Restrictive covenants: A look at what’s fair, what’s legal and everything in between
As non-compete clauses become more common for physicians, some experts say they’re becoming more aggressive by Bonnie Darves
Published in the April 2006 issue of Today's Hospitalist
Seven years ago, when the “marriage” between a Colorado hospital and the medical group that used his hospitalist service went sour, Duane Spaulding, MD, found himself unable to work as a hospitalist in a community that was clamoring for his group’s services.
“The hospitalist practice that I’d given my heart and soul to was booked to the hilt, yet I was out of a job,” recalls Dr. Spaulding, who had spent 13 years in office practice before becoming a hospitalist in 1997.
The problem? A non-compete clause in the hospitalist group’s contract precluded Dr.
“The greatest urban legend that’s passed down from year to year in medical school is that these things aren’t enforceable.”
Joan Roediger, JD Obermayer Rebmann Maxwell & Hippel LLP
Spaulding and his 14 colleagues from working as hospitalists in the community—even though they weren’t actually competing with anyone else.
“The program was defunct, but there was still a non-compete clause,” Dr. Spaulding explains. “Some of us wanted to start a new independent program, but we were stuck.”
Dr. Spaulding and two other hospitalists eventually worked through the legal and political challenges of the situation and restarted a hospitalist program in the community, but not before most of the group’s physicians had taken work elsewhere and the remaining members lost nearly a half-year’s revenue. The experience left Dr. Spaulding vowing to never sign another contract with a non-compete clause—or foist one on any doctor he subsequently hired.
“It may be nice for employers, but in good conscience I couldn’t do it,” explains Dr. Spaulding, who is now president of Advantage Inpatient Medical Specialists PC, a 10-hospitalist group in Colorado Springs he started in 1999. “We have no non-compete clause whatsoever, and we tell our candidates that.”
Necessary for hospitalists?
Restrictive covenants are increasingly common in physician contracts, and they almost always have one goal: Protect the employer in the event that a physician leaves and tries to compete with the practice or hospital.
According to Andrew Knoll, MD, JD, a former hospitalist who now is a health care attorney with Scolaro, Shulman, Cohen, Fetter & Bernstein PC in Syracuse, N.Y., restrictive covenants typically address three factors: location, a timeframe and the solicitation of employees or patients.
Geographic and time restrictions, Dr. Knoll says, typically prohibit physicians from practicing in a geographical area spelled out in the contract for at least two years. And non-solicitation clauses are generally upheld, he adds, “because it’s not fair to steal someone’s employees.”
With community-based physicians, the rationale for restrictive covenants is fairly obvious: If a group hires a physician, helps build that doctor’s practice and delivers a steady stream of patients, it wouldn’t be fair for the physician to leave and start a competing practice next door 18 months later.
But is there a place for these clauses with hospitalists, who don’t have patients who would follow them from one practice to another?
A place for non-competes
“If you’re a hospitalist, you have no patient following, so to be presented with an employment agreement that blocks you from a geographic area outside of the institution where you’re working is pretty darn silly,” says Joan Roediger, JD, a Philadelphia attorney with Obermayer Rebmann Maxwell & Hippel LLP. She regularly counsels physicians on contract issues and lectures on restrictive covenants.
But even some physicians say that under the right circumstances, non-compete clauses do serve a purpose. Hospitalists may not compete for patients, but they can compete for referrals from community-based physicians, and that’s where non-compete agreements can serve a legitimate role.
Richard Rohr, MD, director of the hospitalist service at Milford Hospital in Milford, Conn., says that if a hospitalist is hired by a group that has built a program from scratch and developed relationships with the hospital administration and referring physicians, the group has a right to protect that business interest if one of its physicians wants to leave and compete with the group.
“If you’re going to bring in people who are going to trade on your goodwill in order to generate their income,” he explains, “you have to keep people from using that. It’s an essential business tool for the owner of a practice.”
Dr. Rohr says that physicians who want to start a new hospitalist group by approaching physicians they know from their previous group should expect their former employers to take action to protect themselves. “I think there’s an element of unfairness there,” he says of physicians who dip into their previous group’s client list.
A growing phenomenon
Whether they’re needed or not, observers say that non-compete clauses are becoming more common in hospitalist contracts.
“I used to say there would be no reason for non-competes with hospitalists, but about half of the contracts I’ve seen in the last year have included them,” says Joel Leonard, JD, a health care attorney and partner with Holland & Knight in Portland, Ore., who represents physicians in employment contracts. He notes that noncompetes are “the No. 1 issue that I counsel hospitalists and doctors about.”
In some cases, hospitals and medical groups may be putting non-compete language in contracts as a matter of practice. Ms. Roediger notes that she has seen a number of large physician organizations and hospitals include the clauses primarily in the interest of standardizing their physician contracts.
Mr. Leonard recalls that when he tried to eliminate such language from one hospitalist’s contract, the prospective employer refused on the grounds that “everybody does it.”
But with hospitalists in such short supply, there is another reason that non-competes are becoming more popular. Hospitalist groups are trying to make sure their physicians don’t try to enter a fast-growing market at their expense.
