Covenants not to compete

Question: A doctor decides to leave her new job. She had joined the medical group as a junior associate with a 2-year employment contract, but decided to go out on her own after a year. In reviewing her contract, she noted that all she had to do was to give 30 days’ notice, but then discovered there was a non-compete clause (NCC) which forbade her from setting up her practice within a mile of the group’s clinic in the next 3 years. Which of the following statements is best?

A. Non-compete clauses (NCCs) in a physician employment contract are contrary to public policy and legally unenforceable.

B. The American Medical Association believes all NCCs are unethical.

C. The majority of jurisdictions will honor NCCs if the terms are reasonable.

D. Any territorial restriction of the new practice, being against the patient’s interest, is unenforceable.

E. It is inadvisable for a hiring group to include an NCC in its employment contract.

Answer: C. Most employment contracts limit for some duration where the departing doctor-employee may set up his or her new practice. Such restrictive covenants are also known as non-compete clauses (NCCs). In the majority of jurisdictions, an NCC is legally binding so long as the restrictive terms are reasonable. Prior to 1977 (Opinion 4.63), the American Medical Association’s (AMA) position was that there was "no ethical proscription" against a restrictive covenant with reasonable terms, but this has since been modified. As stated in Opinion 9.02¹, the AMA now believes: "Covenants-not-to-compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services. The Council on Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership, or corporate agreement. Restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician."

As regards physicians-in-training, the AMA categorically considers it "unethical for a teaching institution to seek a noncompetition guarantee in return for fulfilling its educational obligations" (Opinion 9.021).

The main reason for incorporating an NCC into a doctor’s employment contract is financial. The employer has invested time, effort, and money in recruiting the new physician with the expectation that he or she will serve out the entire employment period so that those costs can be recouped. Furthermore, patients may leave to follow the exiting doctor, who may become a competitor provider. The counterargument is that patients should be free to choose from whom and where they wish to seek care and that any restriction is against public policy, being against the patient’s best interest.

Some jurisdictions have ruled all NCCs unenforceable unless there are statutory provisions to the contrary. A litigated case is Murfreesboro Medical Clinic v. Udom². Dr. Udom, an internist, had signed a non-compete agreement with his employer, the Murfreesboro Medical Clinic, a multispecialty physician group in Tennessee. The contract restricted, for 18 months, his setting up a new practice within 25 miles of the city. Dr. Udom argued that the restrictions were unreasonably broad and inimical to public policy. The clinic pointed to its legitimate business interest, having invested in the doctor’s relocation and training, and having incurred overhead and other expenses. Notwithstanding rulings from the lower courts siding with the Murfreesboro Medical Clinic, the Tennessee Supreme Court, upon appeal, held that such restrictive covenants for doctors, unless permitted by statute, are contrary to public policy and therefore unenforceable. This court victory for Dr. Udom put Tennessee among the minority of jurisdictions (for example, California, Colorado, Massachusetts, and Texas) that significantly disfavor or disallow NCCs altogether.

However, subsequent to this landmark decision, the Tennessee legislature enacted a law permitting NCCs under limited circumstances, and since 2008, the terms of the statute (Tenn. Code Ann. 63-1-148) have been revised on several occasions. One should therefore always consult current state statutes on point.

The majority of jurisdictions continue to honor NCCs as long as the terms are reasonable. A recent Kansas case is illustrative. Wichita Clinic v. Louis³ involved an action against a family practitioner for alleged violation of a restrictive covenant not to compete. In ruling for the clinic, the Court of Appeals of Kansas reversed a lower court decision that initially found in favor of Dr. Louis. The Court of Appeals held that NCCs are enforceable so long as four conditions are satisfied: 1) the agreement protects a legitimate business interest of the employer;, 2) there is no undue burden on the departing employee; 3) the terms are not injurious to the public welfare; and 4) the time and territorial limitations are reasonable.

