The 10 Biggest Legal Mistakes Physicians Make in Litigating a Noncompete Agreement

Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them
Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)

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Executive Summary

A “covenant not to compete,” or “noncompetition” provision, places certain limitations on a physician’s practice following termination of employment and is a common feature in many employment agreements. Depending on the circumstances, both physician employers and physician employees may find themselves facing litigation over the enforcement of such a noncompete provision after employment has terminated. Therefore, both physician employers and physician employees should consult appropriate counsel, make an early assessment of the evidence needed to support their position, take a realistic look at the enforceability of the noncompete in question, and have an appreciation for the time frames involved in such litigation.

Mistake 1 Making an Unwise Choice of Counsel

The enforceability of noncompete provisions in employment agreements (which also often appear in agreements for the purchase and sale of medical practices) is governed by state law, and consequently can vary from state to state. Given the unique status of physicians in society and the importance of the physician-patient relationship, certain states have placed additional limitations on noncompete agreements affecting physicians (e.g., providing for access to patient records even after the termination of employment). When noncompete issues become the subject of litigation, both physician employers and physician employees should turn to skilled trial counsel knowledgeable in employment law and experienced in dealing with physician agreements. All too often, physicians turn to their transactional attorney who drafted the agreement (in the case of an employer) or reviewed the document (in the case of an employee), regardless of the attorney’s courtroom experience. Due to the ramifications of noncompete litigation, it should be handled by experienced litigators who are familiar with this area of law (and preferably with noncompetes involving physicians).

Action Step Physicians should consult with experienced civil trial counsel, licensed in the jurisdiction in which their practices are located, and knowledgeable in employment law.

Mistake 2 Not Appreciating the Time Frames Involved

The usual method of enforcing a noncompete is to seek injunctive relief from a court by obtaining first a temporary restraining order and shortly thereafter scheduling a hearing for a temporary injunction, the purpose of which is to obtain an order enjoining the competing physician from engaging in a practice that violates the geographic, time, or type of activity limitations contained in the noncompete agreement. An injunction hearing is much like having a full-blown trial on the merits of the case within an extremely compressed time frame, complete with discovery (usually depositions) conducted on an expedited basis. For physicians whose only acquaintance with litigation is a medical malpractice case that might not come to trial for several years, this drastically shortened time frame can come as quite a shock (not to mention a disruption in practice). A case in which injunctive relief is sought can proceed rapidly from initiation to resolution in just a few weeks.

Action Step Physicians should carefully consider the compressed time frames often involved in litigating a noncompete agreement and the ensuing implications such a shortened time period will have for their practices.

Mistake 3 Failing to Make an Early Assessment of the Noncompete’s Enforceability

Given the fact that noncompete covenants are generally disfavored as unreasonable restraints on trade, unless they comply with certain requirements, physicians would be well advised to assess the enforceability of a noncompete before embarking on litigation. The physician should consult with a licensed, experienced, and knowledgeable attorney about prospects for enforcement of the noncompete at issue. Important questions need to be asked: Was the noncompete supported by adequate consideration or was it simply a case of “sign this and you’ll have a job?” Does the noncompete contain reasonable restrictions on the geographic area to be covered, the applicable time frame, and the type of competing activity to be restrained? Does the noncompete comply with the particular jurisdiction’s requirements, if any, for noncompetes involving physicians (e.g., certain states require a “reasonable buyout” provision, and reasonable access to patient records so that ongoing patient case is not compromised)? A physician employer may be in for a rude awakening if he or she cannot demonstrate the legitimate business interest being protected by the noncompete’s restrictions.

Action Step Ideally, physicians should consult with appropriate counsel when first formulating a noncompete agreement. Prior to litigation, physicians should consult with trial counsel about the enforceability of the noncompete’s provisions, and they should be prepared to compromise on the restrictions that are not likely to be upheld (e.g., modifying the geographic area affected by the noncompete).

Mistake 4 Failing to Marshal the Right Evidence

Often, physicians fail to look past the most critical witnesses in litigating a noncompete agreement: the physician employer and the physician employee. While such witnesses are clearly the most important to address the terms of the agreement itself, they are by no means the only important witnesses. For example, a physician employer may wish to offer testimony from appropriate hospital representatives, medical society officers, and/or other physicians in the community who can testify to the substantial investment that the practice made in the departing physician employee and the measures taken to integrate him or her into an established practice and into the local medical community. A physician employee might wish to counter with similar witnesses who can testify as to the shortage of doctors in the community in his or her specialty and the resulting need for such practitioners (a number of cases have been won, and noncompetes held unenforceable, on just such a basis).

Action Step Physicians should, in consultation with counsel, consider the significance of witnesses other than the parties to the agreement itself in supporting their cases.

