We wanted to let you know about an important recent decision by the Arizona Supreme Court concerning the enforcement of non-compete agreements. The case has particularly significant implications for medical practices that use such agreements with their physician employees and shareholders.
In Valley Medical Specialists, P.C. v. Farber, a medical group hired a pulmonologist. Three years later, he became a shareholder in the group, and signed an agreement not to compete in the event of his departure. Specifically, he agreed that for three years after his separation, he would not compete in the practice of medicine or treat any of the group's patients within a five-mile radius of any of the group's offices. In 1994, he left the group, and commenced a pulmonology practice within the five-mile restrictive area. The group sued, claiming that he was in violation of his non-compete agreement. The trial court ruled that the restrictions were unenforceable. The group appealed that ruling, and the Court of Appeals sided with the group, holding that the agreement was enforceable. The physician then appealed to the Supreme Court.
The Supreme Court issued its ruling on Friday, June18, concluding that the agreement was not enforceable.
The Court stated that respect for the physician/patient relationship, and for the patient's right to select his or her doctor, required that it construe non-compete agreements very narrowly in the medical context. Using that narrow view, the Court held that a three-year restriction was unreasonable. The Court also held that the five-mile radius was too broad. In addition, the Court noted, the agreement prohibited the physician from practicing medicine at all within the restrictive area, while his actual practice had been limited to pulmonology. Finally, the Court stated that it did not have the power to modify the agreement and enforce it to an extent that would be reasonable, even though the parties had agreed in the contract that a court could do so.
The Farber case has particular significance for medical practices. Two other decisions by the Arizona Court of Appeals over the years had held that such restrictions on physicians were readily enforceable, and many medical practices had structured their employment agreements, shareholder agreements, and professional corporate articles and bylaws to make use of those principles to protect their relationships with their patient and referral bases. The Supreme Court, however, disapproved of those decisions. Although the Supreme Court did leave open the possibility of enforcing limited restrictions on physicians, it has made it clear that because of the patient choice issues involved, non-compete agreements will be scrutinized very carefully before they will be enforced in the medical profession.
Under all of those circumstances, medical practices that desire to have new physicians (or new shareholders) sign non-compete agreements must stop and consider whether the terms of those agreements would be enforceable under the standards set forth in the Farber case. In addition, groups that already have entered into non-compete agreements with current employees or shareholders should evaluate those agreements, to determine whether they meet the standards of the Farber case. Groups whose agreements are in danger of violating those standards may wish to consider entering into new agreements, tailored to suit the terms of the Farber decision.
The members of our Physician Services Group have extensive experience in drafting and enforcing non-compete agreements. If you have any questions about the use of such agreements, including questions about whether any agreements that you currently have in place would satisfy the Farber standards, or if you would like a copy of the Farber decision, please feel free to contact us.
Don Johnsen is a shareholder at Gallagher & Kennedy, P.A.