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Healthcare Practice Strategies - Winter 2016 - Keeping It Legal: Negotiating a Workable Non-Compete

Feb 4, 2016

Restrictive covenants — also known as covenants not to compete or non-compete agreements — are nothing new. From hospitals to multispecialty medical groups, employers have long sought to keep departing providers from poaching patients and establishing competing practices.

In recent years, though, concerns over limiting a physician's ability to earn a living have led some courts to limit the duration and geographic scope of restrictive covenants. In several high-profile cases, courts have struck down overly restrictive covenants they felt would decrease the ability of patients to see the physician of their choice.

This has led some providers to mistakenly assume that non-competes are "unenforceable" and, therefore, not of real concern when negotiating employment contracts. On the contrary, properly constructed restrictive covenants are very much enforceable — particularly when the restrictions are reasonably necessary to protect the employer and reasonably limited in their length and geographic coverage.

What the AMA Says

The reality is that every physician should understand what is in a covenant not to compete and how to negotiate the best possible terms. In its formal opinion on restrictive covenants, the American Medical Association counsels physicians not to enter into covenants that:

  • Unreasonably restrict the right of a physician to practice medicine for a specified period of time or in a specified geographic area on termination of a contractual relationship; and 
  • Do not make reasonable accommodation for patients' choice of physician.

Physicians in training should not be asked to sign covenants not to compete as a condition of entry into any residency or fellowship program.

Everything Is Negotiable

In order to withstand judicial challenge, restrictive covenants must meet a variety of requirements as to their "reasonableness." Herein lies the opportunity for savvy providers to negotiate. Following are a few items to keep in mind when negotiating:

Protectable interest of the employer — A non-compete agreement generally is considered to be reasonable only when it is narrowly tailored to protect an employer's legitimate interests. By contrast, the courts have ruled that covenants that are predominantly designed to eliminate competition or to oppress the employee are overly restrictive.

Negotiating point: Ask for the agreement to specifically list facilities and business opportunities that the employer considers to be a competitive threat. Another approach is to carve out certain types of facilities and positions that everyone agrees are non-competing.

For example, if you are working as a hospitalist at a local inpatient medical center, becoming the medical director of a nearby nursing home should pose no competitive threat.

Geographic scope — A reasonable non-compete might establish that a departing provider will not work within a certain radius from the group's primary office. An overly restrictive agreement might attempt to extend the radius to include each of the group's offices — whether or not the provider ever saw patients there.

Negotiating point: Try to limit the restriction only to the facilities at which you actually worked and for the services you actually provided at that particular location(s) within the last 12 months of your employment. Also watch for any wording that restricts you from practicing within a certain number of miles of any "future offices" of the employer.

Time — In general, contracts that restrict physicians from competition during the term of employment and for one to two years thereafter are considered to be reasonable. However, non-competes should not restrict a physician who leaves within a short time of hire before the employer has expended much in the way of training.

Negotiating point: With a "tiered" approach, you would negotiate restrictions based on the actual amount of time you spent with the employer. So, if you leave prior to the end of the first year, no restrictive covenant would apply.

The argument here is that your ability to draw patients away and develop a competing practice would be fairly limited at that point. Try negotiating for a one-year restriction if you leave during the second year and a two-year restriction only if you have been employed for at least two years.

Triggering events — These are the circumstances under which the restrictions are activated — typically, the departure of the physician.

Negotiating point: Pay attention to the contract's termination provisions as they relate to triggering events. Problems can occur if an overly broad agreement allows the employer to terminate the physician "without cause." This might be a case where the employer overestimates its patient volume or ceases to provide the type of specialized services that the physician provides.

Public interest — In some cases, the courts will not uphold a restrictive covenant that may deprive the public of medical services or harm the physician-patient relationship.

Negotiating point: You might have some leverage here if you are practicing in a rural area or in an area where there is a shortage of physicians in your specialty. In such cases, you may be able to make the argument for complete elimination of any restrictions — or at least a more lenient scope to the restrictions.

Some Legal Fine Points

It's important to note that the burden of establishing a restrictive covenant as unreasonable lies with the employee, not the employer. Here, issues of enforceability are typically addressed on a case-by-case basis and differ from state to state.

The legal issue of "consideration" also comes into play. That is, a non-compete agreement is valid only if it is accompanied by adequate consideration (e.g., the compensation offered in an employment agreement). In cases where an employer wants to add restrictions to an already existing employment agreement, additional payment must be provided.

 Keep Your Eyes Wide Open

Non-compete agreements and are an integral part of virtually all physician employment contracts — and they're here to stay. Physicians who think they can simply blow off restrictions they've agreed to will likely find themselves in court with an aggrieved employer seeking injunctive relief as well as monetary damages.

Our professionals can provide expert guidance in designing or evaluating effective non-compete agreements. Call us to discuss your situation in more detail.

SIDEBAR: What If I'm Fired?

The courts have taken an interesting view of restrictive covenants as they relate to employees who leave employment involuntarily — or in other words, are terminated.

In a Pennsylvania case, Insulation Corp. of Am. v. Brobston, the Superior Court held that once the employer has terminated an employee, the employer's "need to protect itself from the former employee is diminished by the fact that the employee's worth to the corporation is presumably insignificant (i.e., it has effectively discarded the employee as "worthless to its legitimate business interests").

Healthcare Practice Strategies - Winter 2016

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