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).