It behooves the newly recruited physician to study the employment contract, preferably with the aid of an experienced attorney. Likewise, the employer should continue to use reasonable NCCs to protect its legitimate business interest. In general, employment contracts tend to be standardized or "boiler-plate," and are typically generated by the employer. So the prospective physician-employee should carefully note the terms, and clarify or negotiate, if necessary, any that are unfavorable, unfair, or ambiguous. A buyout option is sometimes incorporated into an employment contract, which allows the employee to pay "liquidated damages" of a predetermined sum as a way out of the restrictions. These buyout options have withstood judicial scrutiny if the damages, such as a year’s salary plus reimbursed moving and other expenses, are rationally based and deemed neither excessive nor punitive. Another option is a "nonsolicitation" clause that prohibits the departing doctor from encouraging former patients to relocate.

Citations

1. Opinion 9.02. "Restrictive Covenants and the Practice of Medicine." Code of Medical Ethics of the American Medical Association, 2012-2013 edition, p 325.

2. Murfreesboro Medical Clinic v. Udom, 166 S.W.3d 674 (Tenn. 2005).

3. Wichita Clinic v. Louis, 185 P 3d 946 (Kan. 2008).

Dr. Tan is a former professor of medicine and adjunct professor of law at the University of Hawaii. This article is meant to be educational and does not constitute medical, ethical or legal advice. It is adapted from the author’s book, "Medical Malpractice: Understanding the Law, Managing the Risk" (2006). For additional information, readers may contact the author at siang@hawaii.edu.

Question: A doctor decides to leave her new job. She had joined the medical group as a junior associate with a 2-year employment contract, but decided to go out on her own after a year. In reviewing her contract, she noted that all she had to do was to give 30 days’ notice, but then discovered there was a non-compete clause (NCC) which forbade her from setting up her practice within a mile of the group’s clinic in the next 3 years. Which of the following statements is best?

A. Non-compete clauses (NCCs) in a physician employment contract are contrary to public policy and legally unenforceable.

B. The American Medical Association believes all NCCs are unethical.

C. The majority of jurisdictions will honor NCCs if the terms are reasonable.

D. Any territorial restriction of the new practice, being against the patient’s interest, is unenforceable.

E. It is inadvisable for a hiring group to include an NCC in its employment contract.

Answer: C. Most employment contracts limit for some duration where the departing doctor-employee may set up his or her new practice. Such restrictive covenants are also known as non-compete clauses (NCCs). In the majority of jurisdictions, an NCC is legally binding so long as the restrictive terms are reasonable. Prior to 1977 (Opinion 4.63), the American Medical Association’s (AMA) position was that there was "no ethical proscription" against a restrictive covenant with reasonable terms, but this has since been modified. As stated in Opinion 9.02¹, the AMA now believes: "Covenants-not-to-compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services. The Council on Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership, or corporate agreement. Restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician."

As regards physicians-in-training, the AMA categorically considers it "unethical for a teaching institution to seek a noncompetition guarantee in return for fulfilling its educational obligations" (Opinion 9.021).

The main reason for incorporating an NCC into a doctor’s employment contract is financial. The employer has invested time, effort, and money in recruiting the new physician with the expectation that he or she will serve out the entire employment period so that those costs can be recouped. Furthermore, patients may leave to follow the exiting doctor, who may become a competitor provider. The counterargument is that patients should be free to choose from whom and where they wish to seek care and that any restriction is against public policy, being against the patient’s best interest.

Some jurisdictions have ruled all NCCs unenforceable unless there are statutory provisions to the contrary. A litigated case is Murfreesboro Medical Clinic v. Udom². Dr. Udom, an internist, had signed a non-compete agreement with his employer, the Murfreesboro Medical Clinic, a multispecialty physician group in Tennessee. The contract restricted, for 18 months, his setting up a new practice within 25 miles of the city. Dr. Udom argued that the restrictions were unreasonably broad and inimical to public policy. The clinic pointed to its legitimate business interest, having invested in the doctor’s relocation and training, and having incurred overhead and other expenses. Notwithstanding rulings from the lower courts siding with the Murfreesboro Medical Clinic, the Tennessee Supreme Court, upon appeal, held that such restrictive covenants for doctors, unless permitted by statute, are contrary to public policy and therefore unenforceable. This court victory for Dr. Udom put Tennessee among the minority of jurisdictions (for example, California, Colorado, Massachusetts, and Texas) that significantly disfavor or disallow NCCs altogether.

