Debate and Developments Around Non-Competes in Physician Agreements
When physicians and their employers enter into employment agreements, the non-competition provision is often the most fiercely negotiated component. Hospitals and private practices view these “non-competes” as an important tool to protect their investment in physicians’ practices, including expanding their patient base and, in many cases, training the physicians. Physicians, on the other hand, are often wary of such covenants to the extent they may impede the physicians’ ability to seek future employment or start their own practices. Outside of such individual negotiations, there is a larger discussion amongst patient advocates and state legislatures about whether such agreements are in the best interest of patients and could limit the availability of patient care. These concerns have led to the increased regulation of non-compete provisions as they relate to physicians in certain jurisdictions.
The American Medical Association (AMA) has also weighed in with respect to non-competes in physician agreements. In an ethics opinion, the AMA advises that “physicians should not enter into covenants that: (a) 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 (b) do not make reasonable accommodation for patients’ choice of physician.” Despite such concerns from the AMA, non-competes in physician agreements remain common in most states, with just a few exceptions, as discussed below.
For example, non-competes in physician agreements are lawful and widespread in New York State. Under New York law, such provisions are judged by the same standards as non-competes in any other field. They are enforceable as long as they are: (1) necessary to protect the employer’s legitimate interests; (2) do not impose an undue hardship on the employee; (3) do not harm the public; and (4) are reasonable in time period and geographic scope. When determining whether a non-compete is reasonable in time period and geographic scope, New York courts focus on the facts and circumstances of each case. Courts typically find time periods of six months or less to be reasonable, and agreements up to two years in duration may be enforced, depending upon the circumstances. The courts’ assessment of reasonableness in geographic scope often considers whether the restricted area is related to the geographic scope of the medical practice itself. An agreement with a long duration is more likely to be enforceable where the geographic scope is limited, and vice versa.
In contrast with New York, Massachusetts, Delaware, Colorado and Rhode Island have all passed laws that bar the use of non-competes in physician employment agreements. New Mexico also prohibits non-competes that prevent physicians and other healthcare practitioners from providing clinical healthcare services, but the state does not limit such provisions in agreements between shareholders, owners, partners or directors of the practice. Non-competes in employment agreements are generally unenforceable in California, so this restriction applies to physician agreements as well. Both Delaware and Colorado’s statutes contain loopholes that permit physicians to be held liable for damages in the event they leave their practice and compete in the area; but in 2018, Colorado passed legislation to prevent physicians from being liable for such damages where they disclose their new contact information to patients with “rare disorders.”
Other jurisdictions have also imposed restrictions on physician non-competes with patients’ access to care in mind. For example, the Florida legislature enacted a law made effective last year that prohibits non-compete agreements between a physician who practices a medical specialty and an entity that employs or contracts with, either directly or through related or affiliate entities, all physicians who practice the specialty in the county. The law explicitly states that such non-competes are unlawful because they restrict patient access to physicians and increase healthcare costs. Similarly, Texas law allows physician non-competes only to the extent that they: (a) do not deny physicians access to a list of the patients whom they had seen or treated within one year of termination of the contract or employment; (b) provide physicians access to medical records of their patients upon authorization of the patient; (c) provide for a buyout of the non-compete by the physician at a reasonable price or a price determined by an arbitrator; and (d) allow physicians to provide continuing care and treatment to a specific patient or patients during an acute illness.
Some jurisdictions have decided to legislate exactly what constitutes reasonable duration and geographic scope in physician non-competes. Connecticut restricts the covenants to a duration no longer than one year and a geographic scope of within a 15-mile radius from the primary site where a physician practiced. Connecticut’s statute also prevents the enforcement of non-competes if a physician is terminated without cause. Tennessee has declared that the covenants are enforceable only where the duration is two years or less and the geographic restriction does not exceed the greater of a 10-mile radius from the site of the healthcare provider or the county in which the healthcare provider’s practice is located. The Tennessee law also permits physician non-competes without a geographic restriction if the physician is restricted only from practicing at any facility where the employer provided services during the physician’s time of employment.
Even in states where their non-competes are valid, many physicians question whether or not their employer will move to enforce such provisions. While the answer to this can be determined only on a case-by-case basis, many medical practices insert additional provisions to dissuade employees from risking a breach. For example, a practice may insert a liquidated damages clause or state that the physician’s tail insurance coverage—pursuant to which an employer’s malpractice insurance continues to cover physicians for claims related to their time at the practice after they have left and the policy has otherwise been cancelled—will be terminated.
The takeaway for physicians, hospitals and medical practices is that in most jurisdictions, the non-compete provision in physician employment agreements is alive and well, as long as it is reasonable in duration and geographic scope. However, due to the additional scrutiny of such restrictive covenants as they relate to patient access to care, physicians and their employers should stay abreast of developments in their states to ensure that such provisions in their employment agreements remain legal and enforceable.
This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Attorney Jill Kahn Marshall who counsels both companies and individuals on employment matters. Ms. Marshall is admitted to practice law in New York and Massachusetts. Attorney Advertising.