Understanding non-compete employment clauses
An orthopedic surgeon is offered a lucrative position in an adjoining community by a successful group practice. He is concerned that his existing employment agreement with a university hospital would prohibit him from accepting the new job opportunity. His current employment contract contained a noncompetition (“non-compete”) clause that made him and his prospective employer rightfully concerned. Upon a comprehensive review of his current employment contract, the non-compete provision was not as restrictive as he and his prospective employer had previously thought.
This scenario is not uncommon. Non-compete clauses are a part of most physician employment contracts, and physicians should understand the implications of such clauses. This article attempts to shed some light on the subject.
Definition of a non-compete clause
A non-compete clause, also known as a “covenant not to compete” or a “restrictive covenant,” is a provision in an employment contract that precludes one party from engaging in competition with another party by working in a particular field, within a specific geographic area and for a stated period of time. The most common purpose is to protect an employer from having valued employees migrate to competitor employers or from setting up competing businesses of their own. A well-written noncompetition provision will prevent a physician from practicing within a certain geographical area surrounding the employer or the employer’s hospital relationships and for a prescribed period of time after the termination of the physician’s employment. The goal is to protect the business interest of the employer, who will have invested time, money and other resources in the employee’s professional development.
B. Sonny Bal
Lawrence H. Brenner
In negotiating the restricted length of time, it is more common to have a longer time restriction when a physician is selling an ownership interest in a practice than for a physician entering into an employment relationship. In some jurisdictions, such as California, non-compete clauses are invalid for all but equity stakeholders in businesses. Most states recognize and enforce various forms of non-compete agreements.
Often, the physician will be permitted to practice within the parameters of the restricted geographical area or time period if they (or the prospective employer) “buy out” of the clause. This is desirable when the reasonableness of the non-compete clause is not clear cut and both parties want to avoid the expense of litigating its enforceability. Otherwise, in the event the physician breaches the non-compete clause, the former employer will usually first seek injunctive relief that prohibits the physician’s new employment and then follow with a demand for monetary damages arising from the physician’s breach.
In states where non-compete clauses for physicians are enforceable, the provision must protect the employer’s legitimate business interest, be specific in geographical scope and have a narrowly tailored durational scope. If the language in the clause is vague or does not clearly describe the exact terms of the restrictions on practice, the clause might be unenforceable or open to greater interpretation than either party anticipated.
Legitimate business interests, scope
In order for a non-compete clause to prevail in court, it must protect the employer’s legitimate business interest. Some examples of a legitimate business interest are the employer’s goodwill and the retention of the employer’s (hospitals and medical practices) patients. Moreover, since non-compete clauses are generally not looked upon with favor by courts because they operate as a restraint of trade, the language needs to be narrowly tailored in order to protect the employer’s legitimate interests.
Non-compete clauses must also specify the restricted geographical area where the physician is prohibited from practicing. However, whether a geographical scope is overly broad depends on state law and the location of the employer and the surrounding community.
Typically, contracts will provide a radius in miles surrounding the employer’s location or locations as the restricted territory. For hospitalists, the geographic restriction might prohibit the physician from practicing at or for the employer’s clients (e.g. hospitals).
A review of contracts with the following geographic restrictions should be considered unenforceable red flags: prohibition to practice anywhere in the United States; prohibition to practice anywhere in a specific state; prohibition to practice in a territory extending to excessive miles from the employer’s location; and prohibition to practice in certain counties. Note that the exclusion to practice in certain counties might be overly broad in some situations, but might be acceptable in others.
A non-compete clause should identify the length of time in which the physician is prohibited from practicing within the restricted geographic area. Whether the durational scope is reasonable will vary from state to state. As a general rule of thumb, if the restricted time frame is 2 years or less after termination of the contract, the time restriction will likely be deemed reasonable. However, state laws vary on whether time restraints in excess of 2 years are enforceable. A common pitfall with time restrictions is excessiveness based on the state’s laws and the specific circumstances of the physician and the employer.
What employers need to know
Great care must be taken when hiring a physician. States recognize the legal theory of interference with a contract. If an employer is recruiting a hospitalist who is subject to an employment agreement with a non-compete clause, the prospective employer must be careful in the recruiting process. An employment agreement should include a representation by the physician-employee that he/she is not subject to any other agreement that would prohibit the physician from entering into the new employment relationship.
If a prospective employer is aware of an existing employment contract that contains practice restrictions on a recruited physician, the prospective employer could be held responsible for damages if a dispute arises between the parties. One basis for doing so would be the legal theory of tortious interference with the business contract between the physician and his/her existing employer.
Although it might seem like semantics, a few words can change your future. Be sure to have any contract containing a non-compete clause reviewed by a lawyer who is well-versed in your state’s laws. If you have already signed an agreement with a non-compete clause and are considering your next career move, a lawyer can shed useful light on a seemingly impenetrable clause, and advise you of practical and safe options.