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April 20, 2022

Recent Guidance On Enforceability Of Physician Non-Competes

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As previously reported here, courts are known to "blue pencil" terms of non-compete provisions in employment agreements that do not appear to further legitimate business interests. Earlier this year, an Ohio appellate court affirmed the lower court's modification of the scope and duration of a challenged non-compete provision found to be partially unreasonable.

In Metrohealth System v Khandelwal, a burn center recruited a physician to become its burn surgeon; he was later promoted to director of the facility. The employment agreement included a non-compete clause precluding the physician from providing "consulting, medical expert or professional services similar to those [he provided] as an employee" within 35 miles of the burn center for two years after termination of his employment.

After a number of years, the physician resigned from Metrohealth and accepted a position as director of another burn center within 35 miles of Metrohealth. His former employer sued to enforce the non-compete and prevent him from taking the position.

Following a hearing, the trial court held that the physician could begin his new employment as a burn surgeon, but he was precluded from assuming the position of director for one year after leaving Metrohealth, modifying the duration of the non-compete. The court also held the physician could not use any proprietary information of Metrohealth and that he could not solicit any of Metrohealth's patients or employees for one year.

The appellate court noted that preventing ordinary business competition is not a legitimate business interest that supports enforcement of a non-compete provision. Rather, non-competes are only enforceable to avoid unfair competition.

The trial court was influenced by testimony that burn patients are more likely to seek care at the closest facility because time is of the essence and that referrals to a specific physician are uncommon. In addition, the physician testified that being precluded from working in his specialty for two years would be detrimental to his credentialing prospects, to the outcome of burn patients, and to his family, who had established roots in the community. For those reasons, the court agreed the physician should be allowed to work as a burn surgeon for his new employer.

The physician's administrative role was treated differently because the court agreed with Metrohealth that those responsibilities involve proprietary knowledge of a former employer's business. The court did not provide its reasoning for reducing the duration of the non-compete from two years to one, other than to note that two-year non-competes are not standard practice in Ohio. As a practical matter, any knowledge of pricing structure, profit and loss data, or other such information is likely to be stale after one year, making it more difficult to justify a two-year restrictive covenant.

This case presents yet another example of the many factors a court will consider when evaluating a physician's non-compete. As a drafting tip, including confidentiality and non-solicitation terms in an employment agreement are supplemental methods to protect an employer's business interests even if a court determines the non-compete terms are unreasonably restrictive.

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