The 10 Biggest Legal Mistakes Physicians Make in Dealing with Noncompete Issues

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

Many employment agreements contain a “covenant not to compete” or a “noncompetition” or “noncompete” provision. These terms are often used interchangeably. Such a provision places conditions and restrictions on a physician’s practice following termination of the agreement. For example, a contract may specify that the physician cannot practice medicine within a 50-mile radius for one year after the termination of employment. This type of agreement is disfavored by the law and must be properly drafted to be enforceable. A physician employer should consult counsel to ensure that an agreement is enforceable and protects the employer’s legitimate business interests. A physician employee should pay careful attention to such provisions and not treat them as an afterthought in the negotiation of a broader employment agreement.

Mistake 1        Being Ignorant of the Law

Because a noncompete provision is a restraint of trade, it is generally disfavored by the law. The enforceability of noncompete provisions is governed by state law and varies widely from jurisdiction to jurisdiction. Although most jurisdictions impose at least some limitations on the enforceability of noncompete provisions, the unique nature of the physician-patient relationship has led some states to prohibit these types of provisions with respect to physicians; other states impose particular requirements, some of which are discussed in this section.

Action Step     Physicians should consult with counsel, licensed and knowledgeable in the law of the jurisdiction where their practices are located.

Mistake 2        Treating the Noncompete As an Afterthought

Generally, when negotiating the terms of an employment contract, physician employees naturally focus on duties, compensation, and fringe benefits. At the time the contract is signed by both parties, goodwill exists, and employees tend not to think about the termination of the contract. Employers may insert noncompete provisions in the contract without negotiation or discussion, hoping the physician employee will accept the proposed terms. Months, or even years, may go by before the contract terminates, at which time the physician employee is surprised to discover that there may be restrictions on his or her right to continue to practice. 

Action Step     In consultation with counsel, physicians should consider from the beginning the implications of a noncompete provision. If possible, it is generally in the physician employee’s interest not to accept such a provision.

Mistake 3        Assuming the Noncompete Will Never Apply

Physician employees who are aware of noncompete provisions in their contracts may assume that such provisions will never be triggered because employment will continue indefinitely. As time goes by, the physician employee may realize that continuation of the employment relationship is not in his or her best interest. The physician employee’s options will be greater in the absence of a noncompete provision or with the least restrictive provision possible.

Action Step     If a noncompete provision is included in an employment agreement, physician employees should assume that the provision is valid and will be triggered by the termination of employment. Attention should be given at the negotiation stage to ensure that both parties’ interests are protected by the agreement. 

Mistake 4        Not Limiting the Trigger to Specific Circumstances

Employers try to impose a noncompete provision that is triggered by termination of employment for any reason. There are circumstances when both parties will agree that termination is appropriate; however, in the scenario in which the employer fires the physician, the physician has no control over his or her employment situation and will need to take immediate steps to begin his or her own practice or seek other employment. Arguably, the employer’s interest in preserving its investment in the physician employee is preserved if the trigger is limited to circumstances under which the physician initiates termination of the contract. If the employer decides to discharge the physician, then the employer is obviously dissatisfied with the physician. Under these circumstances, the departing physician should not be constrained in his or her future employment opportunities.

Action Step     The parties may desire to limit the circumstances under which a noncompete provision will apply following the termination of employment. 

Mistake 5        Failing to Exchange Adequate Consideration to Support the Agreement

As with all contracts, a covenant not to compete must be supported by consideration. In some jurisdictions, the consideration given by the employer for a promise by the employee not to compete must specifically give rise to the employer’s interest in restraining the employee from competing, and the covenant must be designed to enforce the employee’s consideration or return promise. For example, if an employer gives an employee confidential and proprietary information or trade secrets in exchange for the employee’s promise not to disclose them, then the consideration given by the employer (the trade secrets) is related to and gives rise to the employer’s interest in restraining the employee from competing. Often, contracts recite that this consideration is exchanged, but in reality the employer has not provided adequate consideration to support the employee’s promise not to compete.

Action Step     A physician employer should ensure that adequate consideration is exchanged to support the noncompete provision.

Mistake 6        Having Unreasonable Restrictions on Time, Geographical Area, and Scope of Activity in the Agreement

To be enforceable, a noncompete provision must have a reasonable time, geographical area, and scope of activity. These limitations vary from jurisdiction to jurisdiction, and physicians are well advised to consult counsel who will be familiar with their particular jurisdictions. However, in general, restrictions longer than two years probably will not be enforceable. Similarly, most courts will not enforce a restriction over geographical area that is broader than the practice area. For example, a court is unlikely to restrict a physician from practicing anywhere within the state, when the employer’s practice is limited to a particular metropolitan area. The principle here is that the restraint must be no greater than is necessary to protect the goodwill or other business interests of the employer. If a noncompete provision is found to be too broad, some courts will strike the entire provision (or even the entire agreement). Other courts will “reform” or rewrite the provision so that it is more limited. In this case, however, the court is imposing its interpretation on the parties. It is preferable that the parties negotiate a reasonable time, area, and scope themselves.

Action Step     Physicians should negotiate a reasonable time, geographical area, and scope of activity for a noncompete provision.

Mistake 7        Failing to Consider Nonsolicitation Provisions and Patient Information in the Agreement

Apart from noncompete provisions that address where and under what circumstances the physician employee may go to work for a subsequent employer, some contracts contain nonsolicitation provisions that purport to limit the departing physician’s ability to contact patients and “solicit” them to follow the physician. Because of the particular nature of the physician-patient relationship, state law may require the employer to provide the departing physician with certain information regarding his or her patients and access to their records upon appropriate authorization by them.

Action Step     Physicians should consider nonsolicitation provisions and ensure that state law requirements regarding access to patient information are followed.

Mistake 8        Failing to Include Buyout Provisions in the Agreement

Some states require a noncompete agreement to contain a buyout provision. Whether or not required by state law, a buyout provision may be advisable. A buyout provision allows the departing physician to pay a certain amount of money in exchange for a release of the noncompete agreement. The buyout should be set at a reasonable price, and the parties may wish to consider some method of ascertaining such a price. Arbitration is one option; however, the parties should agree upon a method of selecting the arbitrator and other procedural issues at the time the noncompete agreement is negotiated.

Action Step     Physicians should pay attention to buyout provisions, including the method of determining a reasonable price.

Mistake 9        Failing to Include Remedies for Violations in the Agreement

Both parties should consider what the consequences of violating the noncompete provision will be. It can be difficult to measure the employer’s damages if the departing physician takes all of his or her patients. Some agreements contain a specific dollar amount, known as liquidated damages. Liquidated damages, which attempt to address the speculative nature of determining damages, must be a reasonable measure of the harm suffered by the employer. If the liquidated damages amount is too high, it may act as a disincentive for breach, but it may also be unenforceable.

Action Step     Physician employers should consider the advisability of liquidated damages provisions and/or other provisions that address the remedy for breach of the noncompete provision. Physician employees will want the liquidated damages amount to be as low as possible.

Mistake 10      Failing to Address Other Specific State Law Requirements

There may be other specific limitations on the enforceability of noncompete agreements. These restrictions will vary from jurisdiction to jurisdiction.

Action Step     Physicians should be sure to consult with counsel knowledgeable about the specific state laws applicable to their jurisdictions.

Conclusion

Whether employer or employee, physicians should consider the implications of noncompete provisions often included in employment contracts as an afterthought. This area of the law varies widely from jurisdiction to jurisdiction.

Additional Resources

Written by:

Holly B. Williams, Esq. 

Peer reviewed by:

Vianei Lopez Robinson, Esq.

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