Diagnosing Problems with Non-Competition Agreements

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A self-exam guide for practices & physicians

By Katherine Koop, Esq. and Albert Lee, Esq.

These days, physicians rarely graduate from medical school, join a practice and stay until retirement.  In fact, for the first time since 2008, physician turnover has increased, from 5.9 percent in 2009 to 6.1 percent in 2012.    Some estimate that 40 percent of newly practicing physicians leave their initial practice group within two years of joining and that turnover will further increase in 2011 – 2012 due to a belief that physician retirees will swell.  A recent study of community family practices in Northeastern Ohio found mean duration of work at the current practice location to be 9.1 years.

It is more common for a physician to be employed by multiple practices over his or her career, often within the same community.  As an employer, it is important to protect your practice from departing employees joining a competitor or opening their own practice down the block and taking your most valuable asset:  the patients.  As a physician entering the profession or presented with the opportunity to join a practice, it is likewise important to ensure that you won’t be unreasonably limited in practicing medicine should you choose to leave your employer.

Medical practices often protect themselves from the damage that can result from an employee leaving to work for a competitor by the use of non-competition clauses (also known as restrictive covenants).  From the practice’s standpoint, a non-competition clause can be a valuable asset when drafted reasonably and, if challenged, can be upheld by a court of law.  Because practices are utilizing non-competes, it is important for physicians joining a practice to know if such agreements are reasonable under the law and in light of all of the circumstances.

The basic tenets of a non-competition clause in Pennsylvania are straightforward:

  • A non-compete agreement must be tied to a lawful purpose such as entering into or extending an employment relationship.
  • The agreement must be reasonably necessary to protect the employer’s actual business interests.  In other words, a court will likely not uphold the agreement if the actual loss of the employee to a competitor would pose no threat to the practice.
  • The employee’s agreement to restrict future employment must be in exchange for receiving something of value, such as the initial job offer, a raise or promotion, or some other tangible benefit.  Without such consideration for entering into the agreement, the non-compete will not be upheld.

To be enforceable, the agreement must be reasonable in time and geographic scope.  For example, courts have upheld non-competition agreements with a one- to two- year time frame and limitations on the employee’s ability to practice anywhere from a one-mile to five-mile radius.

Please note that non-competition agreements that satisfy the above-criteria may still be invalidated if either of the following circumstances apply:

First, due to the special position of a physician, a lack of competition in the geographic area may invalidate a normally valid non-competition agreement.  Pennsylvania case law shows that public interest can be the determinative factor that dictates enforceability of a non-competition covenant as applied to a health care provider.  Courts ruling on the enforcement of a physician non-competition covenant have considered the effect of the covenant on the patients who are in need of the physician’s service.  For example, if there is a lack of medical providers or of a specialist’s services in a certain geographic area, courts will either blue-line or invalidate the agreement entirely to assure that the covenant will not compromise patients’ ability to obtain adequate skilled care in the area in which the health care provider is planning to work.  In other words, the employer must evaluate the likelihood that consumers could be adequately served by existing health care providers or the hiring of a  new physician of the same discipline to meet patient demand.

Second, past practices of enforcing or failing to enforce breaches of existing non-compete may prove detrimental to enforcing breaches of non-competes in the future.  Specifically, it may be appealing to have a strong, all-encompassing non-compete and have all of your physicians and employees sign it upon joining the practice, but thereafter only fight to enforce non-competes for certain employees and only when their separation threatens the viability of your practice.  This is not a prudent practice.  Employers who require non-competes for all employees or certain positions, whothen neglect to enforce those non-competes, have later found it hard to justify their ad hoc enforcement against some employees, but not others.  Courts are likely to find that the failure to pursue some employees’ violations of non-competes demonstrates that there is no real need for the restriction in the first place.  Thus, a practice should bind with a non-competition agreement only those employees whose breach of such an agreement would warrant enforcement.  You should consistently enforce breaches of any non-compete or be prepared to explain the reasons behind any decision to not pursue enforcement.

Employer considerations

Before demanding that all employees in your practice sign what appears to be an iron-clad, non-compete agreement, employers should ask themselves:

  • What activity do I need to prohibit?
  • If a physician leaves my employ to work for a competitor, could I provide the same medical services of that physician to my patients and/or the geographic region?
  • How far from my practice do most of my patients live?  Do my patients travel two miles or across the country to be treated?  Do the geographic limitations in my non-compete reflect the answer to this question?
  • Am I part of a regional hospital group and, if so, would the non-compete restrict the physician from practicing within a certain distance of other related hospital group practices?  Is this restriction necessary to protect my practice?
  • Have I consistently enforced my non-competes in the past?  If not, what are the reasons I chose not to enforce the non-compete?
  • Am I offering something of value in exchange for the non-competition agreement?  If the non-competition agreement is part and parcel of the original job offer, have I clearly indicated to the physician — prior to the commencement of the employment relationship– that the agreement is a condition of the employment?
  • Before tendering a non-competition agreement to a potential hire, should I consult an attorney?

Employee considerations

When presented with a non-compete agreement, employees should ask themselves and potential employers:

  • Are there other physicians practicing my specialty within the area?  If so, where?
  • How far from the practice do most of the practice’s patients live?  (If the non-compete appears overly restrictive in scope, consider asking the employer to modify the agreement.)
  • If I was bound to the proposed terms of the non-compete, how would this affect my current living situation?  Would there be opportunities for employment outside of the restricted geographic area?
  • Before executing an agreement or accepting new employment that may violate my non-compete, should I consult an attorney?