Is There a Doctor in the House? Helping Physician Non-Competes Survive Challenges

IN DEPTH

1. WHAT STATE LAW GOVERNS THE NON-COMPETE?

Acceptable terms within an employment agreement non-compete vary widely from state to state:

• Some states, including Hawaii, New Jersey and New York, follow the same general "reasonableness" tests that they do for other non-healthcare employees.
• Others have codified specific terms that must be drafted into physician non-competes (such as Texas's requirement to include a buy-out clause), or specific exceptions where they cannot be imposed (such as Florida's ban on physician non-competes where "one entity employs or contracts with, either directly or through related or affiliated entities, all physicians who practice such specialty.")
• In some states, such as Delaware, physician non-competes cannot be specifically enforced. Liquidated damages are the only remedy for a breach.
• And in other states, including California and Massachusetts, non-competes are simply prohibited in the physician employment context.

Therefore, the state law that governs the physician's employment agreement is incredibly important to the analysis of what restrictions are permissible.

2. DOES THIS NON-COMPETE RESTRICT AN EMPLOYEE OR THE SELLER OF A BUSINESS?

Non-competes are not one-size-fits-all, even within one state. The context is important.

Consider the nature of the relationship and transaction when drafting non-competes for physicians. As a general rule, non-competes are more broadly enforceable in the sale-of-business context than they are in the context of an employment contract, and can be broader in duration and scope for a sale of business. Even in the state of California (notorious for being anti-restrictive-covenant), Business and Professions Code section 16601 permits the seller of a business to enter into a reasonable non-compete to protect for the buyer the value of the goodwill of the business being sold. Make sure your non-competes are properly tailored for each context.

3. WHAT TYPE OF PHYSICIAN ARE YOU WORKING WITH?

Some states differ even in how they apply non-compete restrictions for "physicians." For example, in Nevada, a specialist may be restricted from practicing general medicine for a certain amount of time, but must be permitted to continue to practice her specialty without restrictions (see Ellis v. McDaniel). Meanwhile, in New Jersey, a restrictive covenant against a specialist may be upheld for a reasonable amount of time and geographic range (see Community Hospital Group, Inc. v. More).

Keep in mind that many states have not only taken a special interest in monitoring non-competes for physicians generally, but also apply additional carve-outs for specialists.

4. DOES YOUR STATE ALLOW BLUE PENCILING? 

Even where physician non-competes are drafted in a way that the parties deem reasonable, courts may still find that the terms are too broad. Some states allow courts to "blue pencil" unenforceable terms, which typically means that a court may strike out offensive terms but will not rewrite the provision. Other states permit courts to reasonably reform a non-compete if, for example, the duration or geographic scope is unenforceable.

Before entering into a non-compete with a physician, consult with legal counsel on whether the jurisdiction allows for blue penciling or reformation, and whether it is discretionary or mandatory for a court to do so. In a state that will blue pencil, depending on your strategy and goal for that restriction, you may consider building in step-downs to permit the court to more easily revise the provision.

5. WHAT ARE THE NEEDS OF YOUR BUSINESS?

The best defense is a good offense. The best way to ensure that your noncompete with a physician is enforced is to take a critical look at the reasonable needs of your business. While every state has its standard of "reasonable," it helps to know in advance where exactly your patients and clients live, how far-reaching your practice or hospital is, and for how long your business will reasonably need to restrict a physician from competing or interfering with your business. All of those facts are pertinent to eventual enforcement of a non-compete, which means you will need them in the first instance when drafting the agreement. Corporate and employment counsel can assist you with understanding what is "market" (typical and reasonable) in the current transactional landscape and industry. But no one knows your business better than you, and because of this, your input is necessary to effectively tailor the non-compete to meet your business's needs.

THE MCDERMOTT DIFFERENCE

For any business transaction or issue involving non-competes with physician sellers, employers or owners, please feel free to contact our M&A healthcare and employment teams, who can help you draft an appropriately tailored noncompete to meet your needs.