A Clause for Concern
The details of any non-competition
covenant within an employment
contract may mean the difference between a contract you can live
with and one that needs to change.
contract may mean the difference between a contract you can live
with and one that needs to change.
Very few things last forever. For most
physicians, one of the most difficult transitions is the end of
an employment relationship. In addition to the inevitable
personal reflection that will take place, the severing of the
physician’s employment with the employer will likely have
a profound professional impact on the physician. One aspect of
the transition that physician-employees often do not anticipate
is the long and short-term impact of contractual
non-competition provisions on the physician’s
professional success in a community.
For a moment,
let’s look at the situation from the employer’s
perspective. Imagine that you are an employer and you hire a
bright and eager physician-employee. You provide your employee
with uninhibited access to your referral sources, patient
lists, business model, and payer contract agreements. When this
employee leaves your employ, he sends a letter to each of your
practice’s patients notifying them of the decision to no
longer work with you and that he would welcome the opportunity
to continue to care for the patient and her family and friends
at the new office location—right down the street from
your current office!
To protect an
employer’s interests from such behavior, most physician
employment contracts include so-called
“non-competition” provisions, which govern the
physician-employee’s activities both during employment
and after termination. Like most physician employment contract
provisions, the devil is in the details regarding the
scope—and enforceability—of a non-competition
provision.
A non-competition
provision usually includes language that the employee covenants
not to directly or indirectly own, manage, work for, invest in,
or otherwise participate in “certain activities”
within a defined “radius” for a certain
“period of time.”
Activities. It is imperative that the prohibited
activities accurately describe the employer’s medical
practice and are not overly broad from the employee’s
perspective. Every medical specialty includes various practice
components. For instance, a physiatrist’s practice could
include (1) inpatient and/or (2) outpatient pain services in
the area of (3) management and/or(4) rehabilitation. The
practice likely does not include all four practice types and
settings. If the non-competition provision broadly prohibits
the employee from practicing any physiatry upon termination, a
court may find the covenant overly broad if the
employer’s practice was, for instance, exclusively
focused upon outpatient pain management.
Radius. The “radius” of a non-compete
provision can have important consequences, and should be
examined carefully by both employers and employees. Agreeing
not to perform certain activities within a five-mile radius of
an employer’s office(s) likely has much different
implications if your practice is in Lower Manhattan versus a
suburban or rural community. As an employee, it is important to
determine your long and short-term goals and the potential
opportunities in a community before you agree to a particular
non-compete radius. If your spouse or significant other also is
a physician, be cognizant of the radii of your respective
non-compete provisions. Ideally, both of you will not have to
switch jobs—and home and schools if you have
children—because the radius in one of your contracts
effectively means you will have to move to continue practicing
medicine. The radius should be specifically identified in the
employment contract, whether it is city blocks, particular zip
code(s), a county, or natural boundaries (e.g., a river).
An employer will want to
make sure that the geographic radius matches the actual radius
of the practice’s business. Radius will be closely
scrutinized by the courts if the non-competition provision is
challenged. In some states, if the radius is too broad the
court will modify it to something the court feels is
appropriate. But there are other possibilities. In a recent
Kansas case, Graham v. Cirocco, involving a colorectal surgeon, the Kansas Court of
Appeals found a shortage of colorectal surgeons on the Kansas
side of Kansas City, and consequently refused to enforce an
agreement not to place an office within a 25 mile radius (the
court did, however, enforce a separate covenant not to solicit
patients). In other states, such as Georgia and Wisconsin,
there is no leeway: If any part of the covenant is over broad,
the entire covenant will be thrown out.
Time Period. Finally, the physician’s employment
contract should identify the period of time in which the
employee will not compete with the employer. In many
circumstances, this begins when the employee starts work for
the employer and will continue in effect for a year or more
beyond the end of the contractual relationship. The employment
agreement may provide that the period of time may extend beyond
the designated period if the employer seeks an action for
equitable relief because the employee violated a provision of
the non-compete clause. This is to ensure that the employer has
the benefit of the restrictions in place for the full,
agreed-on period of time.
Non-Solicitation of
Patients. A non-compete agreement
may also include a non-solicitation clause. As its name
suggests, these provisions may prohibit an employee from
directly or indirectly soliciting for treatment any former or
existing patient (or patient’s family member) of the
employer, influencing anyone with a referral relationship with
the employer from altering that relationship, and/or
influencing any employee of the employer to alter her
employment relationship with the employer. An employer may not
generally interfere with a patient who requests that he
continue to be treated by the departing physician and requests,
in writing, the medical records be forwarded accordingly.
