‘‘They Can’t Enforce
That ... Can They?”
That ... Can They?”
When conflict arises over a
non-competition covenant,
resolution can be achieved through several means.
resolution can be achieved through several means.
The “urban myths” come in many
forms: “Those contracts are just a scare
tactic,” “They aren’t enforceable,
right?” “This is a right-to-work state,”
“I thought they couldn’t use those with
doctors.”
The reality, as we discussed
in the January/February issue, is very different. Physician
non-competition agreements generally are enforceable to some
degree in most states, although whether they will be enforced
in any particular circumstance depends on a lot of factors.
In the last
issue’s article, we talked about the anatomy of a
non-compete clause, and touched on some of the particular
provisions that can make a difference for you if it ever comes
time to leave your practice—whether it’s by your
choice or your employer’s choice. Now, fast forward to
the fateful time when your employer seeks to hold you to that
non-compete clause. What happens then? Unfortunately, this is
when too many physicians find out for the first time that there
is no truth to the myth that “those things aren’t
enforceable.”
Physician
non-competition clauses typically include prohibitions on (a)
practicing in your subspecialty within a certain geographic
radius, (b) soliciting patients and staff to follow you, and
(c) taking patient lists and proprietary practice information
with you. These restrictions may last anywhere from as little
as a few months to as much as a few years. However, a
non-competition clause that is disproportionate to the length
of employment may be problematic for the employer (e.g., a
four-year non-compete clause for a one-year contract).
The contract may
provide that asserted violations of a non-compete clause will
be litigated either in court or arbitration. From an
employee’s perspective, arbitration may be a more
affordable alternative. The arbitration route, however, does
not provide any more certainty of the outcome. Unless your new
employer is funding the litigation or arbitration, the former
employer normally will have more financial resources and can
make it expensive for you to go toe-to-toe with them. This is
particularly true if the practice wants to teach the former
employee “a lesson” or make an example for other
employees lest they also elect to compete with
the group.
the group.
So what can you expect
during litigation or arbitration proceedings to enforce the
non-compete clause in your employment agreement? In rough
chronological order, you could expect things to unfold like
this:
• Demand Letter. The process usually starts when you receive a
nasty letter from your former employer’s attorney
“demanding” that you immediately comply with the
non-competition restrictions in your employment agreement, and
threatening you with litigation if you do not cooperate. This
so-called “demand letter” normally will impose a
short deadline for response, and may insist that you share the
letter and your contract with your new employer. Be aware that
your employment agreement with the new employer may include
your representation that there are no prohibitions from you
beginning the new employment. Frequently, the demand letter
triggers discussions among attorneys on both sides, which
sometimes leads to a compromise resolution before any
litigation even begins. Any compromise should be memorialized
in writing and signed by you and your former employer.
• Temporary Restraining Order. If things don’t get resolved at the
demand letter stage, many employers will sue you in court and
file a motion for a temporary restraining order. As its name
implies, this is a temporary order that is issued on an
emergency basis by a judge. If granted, it will restrain you
from engaging in certain delineated conduct. This may happen
even if your contract has an arbitration provision, because
case law allows a party to seek emergency orders in court
pending an arbitration.
In most states, judges
have very wide-ranging discretion to grant or deny a motion for
a temporary restraining order, or to issue a compromise order.
For instance, in all but a few states, the judge has the power
to decide that the hypothetical 20-mile radius on your
non-competition agreement is too broad, and instead issue a
temporary restraining order preventing you from working for a
competing practice within 10 miles. Indeed, many non-compete
clauses expressly allow a judge to modify a particular
provision to make it “legal.” Because these are
emergency orders, the court typically holds a hearing on
whether to grant the temporary order within a day or so of the
former employer filing its papers with the court. Your attorney
needs to be able to act quickly to assist you. When they are
issued, temporary restraining orders can last for 10 to 20
days, until the court has an opportunity to conduct a more
thorough hearing and decide whether to keep any restraints in
place pending the final trial of your case. That next hearing,
10 to 20 days later, is called a “preliminary injunction
hearing.” But before you get to that next hearing, courts
often order what is known as expedited discovery.
• Expedited Discovery. When the court is considering requests for
temporary or preliminary orders, it frequently wants to have
more factual information to work with—even though the
trial itself won’t happen for many more months.
Frequently, the court will order the parties to engage in
expedited discovery. The parties (through their respective
attorneys) produce key documentary evidence to each other
within a few days’ time. Normally, there also will be
depositions of key witnesses: usually you and the
principals of your former employer. Depositions are sessions
where witnesses give sworn testimony about the case. These take
place outside of a courtroom, usually in a lawyer’s
conference room. All of this takes place on a compressed
timetable: during the 10 to 20 days between issuance of a
temporary order and the date of the follow-up preliminary
injunction hearing.