Mistake 5 Failing to Evaluate the Prospects for Settlement at an Early Juncture

Physicians should remember that noncompete litigation, while rife with emotional components (such as feelings of betrayal), is no different from other litigation in that the vast majority of cases are resolved through compromise settlement rather than with a final judicial ruling. Moreover, because the enforceability of a noncompete can be highly discretionary with the court, it is not uncommon for judges to “reform,” or modify, the limitations articulated in a noncompete agreement (e.g., reducing the geographic prohibition against a competing practice from 50 miles from the prior employer’s principal office to 20 miles). Because of these factors, it is in the physicians’ best interest to make an early evaluation of the prospects for settlement, including availing themselves of opportunities to have the case resolved by alternative dispute resolution (ADR) procedures, such as mediation or arbitration. Certain states that mandate a reasonable buyout provision for physician noncompete agreements also stipulate that binding arbitration will be used to arrive at a buyout figure if the parties cannot agree.

Action Step Physicians should consider at an early juncture the prospects for reaching a mutually agreeable settlement and the potential use of ADR. Early evaluation can minimize the costs associated with litigation and the disruptive effect on the physicians’ practices.

Mistake 6 Not Being Consistent

In noncompete litigation, physicians must remember that it is the reasonableness of the business interests sought to be protected that is at issue. Accordingly, the way in which a physician employer reacted to the departures of previous physician employees will be scrutinized. Did the physician employer pursue similar enforcement of a noncompete with regard to others? If not, this failure to be consistent in the protection of business interests can be used to undermine subsequent noncompete litigation and characterize the noncompete enforcement as selective in nature.

Action Step Physicians should take care to be consistent in the protection of their business interests, much as a major brand such as Coca-Cola regards any threat to its trademark as serious.

Mistake 7 Not Being Wary of the Paper Trail

Physicians must be wary of the fact that all kinds of things come out in the discovery that accompanies noncompete litigation, such as personnel files and other documentation. For example, a physician employee who is seeking to break a noncompete but is being characterized as a significant competitive threat to his or her former employer can be greatly helped by internal documents showing that the employee was not yet meeting certain goals of monthly billing or number of patients sought.

Action Step Physicians should be aware of the significance that otherwise mundane records can have in the course of noncompete litigation.

Mistake 8 Failing to Avoid the “God Complex”

Just as in medical malpractice litigation, a physician’s demeanor during testimony in noncompete litigation can be crucial. Whether testifying in a deposition, an injunction hearing, or at trial, the physician should avoid any appearance of arrogance. A physician employer should keep in mind that he or she is no different from any other employer who has made a significant investment in a key employee and is merely seeking to protect that investment. A physician employee is just like any other individual whose livelihood and career development is being threatened, and who is seeking relief from the courts.

Action Step Physicians should be wary of how they may be perceived by nonphysicians, especially in the judicial process, and should strive to cultivate a certain level of humility.

Mistake 9 Failing to Anticipate Litigation

Physicians who counsel patients on preventive medicine would be wise to take some of their own advice and plan their employment agreements with the potential for litigation in mind. For example, physician employees could request that their employer add language to the employment agreement rendering the noncompete null and void in the event that they are involuntarily terminated. A physician employer, on the other hand, could make the road to obtaining injunctive relief much smoother by adding to the noncompete acknowledgments by the physician employee that the relief sought by the employer is appropriate, that no adequate remedy exists if the employee were to violate the noncompete, and that the harm in such an event would be irreparable.

Action Step Physicians should be mindful of the potential for litigation in the first place, and should consult with counsel about appropriate preventive measures.

Mistake 10 Failing to Learn From Past Experience

Surprisingly, even physicians who have been involved in litigation over a noncompete agreement (whether seeking to enforce it or break it) sometimes fail to learn from the past. For example, a physician employer should review all other noncompete agreements—and revise them accordingly—in the event of certain restrictions being reformed or held unenforceable by a court considering a particular noncompete. While appropriate and competent legal counsel should apprise the physician of statutory or other changes in the law that necessitate revising a noncompete agreement, the physician should be mindful of the lessons learned from ongoing or postlitigation.

Action Step Physicians should be proactive and take steps to revise their noncompete agreements in the wake of noncompete litigation in order to incorporate the lessons learned from such an experience.

Conclusion

Regardless of whether they are the employer or the employee, physicians engaged in or facing the prospect of litigation over a noncompete agreement should consult with experienced trial counsel, consider the greatly compressed time frames involved in such litigation, assess the noncompete’s enforceability at the earliest possible juncture, avoid overlooking important sources of testimony and evidence helpful to their case, and carefully evaluate the prospects for achieving settlement. Just as the requirements for valid noncompete agreements differ from state to state, judicial treatment of noncompete agreements can vary even more widely.

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