Depending on the language in the non-solicitation clause, it
may be difficult or impossible for a departing employee to
build a patient base from the former employer’s practice.
Protection of
Confidential Information and Trade Secrets. An employer is entitled to protect its confidential
business information and trade secrets even without a signed
contract restricting use of such information. In a case decided
in 2002, Total Care Physicians v. O’Hara, a Delaware court ruled that a physician
practice’s billing records containing patient identity,
address, treatment history, and insurance data were trade
secrets under the Delaware version of the Uniform Trade Secrets Act (a standardized trade secrets statute that has
been enacted by more than 40 states). The court held a
departing physician liable and required him to pay money
damages when he removed copies of billing records and used them
to send a solicitation mailing that resulted in the transfer of
hundreds of patients to his new practice.
Professional
Announcements. An interesting issue
that came up in the Total Care Physicians v. O’Hara case
was whether a physician has a right or duty to inform existing
patients of a new practice affiliation, regardless of contract
or trade secrets issues. The court examined the AMA Code of Medical Ethics, as well as state public policy on the medical
profession, and concluded that patients are entitled to be
notified. The court even went so far as to conclude that trade
secret materials may be used to effectuate that notification,
but stressed that using trade secret data to solicit, rather
than merely notify, crosses the line into a violation of trade
secrets law. This may mean that even a contractual clause
purporting to prohibit announcement of a new affiliation would
be unenforceable. Many states also have abandonment statutes or
regulations that prohibit a physician from abandoning her
patients.
Liquidated Damages or
“Buy-Out” Provisions. Many
employers include a buy-out or liquidated damages provision
that permits an employee to not comply with one or more of the
provisions in the non-compete clause in exchange for a cash
payment. In many situations the requested payment is quite
significant, e.g., some multiplying factor of the
employee’s wages during a designated period of time or a
pre-determined amount. To be enforceable, a liquidated damages
clause must meet some basic criteria: (a) the actual damages
must be difficult to measure; and (b) the contractually
specified damages payment must be a reasonable amount in
proportion to the value of the services involved in the
contract itself. In covenant cases, the first of these is
usually easy to satisfy, but the second factor typically
receives fairly close scrutiny. For instance, even though the
Pennsylvania Superior Court had upheld a liquidated damages
clause in the 1992 case of Geisinger Clinic v. DiCuccio, a 2001
decision from a lower court (Medical Wellness Associates v.
Heithaus) refused to enforce a liquidated damages clause
because the former employer did not introduce evidence of how
the $25,000 figure was derived as a damages forecast. The
lesson is that if your contract includes a liquidated damages
clause, the employer needs to have a rational and defensible
basis for the number to explain to a busy trial court judge if
the employer wants to get the clause enforced.
The Public Interest. One
factor that comes up often in litigation involving physician
non-compete agreements is the public interest. Frequently,
courts will examine the impact on the public before issuing an
order preventing a physician from practicing in a certain area,
such as availability of physicians practicing a particular
specialty in the geographic area. Employers will argue that the
public interest is served by protecting investment in building
successful businesses in the community.
It is very important
to review and understand the potential short and long-term
impact of your contract’s non-competition clauses before
you sign the employment agreement. A few potential items to
consider:
• Are your long-term plans to
stay in the community? If you are close to 100 percent positive
that you will be moving far away if, for any reason, you stop
working for your employer, the non-compete clauses may be much
less important than other issues in the contract (e.g., salary,
bonus, benefits).
• Does the contract provide any
exceptions in which the non-compete clauses do not apply (e.g.,
expiration of the contract or termination by employer without
cause)?
• Are the non-compete clauses
overbroad and/or unenforceable?
Many physician
employees erroneously assume that non-competition clauses are
illegal or will not be upheld by a judge or an arbitrator. This
is a gamble that may prove expensive for the
physician—both financially and professionally. Should
there be a dispute regarding enforcement of a non-competition
clause, the employer is likely to have more financial resources
at its disposal and can make the departing employee’s
professional and personal life miserable. Careful consideration
should be given to reviewing and seeking modification to your
non-competition clause to protect yourself in the short term
financially, and in the long term professionally.
In the next issue of UO, we
will detail what you can expect during litigation or
arbitration of a disputed non-competition clause in an
employment agreement. 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.