However, subsequent to this landmark decision, the Tennessee legislature enacted a law permitting NCCs under limited circumstances, and since 2008, the terms of the statute (Tenn. Code Ann. 63-1-148) have been revised on several occasions. One should therefore always consult current state statutes on point.

The majority of jurisdictions continue to honor NCCs as long as the terms are reasonable. A recent Kansas case is illustrative. Wichita Clinic v. Louis³ involved an action against a family practitioner for alleged violation of a restrictive covenant not to compete. In ruling for the clinic, the Court of Appeals of Kansas reversed a lower court decision that initially found in favor of Dr. Louis. The Court of Appeals held that NCCs are enforceable so long as four conditions are satisfied: 1) the agreement protects a legitimate business interest of the employer;, 2) there is no undue burden on the departing employee; 3) the terms are not injurious to the public welfare; and 4) the time and territorial limitations are reasonable.

It behooves the newly recruited physician to study the employment contract, preferably with the aid of an experienced attorney. Likewise, the employer should continue to use reasonable NCCs to protect its legitimate business interest. In general, employment contracts tend to be standardized or "boiler-plate," and are typically generated by the employer. So the prospective physician-employee should carefully note the terms, and clarify or negotiate, if necessary, any that are unfavorable, unfair, or ambiguous. A buyout option is sometimes incorporated into an employment contract, which allows the employee to pay "liquidated damages" of a predetermined sum as a way out of the restrictions. These buyout options have withstood judicial scrutiny if the damages, such as a year’s salary plus reimbursed moving and other expenses, are rationally based and deemed neither excessive nor punitive. Another option is a "nonsolicitation" clause that prohibits the departing doctor from encouraging former patients to relocate.

Citations

1. Opinion 9.02. "Restrictive Covenants and the Practice of Medicine." Code of Medical Ethics of the American Medical Association, 2012-2013 edition, p 325.

2. Murfreesboro Medical Clinic v. Udom, 166 S.W.3d 674 (Tenn. 2005).

3. Wichita Clinic v. Louis, 185 P 3d 946 (Kan. 2008).

Dr. Tan is a former professor of medicine and adjunct professor of law at the University of Hawaii. This article is meant to be educational and does not constitute medical, ethical or legal advice. It is adapted from the author’s book, "Medical Malpractice: Understanding the Law, Managing the Risk" (2006). For additional information, readers may contact the author at siang@hawaii.edu.

Question: A doctor decides to leave her new job. She had joined the medical group as a junior associate with a 2-year employment contract, but decided to go out on her own after a year. In reviewing her contract, she noted that all she had to do was to give 30 days’ notice, but then discovered there was a non-compete clause (NCC) which forbade her from setting up her practice within a mile of the group’s clinic in the next 3 years. Which of the following statements is best?

A. Non-compete clauses (NCCs) in a physician employment contract are contrary to public policy and legally unenforceable.

B. The American Medical Association believes all NCCs are unethical.

C. The majority of jurisdictions will honor NCCs if the terms are reasonable.

D. Any territorial restriction of the new practice, being against the patient’s interest, is unenforceable.

E. It is inadvisable for a hiring group to include an NCC in its employment contract.

Answer: C. Most employment contracts limit for some duration where the departing doctor-employee may set up his or her new practice. Such restrictive covenants are also known as non-compete clauses (NCCs). In the majority of jurisdictions, an NCC is legally binding so long as the restrictive terms are reasonable. Prior to 1977 (Opinion 4.63), the American Medical Association’s (AMA) position was that there was "no ethical proscription" against a restrictive covenant with reasonable terms, but this has since been modified. As stated in Opinion 9.02¹, the AMA now believes: "Covenants-not-to-compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services. The Council on Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership, or corporate agreement. Restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician."

