Understanding Noncompetes

If you’re like most physicians you can expect to change practices several times in your career, so it is important to understand the legal ramifications of your written employment agreement - especially any noncompetition covenants. Oftentimes, these are the stickiest points in a contract negotiation.

These covenants, found in most physician employment agreements, may come in the form of noncompete or restrictive covenants, or a nonsolicitation covenant that precludes you from taking certain actions after you terminate employment with the practice.

Perhaps one of the most common misconceptions among physicians is that restrictive covenants are not enforceable. While this may be true in certain limited situations, that belief can get you into a great deal of trouble down the line.

Even if you think otherwise, and are ultimately proven correct in court, you will have spent tens of thousands of dollars or more in your defense and will likely be emotionally and financially exhausted - which means the other guys will have won in the end anyway.

Geography counts

Restrictive covenant enforceability varies by state but most allow them. It’s wise to consult a healthcare attorney to advise you on what’s allowed in your state. Some states, such as Massachusetts, do not allow restrictive covenants in physician employment agreements. California does not allow restrictive covenants in employee contracts, but they are permitted if a physician is an owner in a medical practice.

In general, restrictive covenants must be “reasonable” in scope, nature, and duration. In other words, the covenant must be very specific as to what services you may not provide after you terminate employment, where you may not provide these services, and for how long. What constitutes “reasonable” is not always clear. Oftentimes, practices are overzealous in protecting their turf and may try to impose more restrictions than necessary.

Geography is essential in the enforcement of a restrictive covenant.

Covenants can prohibit you from practicing in one or more counties, in specified ZIP codes, within certain town borders, or within an area marked on a map attached to your contract. Commonly, the limitation is within a mileage radius of certain locations. The mileage radius is usually interpreted “as the crow flies,” or a straight line from a point on a map, not in terms of driving distance. Practices in coastal areas might use other measures than radius to protect their area.

See where the practice derives its patients and referral sources and expect that area to be the most logical one to protect. You can measure for yourself by reviewing a ZIP code analysis of the practice’s active patients and referral sources. If you are uncomfortable requesting this information, ask the physicians or manager where the practice’s patients and referral sources come from during your employment interview.

If the practice draws patients from a small geographical area, it would not make sense to agree to a covenant that precludes you from practicing within a great portion of the state. If the practice is in a metropolitan or urban area, it won’t make sense to block out entire counties.

Consider the type of practice you are joining before signing any covenants. Absent unique circumstances, a hospital-based specialty group (such as radiology, pathology, anesthesia, or emergency medicine) should not claim a huge restricted area.

If you are joining a large health system, watch for any restrictive covenants that would prohibit you from working in the area surrounding each hospital within the health system as well as near any of the system’s outpatient offices, facilities, clinics, etc. - it could end up as the entire state or several states.

Just as geography is important, so is a clear description of the type of services you are precluded from performing. The contract should explicitly define what services are prohibited within the restricted area. Thus, if you are dual boarded, are you prohibited from performing both areas of your specialty or just one?

There are other reasons to reject a contract based upon its restrictive covenant. For instance, if you are from a particular area, you might not want to accept a contract requiring you to move away to remain in practice after your contract terminates. Further, if you accept a position as a locum tenens physician, watch for restrictive covenants precluding you from accepting other job opportunities.

Time is a factor

One- and two-year restrictive covenants are common, but look skeptically at agreements that contain covenants longer than two years. Be especially wary of covenants that would last longer than the contracted term of your employment. One notable exception to this rule is in the context of a practice sale. In that limited circumstance, it is not unheard of to see restrictive covenants last several years.

Also be aware that other agreements related to your employment may affect what type, if any, of restrictive covenant can be included in your employment agreement. Hospital recruitment agreements have gained popularity in recent years and may offer existing community practices financial assistance to recruit a new physician to the area.

