out of a non-compete clause. Keep in mind, however, that the price charged could be as much as a year’s salary.
- When hiring a new physician, it is important to ask the potential employee whether they owe any obligations to a current/prior employer. If the potential employee is subject to the current/prior employer’s non-compete, obtain legal guidance to determine whether/how to proceed with the hiring process.
1 AMA, Code of Medical Ethics E9-02.
2 Conn. Gen. Stat. §20-14p (b) (2).
3 N.M.S.A. § 24 1i-1.
4 Rosenthal, A., Physicians News Digest, “Enforcement of Noncompete Agreements.”