As regards physicians-in-training, the AMA categorically considers it "unethical for a teaching institution to seek a noncompetition guarantee in return for fulfilling its educational obligations" (Opinion 9.021).

The main reason for incorporating an NCC into a doctor’s employment contract is financial. The employer has invested time, effort, and money in recruiting the new physician with the expectation that he or she will serve out the entire employment period so that those costs can be recouped. Furthermore, patients may leave to follow the exiting doctor, who may become a competitor provider. The counterargument is that patients should be free to choose from whom and where they wish to seek care and that any restriction is against public policy, being against the patient’s best interest.

Some jurisdictions have ruled all NCCs unenforceable unless there are statutory provisions to the contrary. A litigated case is Murfreesboro Medical Clinic v. Udom². Dr. Udom, an internist, had signed a non-compete agreement with his employer, the Murfreesboro Medical Clinic, a multispecialty physician group in Tennessee. The contract restricted, for 18 months, his setting up a new practice within 25 miles of the city. Dr. Udom argued that the restrictions were unreasonably broad and inimical to public policy. The clinic pointed to its legitimate business interest, having invested in the doctor’s relocation and training, and having incurred overhead and other expenses. Notwithstanding rulings from the lower courts siding with the Murfreesboro Medical Clinic, the Tennessee Supreme Court, upon appeal, held that such restrictive covenants for doctors, unless permitted by statute, are contrary to public policy and therefore unenforceable. This court victory for Dr. Udom put Tennessee among the minority of jurisdictions (for example, California, Colorado, Massachusetts, and Texas) that significantly disfavor or disallow NCCs altogether.

However, subsequent to this landmark decision, the Tennessee legislature enacted a law permitting NCCs under limited circumstances, and since 2008, the terms of the statute (Tenn. Code Ann. 63-1-148) have been revised on several occasions. One should therefore always consult current state statutes on point.

The majority of jurisdictions continue to honor NCCs as long as the terms are reasonable. A recent Kansas case is illustrative. Wichita Clinic v. Louis³ involved an action against a family practitioner for alleged violation of a restrictive covenant not to compete. In ruling for the clinic, the Court of Appeals of Kansas reversed a lower court decision that initially found in favor of Dr. Louis. The Court of Appeals held that NCCs are enforceable so long as four conditions are satisfied: 1) the agreement protects a legitimate business interest of the employer;, 2) there is no undue burden on the departing employee; 3) the terms are not injurious to the public welfare; and 4) the time and territorial limitations are reasonable.

It behooves the newly recruited physician to study the employment contract, preferably with the aid of an experienced attorney. Likewise, the employer should continue to use reasonable NCCs to protect its legitimate business interest. In general, employment contracts tend to be standardized or "boiler-plate," and are typically generated by the employer. So the prospective physician-employee should carefully note the terms, and clarify or negotiate, if necessary, any that are unfavorable, unfair, or ambiguous. A buyout option is sometimes incorporated into an employment contract, which allows the employee to pay "liquidated damages" of a predetermined sum as a way out of the restrictions. These buyout options have withstood judicial scrutiny if the damages, such as a year’s salary plus reimbursed moving and other expenses, are rationally based and deemed neither excessive nor punitive. Another option is a "nonsolicitation" clause that prohibits the departing doctor from encouraging former patients to relocate.

Citations

1. Opinion 9.02. "Restrictive Covenants and the Practice of Medicine." Code of Medical Ethics of the American Medical Association, 2012-2013 edition, p 325.

2. Murfreesboro Medical Clinic v. Udom, 166 S.W.3d 674 (Tenn. 2005).

3. Wichita Clinic v. Louis, 185 P 3d 946 (Kan. 2008).

Dr. Tan is a former professor of medicine and adjunct professor of law at the University of Hawaii. This article is meant to be educational and does not constitute medical, ethical or legal advice. It is adapted from the author’s book, "Medical Malpractice: Understanding the Law, Managing the Risk" (2006). For additional information, readers may contact the author at siang@hawaii.edu.