These hospital agreements are complex and often fraught with legal peril so you would be wise to have an experienced attorney help you sort out the terms. However, the one bright spot with these agreements is that Stark regulations bar existing practices that accept hospital financial assistance from including restrictive covenants in contracts they write with physicians. Notwithstanding this, some practices may still try to include some form of restrictive covenant into your employment agreement.

What about nonsolicitation?

Even in states that prohibit restrictive covenants, nonsolicitation covenants are regularly enforced. A nonsolicitation clause bars you from using your position within the practice and the knowledge you gained in your employment for your own personal benefit.

Common items in these clauses may include prohibitions on soliciting the patients, staff, referring sources, and contracts of the practice. Read the language of the nonsolicitation clause carefully to see if it is appropriate for your practice opportunity.

For example, a nonsolicitation clause that prohibits you from placing a listing in a telephone business directory following your departure is not necessarily a reasonable restriction, particularly if you do not identify your former practice in the ad.

Similarly, a nonsolicitation clause that prohibits you from soliciting any employee of the practice may not be reasonable if it extends to, say, 20 offices of the practice, but you work at only one of those offices. However, it may be deemed reasonable to restrict you from taking a list of patients from the practice when you leave and contacting them to transfer to your new practice, unless otherwise permitted under state law.

Enforcing the covenants

Noncompetition covenants are enforced by either injunctive relief or by payment of liquidated damages. Your employment agreement likely will state which remedy the practice intends to seek.

In the former, the practice will seek a court injunction prohibiting you from violating your contractual promises. This would be especially troublesome if you had already leased new office space and a court issued an injunction barring you from using that space.

If your contract calls for liquidated damages, then the amount the practice would seek in court is outlined in your employment agreement. This amount must be reasonable and not a penalty for your violation. Although what constitutes “reasonable” is subject to judicial interpretation, you should try to avoid contracts that would require you to pay a percentage of your new practice’s gross income. In general, the liquidated damages remedy should not exceed a fixed percentage of your annual salary, but that could vary from 20 percent or less to as much as 200 percent.

It is not uncommon for contracts to propose outrageous amounts for liquidated damages relief. Be prepared to negotiate these amounts before you sign, especially if there is any chance that you would remain in the community after you left the practice.

Most importantly, avoid at all costs contracts that call for both liquidated damages and injunctive relief as remedies. You should not have to pay liquidated damages at the same time that you are prevented from practicing within the restrictive covenant area.

While restrictive covenant clauses, however, may have either form of relief, nonsolicitation clauses commonly call for liquidated damages as the remedy. The rationale is simple: by the time the practice has gone to court to enforce the nonsolicitation covenant, the associate will have most likely already violated the terms of the nonsolicitation covenant and will have already damaged the practice.

Negotiate before you sign

Always consider negotiating the terms of a restrictive covenant in any contract before you sign. First, try to change the restricted area and the length of time the covenant applies to an area and time that is more acceptable to you. Next, consider negotiating a buy-out to your noncompetition covenants. Thus, if you decide to stay in the area following the termination of your employment, you can pay a specified sum to your former employer and be released from the covenants.

You also may want to suggest certain contractual additions to your restrictive covenant. Terms to ask for might include removal of the restrictive covenant if your employer terminates your employment for cause due to your disability or if you terminate your employment for cause. Sometimes new employees request that there be no restrictive covenant for the first six months of their employment.

Don’t expect your new employer to agree to all of these additions or exceptions to your noncompetition covenants. If they are inflexible with the restrictive covenant and if you have reservations about the wording of the covenants, walk away from the proposed arrangement and look for another position.

You will be much better off waiting and signing a deal that you can live with than having to deal with the legal and financial consequences if the relationship does not work out. The time you spend negotiating your restrictive covenant will help you ward off legal headaches down the line.

Joan M. Roediger can be reached at editor@physicianspractice.com.

This article originally appeared in the October 2004 issue of Physicians Practice.