Earlier this year, we posted an article addressing Physician Employment Contracts. In it, we briefly referenced restrictive covenants, which limit a physician’s right to seek employment with another employer following termination. In this article, we address the legality and desirability of such “covenants not to compete,” focusing on Connecticut law, and also referencing those of a few other states.
What are Restrictive Covenants?
Restrictive covenants are attempts to restrict the right of an employee or other contractor to compete against the employer or primary contracting party. Their common forms are:
Non-competition. This is language stating the employee or contractor will not work for any other employer or person within a certain geographic area who is in competition with the employer or primary contractor. A typical physician non-compete provision might read more or less as follows:
During the term of employment and for twelve (12) months thereafter, Employee shall not, as an employee, contractor, solo practitioner, shareholder, partner or member, perform services which are substantially similar to those provided to Employer hereunder, within a fifteen mile radius of Employer’s primary location.
The details may vary, but the basic idea is the same: the physician agrees not to work for a competitor during the contract and for a year thereafter.
Non-solicitation and Non-inducement. These provisions don’t limit the employee’s or contractor’s right to work for a competitor, but they do prohibit “soliciting” anyone who the employee or contractor knew, or had reason to know, was doing business with, or was considering doing business with, the employer. For physicians, this usually applies to contacting patients of the former employer’s health system or practice. A typical non-solicitation or non-inducement provision might read like this:
During the term of employment and for eighteen (18) months thereafter, Employee will not directly or indirectly, whether as an individual, employee, advisor, contractor, owner in whole or in part, or representative of any third party, take any action to induce any person to discontinue receiving patient care or other services from or through Employer or at any Employer location.
Employee Non-solicitation. These provisions limit the right of an employee or contractor to solicit, or try to hire, for his/her new business, any other employee or contractor of the former employer. This can be a mechanism to protect existing employment and service contractor relationships with staffers, such as a first-rate RN, or even another physician. A typical provision might read as follows:
During the term of employment and for eighteen (18) months thereafter, Employee will not directly or indirectly, whether as an individual, employee, advisor, contractor, owner in whole or in part, or representative of any third party, take any action to induce any person to discontinue employment or any other service relationship with Employer.
Obviously, the 2 non-solicitation provisions may present challenges for a physician who wants to strike out on his/her own in the same area.
Confidential Information Restrictions. These are very standard, and their primary purpose is to protect the employer's proprietary information. But these provisions may also serve as a restraint on post-employment freedom, because they prohibit use of information (such as patient or treatment information) learned while working for the employer. It’s not unusual for employers to suspect that a recently departed star will make use of the employer’s trade secrets or customer information to build a similar mouse trap or to engage in some negative counter-marketing.
Of course, all 4 provisions (non-compete, non-patient solicitation, non-employee solicitation and confidentiality) may appear in any or all combinations in a physician contract, and frequently do.
Restrictive Covenants Are Usually Enforceable by Court Orders
Restrictive covenants often include language such as this:
In the event of breach or threatened breach by Employee, Employer may enforce this section with an injunction in a suit in equity, without necessity of proving actual damage. However, nothing herein limits Employer from pursuing any other remedy for such breach, including recovery of monetary damages. This section will survive expiration of this Agreement.
What’s the point of this language? It’s to allow the employer to get a quick court order (the “injunction”) to prevent or stop the perceived breach. But courts are usually reluctant to issue injunctions in contract disputes. Instead, the usual damage “award” for breach of contract is payment of money unless the parties have expressly agreed otherwise with language such as this. The rationale is that it would be too hard, or take too long, to determine the financial impact of breaching a restrictive covenant.
Will Courts Enforce Non-Competes?
That depends—on the type and scope of the restriction, on its length, on the law of the employer’s state, on the law of the employee’s state, and the judge who hears the case.
Historically, courts have been skeptical of restrictions on employment, especially if they’re too broad, and even more so in regard to professional services that should be available to the public. The “public policy” reasons for this skepticism is that the public and patients should have reasonable access to physician services and be free to choose the physicians of their choice. This judicial skepticism is why non-competes often include a “savings” clause, such as this:
If in any judicial proceeding a court refuses to enforce any provision of this section by reason of the duration or extent thereof, such provision will be construed to have only the maximum duration or extent permitted by law.
