Restrictive covenants

How Useful is a Strong Restrictive Covenant

07 Apr 2016

Introduction

If you ask private medical practice leaders to list the most controversial issues they confront when negotiating physician employment agreements with physicians, almost all likely will include restrictive covenant issues on their list. This should come as no surprise; the very mention of restrictive covenants provokes an almost visceral reaction among most health care practitioners, and their very validity is shrouded in confusion and controversy. The purpose of this article is to attempt to clear up this confusion and controversy by providing a straightforward explanation of when and how these covenants are enforceable.

First, there are two types of restrictive covenants: non-competition covenants and non-solicitation covenants. Non-competition covenants preclude a physician who leaves a practice from providing services in close proximity to his or her former practice for a set period of time. In their simplest form, they provide that “for a period of x years after leaving the practice, the physician may not provide any medical services within y miles of the practice’s offices.”

Non-solicitation covenants preclude a physician who leaves a practice from soliciting away patients he or she has treated at the former practice to the physician’s new practice. These covenants can also preclude a physician from soliciting his or her former practice’s referral sources or employees.

The Purpose of Restrictive Covenants

It cannot be disputed that restrictive covenants restrict a physician’s freedom by temporarily controlling how he or she can practice and how he or she can obtain new patients. While, at first blush, this seems contrary to American free enterprise principles, most courts have recognized that “reasonable” physician restrictive covenants serve an important purpose and, therefore are, for the most part, enforceable.

Specifically, a physician working for a practice necessarily gains access to large amounts of the practice’s confidential and competitively sensitive information. The physician also is encouraged to develop close relationships with the practice’s patients. The problem is, however, that when the physician leaves the practice, he or she can use this information – and the close relationship developed with the practice’s patients – to lure patients away from the practice. A narrowly tailored restrictive covenant is theoretically likely to protect the practice against this unfair competition by eliminating the departing physician’s ability to derive an immediate competitive advantage from the misappropriated information. Accordingly, physician restrictive covenants are enforceable in most states.

Enforcing A Non-Competition Covenant

The states that are willing to enforce physician non-competition covenants typically will only do so if the covenant is reasonable in scope, in duration, and in geographic area. The covenant also cannot unduly burden the general public or the individual physician.

A non-competition covenant is reasonable in scope if it is limited to the services that the physician actually provided while employed by the practice. For example, if a physician is board-certified in both internal medicine and radiology, but provided only radiology services at a particular practice, a covenant that prevents the departing physician from providing internal medicine services would be unreasonable in scope.

With regard to the reasonableness of duration requirement, the non-competition covenant should last only as long as is needed to ensure that the departing physician is competing on the basis of his or her own skill and efforts, and not on the basis of material that he or she had access to while employed by the former practice. A general rule of thumb is that the covenant should last either the same amount of time as the term of the contract containing the covenant or two-to-three years, whichever is shorter.

Turning to geographic reasonableness, the non-competition covenant should only prohibit a physician from continuing to provide services in the same general area as he or she provided services before leaving the old practice. A general rule of thumb, used in many states, is that the restricted area should be no larger than the area from which the old practice draws 80% of its patients.

The non-competition covenant also must not unduly harm the public. This would occur if there was a shortage of the physician’s specialty in the area where the physician practice. For example, if a physician was the only pulmonologist in an area, then a covenant that would prevent the physician from practicing pulmonary medicine in the area for a period time would likely be unenforceable.

Finally, the non-competition covenant must not unduly burden the physician subjected to it. Of course, in a general sense, any non-competition covenant burdens a physician subjected to it. The question really is whether circumstances have changed since the physician entered into the covenant such that enforcing it would impose a significant, unanticipated burden.

Enforcing A Non-Solicitation Covenant

The enforceability of a non-solicitation covenant primarily depends on the definition of solicitation. Generally, solicitation means purposeful contact with patients in an attempt to convince the patients to receive services from the physician’s new practice. Typically, contact initiated by the patient does not constitute solicitation as long as the physician does not badmouth his or her former practice in response. Such conduct also could give rise to defamation claims.

Many courts also require, for a non-solicitation covenant to apply, that the physician have treated the patient while working at his or her former practice. Thus, the covenant cannot prevent the physician from soliciting patients he or she never treated at the old practice.

It is important to emphasize that most courts distinguish between covenants preventing a physician from soliciting former patients – which typically are enforceable – and covenants preventing a physician from treating former patients – which typically are not enforceable. Thus, regardless of the existence of a non-solicitation covenant, a physician almost always can treat former patients who came seeking his or her services unsolicited.

Conclusion

As is demonstrated above, the enforceability of physician restrictive covenants turns on a number of complex factors. It is vitally important to consult competent legal counsel when drafting, signing, or enforcing such covenants.


About the Authors:

Andrew E. Blustein is a Partner/Director and Vice Chairman of Garfunkel Wild, P.C. He joined the firm in 1993 and is a member of the firm’s Health Care, Business, and Compliance and White Collar Defense practice groups. He is Co-Chair of the HIPAA Compliance Group and Chair of both the Health Care and Information Technology Practice Group and the Insurance Regulatory Practice Group.

Roy W. Breitenbach is a Partner/Director of Garfunkel Wild, P.C. He is a Co-Chair of the firm’s Litigation and Arbitration Group, and a member of the Appellate Litigation, Employment Law, Environmental Practice, and Personal Service and Estate Planning Groups. His practice predominantly focuses on representing health care providers, business entities, and individuals involved in antitrust or other disputes with competitors, “business divorces,” complex commercial and real estate disputes, healthcare reimbursement disputes, and will contests.


This article was also featured in our newsletter Best Practices Vol. 11