Reprinted with permission of THE HEALTH LAWYER The ABA Health Law Section
As physicians' practice structures continue to evolve from sole proprietorships or small partnerships to larger integrated groups, physicians must be ever mindful of changes in judicial attitudes toward professional contracts as these impact on their patients and the public in general. A very common contractual provision in this ever-competitive business environment is the restrictive covenant. These contractual provisions arise in a multitude of settings, including physician employment agreements, practice buy-sell and purchase agreements and shareholders' agreements when a physician acquires an interest in a practice group. It is no longer prudent to provide physicians with conventional wisdom as guidance on these contractual provisions, because their construction by the courts is changing and the ramifications of failing to effectively evaluate various contractual provisions when negotiating a contract can expose the parties to some surprising judicial attitudes, should enforcement become necessary.
Covenants not to compete in physicians' employment contracts have existed for centuries. Recently, in an attempt to address the pressing concern over the quality of patient care, several states, such as Delaware, Colorado, Florida and Massachusetts, have enacted legislation that specifically addresses noncompetition clauses in physician employment contracts. Further, the American Medical Association (AMA) has consisting taken the position that noncompetition clauses are against public interest during the past sixty years. The AMA's Council on Ethical and Judicial Affairs "discourages any agreement between physicians which restrict the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of employment or a partnership or a corporate agreement."
Courts around the nation typically consider the same or similar factors in determining whether to enforce a restrictive covenant in a physician's employment contract. The majority of jurisdictions still view restrictive covenants in employment contracts as partial restraints on trade and will uphold the contractual provisions if they are reasonable in geographic scope and time. The factors that courts take into account when evaluating the reasonableness of covenants not to compete are still the territorial coverage, duration, the scope of the activity to be considered and the effect on the parties and the public. In addition, courts now take into consideration potential hardship on the employed physician. Finally, courts today are more inclined to consider the reasonableness of the provision in light of the particular patient care setting to which it is to be applied.
Given that each case addresses a unique contractual provision and factual setting, it is difficult to generalize regarding the trends across the nation with respect to the application of the above referenced factors by courts, but some change is evident. Numerous courts continue to uphold anticompetitive covenants where the practitioner has argued that the territorial coverage was too expansive. However, in recent years an increasing number of courts have deemed covenants unreasonable in the face of ethical, public policy and territorial challenges.
The same is true of the other factors taken into account by the courts in evaluating the reasonableness of anticompetitive covenants. Various courts have upheld covenants in the face of allegations that the scope of the proscribed activity was too broad, while others have determined contractual provisions to be unreasonable in light of the breadth of the prohibited activity. Similarly, there has been an expanded split of authority when analyzing the reasonableness of the duration of restrictive covenants. Most courts still uphold covenants that are one to two years in duration. However, courts are reluctant to enforce covenants, which are for one or two years, when the covenant as to time exceeds the length of time that the physician was actually employed. In recent years, greater attention has been focused on the impact of these provisions on patient care. Clearly, in the field of medicine where vital services are rendered to patients who seek both the expertise and trust of the providers, it is imperative that the patient's interests, including their ability to continue treatment with a physician of his choosing, be an important consideration in determining the validity of contractual provisions. For example, in a recent Virginia case four physicians filed an action against Sentara Health Systems wherein they sought to have restrictive provisions in their contracts struck down by the court on the grounds that they were unreasonable. The physicians executed contracts with Sentara whereby they agreed that if the resigned from their positions with Sentara, they agreed not to practice within twenty-five miles of their Sentara office for at least a year. The physicians, who provided chemotheraphy treatments for cancer patients, eventually resigned and filed suit based upon the fact that the provisions were to restrictive and would disrupt the care received by the cancer patients. The case was resolved prior to trial after Sentara agreed that the doctors could join a local cancer practice approximately twenty miles from Sentara's office.
In a recent decision of the Supreme Court of Arizona, the court emphasized that "close scrutiny" must be paid to examining the validity of the restrictive covenants in light of public interest considerations, including maintaining existing doctor-patient relationships. After analyzing the AMA position on restrictive covenants and noting that such covenants are prohibited in contracts between attorneys, the Arizona court concluded that the doctor-patient relationship was entitled to unique protection and that the contractual provisions in physician employment contracts should be strictly construed. In so ruling, the Court concluded that a provision which prohibited Dr. Farber, an internist and pulmonologist who treated patients with carcinoma and complications of AIDS and HIV, from practicing medicine in essentially a 235 square mile area for a duration of three years was unreasonable. The court noted that the patient's access to the physician of choice outweighed the interests of the contracting parties.
Similarly, courts have taken into consideration public interest, including access to medical providers, when determining the reasonableness of various contractual provisions. See e.g., Ohio Urology, Inc. v. Poll, 72 Ohio App.3d 446, 594 N.E.2d 1027 (1991)(court denied summary judgment in favor of professional corporation in suit brought against urologist who formerly was with the corporation and determined that public policy requires that covenant should be strictly construed in favor of professional mobility and access to medical care and facilities); Concord Orthopaedics Prof. Ass'n v. Forbes, 702 A.2d 1273 (N.H. 1997) (trial court exempted the physician from restrictive covenant which provided physician could not practice within 25-mile radius of association's office, and exempted new patients from coverage, limiting the restriction to existing patients); Dick v. Geist, 107 Idaho 931, 693 P.2d 1133 (1985)(court refused to enforce restrictive covenant preventing two doctors from practicing pediatrics and neonatology because to do so would create serious impairment to the welfare of the public in the enjoined area). As the Congress considers reinforcement of patients' rights, the impact of contracts that deprive patients of their physician or otherwise interfere with continuity of care solely for the financial benefit of a party may become more difficult to sustain. Careful drafting and a detailed explanation of the rationale behind restrictions on a physician's practice may increase the potential for enforceability. Provisions that permit notice to former patients of the physician's new location will strengthen a reasonableness argument. In the final analysis, however, it is no longer possible to be certain that a modest two year, ten mile agreement not to compete will always survive judicial scrutiny. Perhaps the importance of more carefully evaluating restrictive covenants in physician employment contracts in favor of professional mobility and public access to medical care and facilities was best summarized a decade ago by the Ohio Supreme Court which, in ruling that a noncompetition clause was unreasonable, opined that "[p]laintiff's services are vital to the health, care and treatment of the public" and that the "demand for his medical expertise is critical to the people in the community."