This tells the judge that if he/she believes the length or geographic reach of a non-competition provision is excessive, then he/she can revise it to an acceptable scope. The idea is to “save” the language from being entirely killed if the judge finds it to be too broad. Similar judicial reasoning may also apply to patient non-solicitation, where the former employer may have to prove that the physician initiated contact with the employer’s patient; if there’s evidence that the patient wanted services from the physician, then the court will be tempted to find a public policy reason to avoid an injunction. But bear in mind that even in such a situation, the court might still require the physician to pay monetary damages for the former employer’s lost patient.
On the other hand, courts will usually enforce confidential information restrictions, so long as they don’t interfere with sharing medical information needed for patient care. Restrictions on soliciting the employer’s other employees will also probably be enforced, unless unreasonable in geographic scope or time.
Connecticut and Other State Law
State legislatures have also expressed skepticism regarding restrictions on employment, including specifically in regard to physician employment. For example, Connecticut law allows enforcement only for up to one year, for a distance of up to 15 miles of primary practice site, as “necessary to protect a legitimate business interest,” and only if the employment contract is in anticipation of a partnership/ownership agreement or the employer terminates for cause.
Connecticut General Statute Section 20-14p(b)(2), and (b)(3) states:
A covenant not to compete that is entered into, amended, extended or renewed on or after July 1, 2016, shall not:
(A) Restrict the physician's competitive activities (i) for a period of more than one year, and (ii) in a geographic region of more than fifteen miles from the primary site where such physician practices; or
(B) be enforceable against a physician if (i) such employment contract or agreement was not made in anticipation of, or as part of, a partnership or ownership agreement and such contract or agreement expires and is not renewed, unless, prior to such expiration, the employer makes a bona fide offer to renew the contract on the same or similar terms and conditions, or (ii) the employment or contractual relationship is terminated by the employer, unless such employment or contractual relationship is terminated for cause.
(3) Each covenant not to compete entered into, amended or renewed on and after July 1, 2016, shall be separately and individually signed by the physician.
The law also defines the "primary site where such physician practices" as “(A) the office, facility or location where a majority of the revenue derived from such physician's services is generated, or (B) any other office, facility or location where such physician practices and mutually agreed to by the parties and identified in the covenant not to compete.”
We think the Connecticut law does a good job of balancing the employers’ need to reasonably protect what’s truly important while allowing physicians to practice for the benefit of the community and themselves.
The states of Tennessee (Tenn. Code Ann. § 63-1-148; § 63-6-204(f), Massachusetts (Mass. Gen. Laws ch. 112, § 12X), Rhode Island (R.I. Gen. Laws §5-37-33), and Texas (Tex. Bus. & Com. Code Ann. § 15.50) have similar laws. Some other state legislatures have gone even farther. For example, at least one state (California) generally prohibits employee non-competes altogether.
Making it Reasonable
We give employers and employees similar advice about restrictive covenants. It boils down to this: “make it reasonable.” One of our authors, in his nearly 30 years of legal practice, has written and reviewed many dozens of employment contracts, and litigated some of them. That experience has convinced him that employers and employees alike are typically best served with fair and understandable restrictive covenants. Employees should understand that the employer has a legitimate interest in protecting its business. After all, the employer is investing in the employee, helping him/her build a practice and make a living, and, along the way, necessarily revealing a great deal about how the employer functions. If you, the employee, are as good as both parties hope, then the employer quite naturally realizes you could pose a threat if you go elsewhere and use what you’ve learned against your former employer.
On the other hand, the employer should bear in mind that the employee is actually doing the day to day work and must make a living even after termination. That can be complicated if the employee must choose between moving and starting fresh, leaving the job but waiting out the non-compete period without a salary, or perhaps staying put in a job that’s no longer working well for either party. Also, if restrictive covenants are too broad, too long or too punitive, you’re more likely to wind up in a legal battle in which a court may balk at enforcing the covenant.
For these reasons, we suggest that the restrictions be reasonably targeted to protect what really matters to both parties. We also often suggest that the employer include some type of severance payment in exchange for the restrictive covenants, at least if the employee is terminated without cause. That gives the employee some time and cash to re-start elsewhere and also makes it more likely a court will enforce the non-compete and non-solicitation provisions as clearly supported by specific "consideration." Also, when contracts appear reasonable to courts and lawmakers, we're less likely to see decisions and laws that take negotiating power away from the actual contractors.