Contributed by Albert Lee & Katherine Koop
Graduating from medical school, joining a practice and staying until retirement rarely happens these days. (Although nationwide physician turnover rates have been on the decline, from 6.7% in 2006 to 6.1% in 2008, some estimate that 40% of newly practicing physicians leave their initial practice group within two years of joining. A recent study of community family practices in Northeastern Ohio found mean duration of work at the current practice location to be 9.1 years. It is more common for a physician to be employed by multiple practices over his or her career, often within the same community. Therefore, as an employer it is important to protect your practice from a departing employee joining a competitor or opening their own practice down the block and taking your most valuable asset, the patient. As a physician entering the profession or presented with the opportunity to join a practice, it is likewise important to ensure that you won’t be unreasonably limited to practicing medicine should you choose to ever leave your new employer.
Medical practices often protect themselves from the damage that can result from an employee leaving to work for a competitor by the use of non-competition clauses (also known as restrictive covenants). From the practice’s standpoint, a non-competition clause can be a valuable asset when drafted reasonably and, if challenged, can be upheld by a court of law. Because practices are utilizing non-competes, it is important for physicians joining a practice to know if such an agreement is reasonable under the law and in light of all of the circumstances.
The basic tenets of a non-competition clause in Pennsylvania are straightforward:
1) A non-compete agreement must be tied to a lawful purpose such as entering into or extending an employment relationship.
2) The agreement must be reasonably necessary to protect the employer’s actual business interests. In other words, the agreement will likely not be upheld by a court if the actual loss of the employee to a competitor would pose no threat to the practice.
3) The employee’s agreement to restrict future employment must be in exchange for receiving something of value, such as the initial job offer, a raise or promotion, or some other tangible benefit. Without such consideration for entering into the agreement, the non-compete will not be upheld.
4) To be enforceable, the agreement must be reasonable in time and geographic scope. For example, courts have upheld non-competition agreements with a 1-2 year time frame and limitations on the employee’s ability to practice anywhere from a 1 mile radius to 5 mile radius.
Please note that non-competition agreements that satisfy the above criteria may still be invalidated if either of the following circumstances apply:
First, due to the special position of a physician, the lack of competition in the subject area may invalidate a normally valid non-competition agreement. Pennsylvania case law shows that the public interest can be the determinative factor which dictates enforceability of a non-competition covenant as applied to a health care provider. Courts ruling on the enforcement of a physician non-competition covenant have considered the effect of the covenant on the patients who are in need of the physician’s service. For example, if there is a lack of medical providers, or of a specialist’s services, in a certain geographic area, courts will either invalidate the agreement entirely or blue-line the agreement so as to assure that the covenant would not compromise patients’ ability to obtain adequate skilled care in the geographical area in which the health care provider is planning to work. In other words, the employer must evaluate the likelihood that consumers could be adequately served by existing health care providers or the hiring of a new physician of the same discipline to meet patient demand.
Second, past practices of enforcing or failing to enforce breaches of existing non-competes may prove detrimental to enforcing breaches of non-competes in the future. Specifically, it may be appealing to have a strong, all-encompassing non-compete and have all of your physicians and employees sign it upon joining the practice, but thereafter only fight to enforce non-competes for certain employees and only when their separation threatens the viability of your practice. However, this is not a prudent practice. Employers that require non-competes for all employees or certain positions, but then neglect to enforce those non-competes have later found it hard to justify their ad hoc enforcement against some employees, but not others. Courts are likely to find that the failure to pursue some employees’ violations of non-competes demonstrates that there is no real need for the restriction in the first place. Thus, a practice should bind with a non-competition agreement only those employees whose breach of such an agreement would warrant enforcement. You should consistently enforce breaches of any non-compete or be prepared to explain the reasons behind any decisions to not pursue enforcement.
Questions to ask prior to entering into a non-compete agreement:
For the employer:
Before demanding that all employees in your practice sign what appears to be an iron-clad non-compete agreement, as an employer you should ask yourself a few questions:
What activity do you need to prohibit?
If a particular physician leaves your employ to work for a competitor, could you provide the same medical services of that physician to your patients and/or the geographic region?
How far from your practice do most of your patients live? Do your patients travel 2 miles or across the county to be treated? Do the geographic limitations in your non-compete reflect the answer to this question?
Are you part of a regional hospital group, and if so, would the non-compete restrict the physician from practicing within a certain distance of other related hospital group practices? Is this restriction necessary to protect your practice?
Have you consistently enforced your non-competes in the past? If not, what are the reasons you chose not to enforce the non-compete?
Are you offering something of value in exchange for the non-competition agreement? If the non-competition agreement is part and parcel of the original job offer, have you clearly indicated to the physician – prior to the commencement of the employment relationship – that the agreement is a condition of the employment?
Before tendering a non-competition agreement to a potential hire, do I need to consult an attorney?
For the employee:
When presented with a non-compete agreement, as an employee, you should consider asking yourself and/or your potential employer the following questions:
Are there other physicians practicing your specialty within the area? If so, where?
How far from the practice do most of the practice’s patients live? If the non-compete appears overly restrictive in scope, consider asking the employer to modify the agreement.
If you were bound to the proposed terms of the non-compete, how would this affect your current living situation? Would there be opportunities for employment outside of the restricted geographic area?
Before executing an agreement or accepting new employment that may violate my non-compete, do I need to consult an attorney?