When Does a Noncompete Really Mean “No Competition”?

In today’s dynamic healthcare environment, physicians, healthcare facilities, practice managers and their business associates have increasingly complex and interdependent relationships. Restrictive covenants are routinely included in employment contracts, partnership/shareholder agreements, asset purchase agreements and service contracts. Misperceptions regarding enforceability abound. Often, the first time any meaningful attention is paid to restrictive covenants is when a relationship ends.

Contrary to urban legend, restrictive covenants in the healthcare field are not presumptively invalid. They generally are enforceable. Several factors are relevant in determining the enforceability of a restrictive covenant and the desirability of enforcing a restriction via injunction.

Legitimate business interests: A key issue is whether a restrictive covenant is necessary to protect a “legitimate business interest” of the party seeking enforcement. Protectible business interests include, but are not limited to: (a) substantial relationships with patients (who must be identifiable); (b) goodwill; (c) trade secrets/confidential business information (e.g., specially developed patient lists, proprietary information regarding managed care contracts, or data developed through clinical studies); and (d) extraordinary or specialized training. If the proponent cannot establish a legitimate business interest, the covenant is unenforceable.

Public policy
A restrictive covenant that negatively affects the public health may not be enforced. This most often is an issue in rural or underserved communities or where enforcement is sought against a highly specialized provider whose services are in short supply. In a few cases (none known in Florida), courts have ruled that restrictive covenants requiring a physician to surrender medical staff privileges violated public policy. A major consideration in this instance is whether the employer is hospital-based and operating under an exclusive contract with the facility. One Florida court held that a surgeon who opened his office outside the area covered by the restrictive covenant could continue performing procedures at a hospital falling within the covenant’s scope. The rationale was that competition for surgical patients occurs at the physician’s office – not at the hospital.

Reasonableness
A two-year restriction is presumed reasonable when applied to a nonshareholder. If the departing employee is a shareholder or partner, three to seven years is considered reasonable. Geographic reasonability is determined by the former employer’s trade area. It typically is unreasonable to prevent someone from working in an area where his former employer is not doing business.

Remedies
Injunctions are the most meaningful enforcement mechanisms. However, since they inherently are “winner take all” cases, one should fully evaluate the expense, risks and rewards of seeking such relief. Obtaining an injunction often requires weeks, sometimes months, of intense litigation. If the proponent succeeds, he must post a bond, which can be substantial. The losing party generally must pay the winner’s attorney’s fees, which also can be substantial.