• Preliminary Injunction Hearing. After the expedited discovery, the lawyers
for each party compile evidence gained during the depositions
and from the documents exchanged, and then make the best case
they can to the judge for issuance or denial of the preliminary
injunction. The judge may have witnesses testify on the stand
at the preliminary injunction hearing, and essentially hold a
mini-trial (without any jury). Alternatively, a judge may call
for submission of documents, affidavits, and excerpts from
deposition transcripts, but will hear no live witnesses at the
hearing. The lawyers argue the law, and then the court decides
whether the temporary restraining order ought to remain in
effect pending the ultimate trial of the case, or if it should
be modified or dissolved altogether.
To win the preliminary
injunction, the former employer must prove that it is likely to
win its case at trial, that it would be difficult to calculate
money damages if violation of the contract continues during the
months leading up to trial, and that the public interest will
not be adversely affected by issuance of an order. As a
practical matter, the hearing on the preliminary injunction
quite frequently is “the whole game,” because the
non-competition agreement frequently will expire before a final
trial can be held.
• Discovery. If the preliminary injunction hearing is not the
final disposition of the matter, there will be some form of
additional discovery prior to the final hearing or trial. Any
earlier expedited discovery will have covered only those issues
necessary for the court to decide the preliminary injunction
motion. There now may be more ancillary issues, additional
witness depositions, and questions about damages that still
need to be covered by document requests, written information
requests, and deposition testimony.
• Arbitration. You will likely only go to arbitration if you and
your former employer agreed to this in your employment
contract. The parties select a mutually acceptable neutral
arbitrator or panel of arbitrators to decide the case. The
advantage? Arbitration is a less formal procedure. In theory,
this can make it a less expensive and faster decision. But the
reality is that time and cost savings depend on how the
arbitrators conduct the proceedings, and you also must pay the
arbitrators for their time.
A primary feature of
arbitration is its relative finality: Unlike a court
proceeding, there is no right to “appeal” if you
lose. The arbitration decision can only be overturned in
extreme circumstances, such as arbitrator bias or misconduct.
Courts cannot overturn the result simply because the arbitrator
made an error of law. This finality helps make the process
cost-efficient by avoiding expensive appeals, but can be
frustrating if you lose the case through what you believe was a
misunderstanding of the law by the arbitrators. One final
advantage of arbitration is that it is private. Any
“dirty laundry” that comes out during the hearing
will be in private. Neither the written filings nor the
testimony will be available to the press, your professional
peers, or patients under normal circumstances.
• Trial in Court. If your case goes to court, the ultimate
decision will be made by a judge or jury. The court is a public
form, which is both an advantage and a disadvantage. You
don’t have to pay the judge or jury for their time, and
you get your proverbial “day in court,” but the
procedures may be longer and more expensive, and always are
public. Most of what happens in court cases is open to public
view.
• What the Employer Can Seek. Either in court or arbitration, the
employer usually will ask for a continuation of any preliminary
injunction that was issued, so that it continues for the
duration of the time period in your non-competition clause.
Alternatively, and sometimes in addition, a former employer may
seek money damages from a breaching former employee. In fact,
in some states, legislation makes money damages the only option
with respect to departing physician employees (see, for
example, Delaware: 6 Del.C. § 2707). If you are in a state like Delaware, or if the
employer decides to seek only money and not an order forcing
you to comply with the non-compete, the case will proceed on a
slower track than the temporary order fire drill, but
ultimately the same types of discovery and trial procedures
will come into play.
• Settlement. Many non-compete cases ultimately settle for
compromise restraints on competitive activity. In fact, one
side-benefit of the temporary restraining order procedure is
that it brings things to a head quickly. Parties often reach
settlements after getting this initial ruling from the court on
the parties’ positions. Another factor that often leads
to settlement is the overriding issues of patient welfare, and
patient perceptions. Contested litigation can be a distraction
from the practice of medicine, requiring time and focus
dedicated to something other than treating patients. In
addition, patients may be put off by an unseemly fight between
a physician and his former practice. These factors often lead
to discussions resulting in a compromise that provides some
protection for the former employer, and some competitive
freedom for the physician.
Litigation or
arbitration over a non-competition agreement can be a stressful
and expensive process. The former employer feels it must
protect the practice’s business and revenues by
preventing an outflow of patients. The departing physician
feels the patients are “hers” and that the former
employer already has made plenty of money through her efforts
over the years. This, of course, is a recipe for a vigorous
fight.
Careful structuring of
the non-competition clause(s) in your employment contract, and
awareness of your short and long-term objectives, can help
insulate you from the time and expense of battling a
non-competition provision.
While nothing lasts forever,
the bitter feelings from a dispute regarding a non-competition
clause can have a negative impact personally and professionally
on both the departing physician and the employer. As a result,
it is a good idea to discuss with any prospective new
employer—and with legal counsel—how litigation will
be handled with your former employer, what it may cost, and how
to plan your conduct in ways that may limit your litigation
exposure. g
Bruce Armon is a partner and practices
health-care law for Saul Ewing LLP. He can be reached at barmon@saul.com. Chris Stief is a partner and litigator who
chairs Saul Ewing’s Employee Defection & Recruitment
Practice Group and can be reached at cstief@saul.com.
