Non-compete Agreements or Restrictive Covenants are contracts that bar a physician from practicing in a specified geographic area for a set amount of time, i.e., working within 20 or 30 miles of their previous office for 1, 2 or 3 years after they leave.
Although they are restricted or illegal in some states, -Alabama, California, Colorado, Delaware, Massachusetts, North Dakota, Tennessee, and Texas- they are generally enforceable as long as the terms are reasonable. It’s the Hospital’s or employer’s insurance which bars doctors from leaving for a competing hospital or clinic and taking patients with them- assuring that the Hospital gets a return on their investment when they hire a doctor.*
When a physician challenges a signed non-compete, courts often look for a reason to not enforce it. Some common weaknesses that make the agreement ineffective are:
- It’s too broad – if it spans more than a year or two or more than 30-50 mile radius of the practice or hospital,
- The Hospital did’t hold up their end – if the employer promised the doctor a certain level of income or similar benefit and didn’t deliver.
- Patients may suffer – If there is an inconvenience to patients – if patients will be required to travel a great distance to see a doctor.
- Hospital fires unfairly – If the hospital determined the doctor to be of such little value that they terminated the doctor – then it is difficult for the hospital to enforce an agreement that presumes the doctor will be a competitive threat.
- Hospital enforces selectively – if the hospital did not enforce the rule in the past to a doctor, the judge will possibly rule that it can not then apply this time.
New Mexico limits restrictive covenants for employed physicians but not for non-solicitation agreements-i.e., physicians who have been employed by an organization for fewer than three years are allowed to leave and compete – but the organization can require the employee to repay incentives like loans, relocation expenses and signing bonuses. After three years a doctor can leave with no strings attached.
The three main parts of most restrictive covenants are:
- Agree not to compete with former employer.
- Agree to not solicit patients, employees or both,
- Agree to not use or disclose confidential information.
To prevent theft of a company’s trade secrets these contracts may be closely related to business torts or suits for money damages caused by unfair competitive practices or theft of trade secrets. Many states have enacted laws modeled after the Uniform Trade Secrets Act to establish standards to protect trade secrets from theft and misappropriation. These define “trade secrets” to include patient lists and contact information, pricing methods and other similar valuable, non-technical business information. Even in the absence of a restrictive covenant, the law protects businesses from employees who seek to use their employers trade secrets for their own competitive advantage. Restrictive covenants allows a business to define its confidential information and the activities it considers off limits. Like trade secret law, restrictive covenants are regulated by state law, so interpretation and enforceability will vary from state to state. ***
Again courts in many states will refuse to enforce a restrictive covenant that:
- does not protect the employee’s legitimate interest
- imposes an undue hardship upon the employee
- contains terms -duration, geographic scope and or breadth of restricted activities- that are broader than necessary to protect the employer’s interests
- causes harm to the public.
However a restrictive covenant will be more likely to be enforced if its description of the employer’s protected business interest is similar to the definition of trade secrets in the home state’s trade secrets act. Anything broader than that definition will be subject to possible rejection by the court. Especially if the Agreement is to:
- last too long
- cover to wide a geographic scope
- result in harm to an area of public interest.
* * * * * * * *
- Beaulieu-Volk, Debra, Physician Noncompetes stir controversy amid shifts in employment trends, Fierce Practice Management, June 2, 2015.
** Beaulieu-Volk, Debra, 5 Sign of an Unenforcable Noncompete, Fierce Practice Management, October 5, 2011
***Kirchner, Philip, https://physiciansnews.com, 2015/08/07
**** Caramenico, Alicia, Fierce Healthcare, Hospital’s nocompete agreement inconveniences patients, judge rules, September 7, 2011.