A hospitalist was recently offered a lucrative position in his community and was concerned that his previous employment agreement would prohibit him from accepting the new job opportunity. His former employment contract contained a noncompetition clause that made him and his prospective employer rightfully concerned. Upon a comprehensive review of his former employment contract, the noncompetition provision was not as restrictive as he and his prospective employer had previously thought. As it turned out, in his case, and in many others, the noncompetition clause was penetrable, and the physician accepted the new employment offer knowing he was not in violation of his previous contract.
What Is a Noncompetition Clause?
A noncompetition clause, also known as a covenant not to compete or a restrictive covenant, is a provision in a contract that precludes one party from engaging in competition with another party by working 1) in a particular field, 2) within a specific geographic area, and 3) for a stated period of time. A well-written noncompetition provision will prevent a physician from practicing within a certain geographical area surrounding the employer or the employer’s hospital relationships and for a prescribed period of time after the termination of the physician’s employment.
Often, the physician will be permitted to practice within the parameters of the restricted geographical area or time period if they (or the prospective employer) “buy out” of the clause. This is an especially good option when the reasonableness of the noncompetition is not black and white, and both parties want to avoid the expense of litigating the enforceability of the noncompetition clause. Otherwise, in the event the physician breaches the noncompetition clause, the former employer will usually first seek injunctive relief that prohibits the physician’s new employment, then follow with a request for monetary damages arising from the physician’s breach.
In states where noncompetition clauses for physicians are enforceable, the provision must: 1) protect the employer’s legitimate business interest, 2) be specific in geographical scope, and 3) have a narrowly tailored durational scope. Each of these factors is described below. If the language in the clause is vague or does not clearly describe the exact terms of the restrictions on practice, the clause might be unenforceable or open to greater interpretation than either party anticipated.
Do Employers Have a Legitimate Business Interest to Protect?
In order for a noncompetition clause to be enforceable, it must protect the employer’s legitimate business interest. Some examples of a legitimate business interest in the HM context are the employer’s goodwill and the retention of the employer’s clients (hospitals and medical practices). Moreover, since noncompetition clauses are not looked upon with favor by courts because they operate as a restraint of trade, the language needs to be narrowly tailored in order to protect the employer’s legitimate interests.
Is Geographical Scope Reasonable?
Noncompetition clauses must also specify the restricted geographical area where the physician is prohibited from practicing. However, whether a geographical scope is overly broad will not only depend on state law, but also the location of the employer and the surrounding community.
Typically, contracts will provide a radius in miles surrounding the employer’s location or locations as the restricted territory. But whether a geographic limitation is “reasonable” is a relative term. A five-mile radius in an urban area like New York City might be home to millions of people, whereas a five-mile radius in a suburb of New York might only be home to a few thousand people. For hospitalists, the geographic restriction might prohibit the physician from practicing at or for the employer’s clients (e.g. hospitals).
Although the following might seem obviously overly broad to some, a review of contracts with the following geographic restrictions should be considered red flags:
- Prohibition to practice anywhere in the U.S.;
- Prohibition to practice anywhere in a specific state;
- Prohibition to practice in a territory comprised of excessive miles from the employer’s location; and
- Prohibition to practice in certain counties.
Please note that exclusion to practice in certain counties might be overly broad in some situations but might be acceptable in others. For example, a hospitalist sold his ownership stake in his practice, and part of the deal required him to agree not to practice in Los Angeles County. This particular county restriction would be difficult, if not impossible, to enforce because Los Angeles County includes more than 80 cities and covers more than 4,000 square miles.
Is Durational Scope Reasonable?
A noncompetition clause should identify the length of time in which the physician is prohibited from practicing within the restricted geographic area. Whether the durational scope is reasonable will vary from state to state. As a general rule of thumb, if the restricted time frame is two years or less after termination of the contract, the time restriction will likely be considered “reasonable.” However, state laws vary on whether time restraints in excess of two years are enforceable.
A common pitfall with time restrictions is excessiveness based on the state’s laws and the specific circumstances of the physician and the employer. In negotiating the restricted length of time in a noncompetition clause, it is more common to have a longer time restriction when a physician is selling an ownership interest in a practice than for a physician entering into an employment relationship.
Prospective Employers: What You Need to Know
Great care must be taken when hiring a physician. States recognize the legal theory of interference with a contract. If an employer is recruiting a hospitalist who is subject to an employment agreement with a noncompetition clause, the prospective employer must be very careful in the recruiting process. It is recommended that the employment agreement include a representation by the physician-employee that he or she is not subject to any other agreement that would prohibit the physician from entering into the new employment relationship.
If a prospective employer is aware of an existing employment contract that contains practice restrictions on a recruited physician, the prospective employer could be held responsible for damages if a dispute arises between the parties.
It’s All in the Words
Although it might seem like semantics, a few words can change your future. Before you put pen to paper, be sure to have any contract containing a noncompetition clause reviewed by a lawyer who is well-versed in your state’s laws. If you have already signed an agreement with a noncompetition clause and you are considering your next career move, a lawyer can shed some light on a seemingly impenetrable clause.
Steven M. Harris, Esq., is a nationally recognized healthcare attorney and a member of the law firm McDonald Hopkins LLC in Chicago. Write to him at [email protected].