Physician Non-Compete Clauses
Connecticut and Beyond
B. Allen Bradford, Esq. and Darlene Gerardi, Esq., R.N.
Nov. 19, 2020
Two years ago, we posted an article addressing Physician Non-Competition Clauses, which itself followed up on an article addressing Physician Employment Contracts. This article updates, expands on and is intended to replace our article on Physician Non-Competition clauses.
In this article, we review (1) the ways in which a hospital, physician practice or other employer often attempt to restrict physicians from competing with their employer, (2) how courts may or may not enforce these restrictions and (3) specific state laws that limit employers’ attempts to restrict physician competition, including in Connecticut, Massachusetts and a few other states.
What are Restrictive Covenants?
Restrictive covenants restrict the right of an employee to compete against his/her employer. They can also restrict an independent contractor from competing against the primary contracting party. Common forms of such restrictive covenants include:
Non-competition. “Non-compete” clauses state that the employee or contractor will not work for any other employer or person within a certain geographic area competes with the business of 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 some period 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 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 Often 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.
Such a clause is intended to allow the employer to get a quick court order (“injunction”) to prevent or stop the perceived breach. Courts are often 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 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 Laws Step In
State legislatures have often limited attempts to restrict physician competition. 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.
Certain Other States that Permit Non-Competes, With Restrictions
The laws of such other states as New York, Texas and Tennessee also permit physician non-compete clauses, subject to certain restrictions that are only roughly similar to Connecticut’s.
A New York court held that restrictive covenants are enforceable against professionals, specifically physicians, so long as they are reasonable in scope. See Karpinski v. Ingrasci, 268 N.E.2d 751 (N.Y. 1971). That’s consistent with this general statement on employee non-competes from the New York Attorney General: “non-compete is only allowed and enforceable to the extent it (1) is necessary to protect the employer’s legitimate interests, (2) does not impose an undue hardship on the employee, (3) does not harm the public, and (4) is reasonable in time period and geographic scope. An employer’s legitimate interest may include protecting an employer’s trade secrets and confidential information and preventing employees from taking specialized skills they gained on the job to a competitor. A non-compete’s restrictions must be no greater than necessary to protect the legitimate interests of the employer.” (See https://ag.ny.gov/sites/default/files/non-competes.pdf , last accessed July 29, 2020).
Tennessee’s law (Tenn. Code Ann. § 63-1-148) allows “healthcare provider” non-compete clauses, but they cannot be applied for more than 10 mile radius or 2 years, or to providers who have been engaged with an employer or contractor for 6 years or more, or emergency medicine physicians at all. If the clause is “in conjunction with the purchase or sale of a healthcare provider's practice, or all or substantially all of the assets of the healthcare provider's practice,” then the only limitation is that “the duration of the restriction and the allowable area of the restriction are reasonable under the circumstances.”
The Texas law (at Tex. Bus. & Com. Code Ann. § 15.50) permits enforcement of physician non-compete clauses only if they allow the physician access to a list of patients seen within one year of the physician’s termination, permit access to patients’ medical records when authorized by the patient (unless the physician has an ownership in a licensed hospital or ambulatory surgical center), allow the physician to have a buyout option at a reasonable price, and allow the physician to continue caring for a patient during an acute illness.
Such other states as Georgia, Florida, New Jersey, Pennsylvania and Virginia also generally permit enforcement of non-compete clauses that meet certain standards.
Physician Non-Competes Not Permitted in Some States
Other states generally will not permit enforcement of physician non-compete clauses.
For example, Massachusetts’ physician non-compete law states “Any contract or agreement which creates or establishes the terms of a partnership, employment, or any other form of professional relationship with a physician registered to practice…which includes any restriction of the right of such physician to practice medicine in any geographic area for any period of time after the termination of such partnership, employment or professional relationship shall be void and unenforceable with respect to said restriction….” Mass. Gen. Laws ch. 112, § 12X. Due to strong public policy supporting a patient's need to receive treatment from his/her physician of choice, courts have ruled that this statute was intended to be broad and encompass any agreement having a significant inhibitory effect on a physician’s ability to practice medicine. (See Falmouth Ob-Gyn Associates v. Abisla, 417 Mass. 176, 178 (1994); and Velazquez v. Eye Health Associates, LLC, SUCV2014-00693, Superior Court of Massachusetts, Suffolk, September 30, 2014). Massachusetts also prohibits restrictions on post-employment covenants for nurses (Mass. Gen. Laws ch. 112 § 74D).
Similarly, Rhode Island law (at R.I. Gen. Laws §5-37-33) has generally made “restriction of the right of [a] physician to practice medicine…void and unenforceable,” except “in connection with the purchase and sale of a physician practice, provided the restrictive covenant … is for a period of a time of no more than five (5) years.”
California’s strong public policy in favor of competition goes even further, stating, “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Ca. Bus. and Prof'l. Code § 16600. This applies to independent contractors as well as employees; nor is it limited to physicians.
Such other states as Colorado, Delaware and Oklahoma also do not permit non-competition clauses, although these may not prohibit non-solicitation clauses. That means, for example, that an Oklahoma employer may not be permitted to enforce a provision stating “you shall not compete with me at all” but could enforce a provision stating “you shall not solicit a current patient or customer to leave me.”
Each state’s law should be reviewed by competent legal counsel in order to determine the extent and manner of its application.
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 more than 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.