“We’ll probably see this more in hospitalist groups,” Dr. Knoll explains, “because a large group that has that hospital contract doesn’t want to chance losing it and having their employees spin off” and start their own group. He adds that those same concerns have led to an increase in non-compete clauses for other hospital-based specialties in recent years, such as radiology and anesthesiology.
Are they fair?
For many hospitalists, the issue of non-competes raise questions of fairness. Even hospitalists like Dr. Rohr who say that restrictive covenants have a place in physician contracts draw the line at certain practices.
A hospitalist who decides to go into a primary care practice in the same area, or someone who leaves the group to pursue a fellowship at a local university, Dr. Rohr offers, should be exempt from an onerous noncompete. But if the physician has an eye to create a hospitalist group in the area and wants to build on the reputation of the group that hired him, he says, “there should be some compensation to the group’s founders.”
Likewise, Dr. Rohr thinks it’s reasonable for large hospitalist entities to try to protect their contractual interests with hospitals by restricting their employees from leaving and working at the same facility. He acknowledges that could mean that if things go sour between a contracted hospitalist company, hospitalists from that group might have to leave the area to find work.
“Business is not always kind and polite,” Dr. Rohr says, “and hospitalists could get stuck in something that isn’t their fault. But there’s a legitimate business interest for a company to say that if this contract ends, you have to come with us or leave the employ of the hospital.”
When contracts go too far
While many physicians would likely agree with Dr. Rohr’s view of what constitutes a fair non-compete, the reality is that restrictive covenants and non-compete clauses are sometimes so broad that they’re both unrealistic and one-sided.
Ms. Roediger, who has counseled hundreds of physicians over the years, knows just how heavy-handed these provisions can be. She has seen language that would prevent physicians from practicing general internal medicine in a large radius from the hospital, or from obtaining privileges at a hospital where any of the former group’s doctors have privileges.
Mr. Leonard cites similarly onerous provisions that go as far as restricting departing (or terminated) hospitalists from working with health plans or insurers that have contracts with the group.
But perhaps the most onerous—and patently unfair—restrictive covenants are those that allow the group to not only obtain a court injunction to stop a formerly employed hospitalist from practicing in the same geographic area, but also require the hospitalist to pay liquidated damages. In the worst cases, that could represent an amount equal to two years of salary, plus any legal costs the former employer incurred trying to enforce the restrictive covenant.
“It never ceases to amaze me what lawyers will throw into a contract,” Ms. Roediger says. “Look at not only the restrictive covenant itself, but also at how it’s enforced, by injunction or liquidated damages, or possibly both if the lawyer who drafted the contract got very aggressive.”
States weigh in
As non-compete clauses become both more common and aggressive, some states are taking a hard look. Of particular concern is the effect that restrictive covenants have on patient access to physician services.
In a highly publicized case in Tennessee last year, the state Supreme Court overturned a non-compete clause involving a primary care physician who was told he couldn’t work in the same community as his former practice as a hospitalist or a private-practice physician. And over the last 15 years, three states—Colorado, Delaware and Massachusetts— have outlawed non-competes in physician employment contracts.
In several cases, overly ambitious non-competes—restricting a physician from practicing in the region for five years, for example, or preventing a doctor from practicing in a very broad area, such as an entire state—have been overturned or narrowed in scope.
Those decisions don’t mean, however, that hospitalists shouldn’t take restrictive covenants seriously. Non-competes and other contract provisions are regulated by individual states, so a court decision in one state may have little or no bearing on a similar contract signed by a physician in a neighboring state.
“A lot of times these things get shot down,” Ms. Roediger says, “but in geographic regions where they’re enforceable or they’re not expressly prohibited, the rule of thumb is that you should always assume they can be enforced. I tell doctors that the greatest urban legend that’s passed down from year to year in medical school is that these things aren’t enforceable. They are.”
Dr. Knoll concurs. “Restrictive covenants are purely a creature of state law,” he explains. “In New York, they’re honored as long as they’re reasonable in geographic scope and temporal time.”
Rules of thumb
That said, a good rule of thumb for the length of noncompetes is two years. Geographical scope, on the other hand, varies depending on the situation and the marketplace. “In Manhattan, it could be one mile,” Dr. Knoll says, “while in Syracuse, it might be 20 miles.”
Nor should hospitalists sign a contract with a noncompete clause that seems too broad simply because they think they can ignore it. Both Ms. Roediger and Mr. Leonard say that enforcement actions are more common than most physicians realize, in part because lawsuits are often settled before they make headlines or hit the high courts.
Finally, because of the time and money required to fight a non-compete clause, taking this kind of fight to court is not something to entertain lightly. “How would you like to spend about $100,000 of your money hiring lawyers and experts and going through depositions?” Ms. Roediger asks.
The bottom line, Dr. Knoll says, is that if hospitalists encounter a non-compete clause and can’t convince a prospective employer to remove it from the contract, they should assume that it will remain in force during their employment.
“You have to go on the assumption that they’re enforceable and plan your life with that expectation,” he explains. “If the covenant says two years and 10 miles, you ain’t working for two years within 10 miles.”
Bonnie Darves is a freelance writer specializing in health care. She is based in Lake Oswego, Ore.
How to spot—and tame—troublesome non-compete clauses
When it comes to restrictive covenants and non-compete agreements, attorneys and physicians alike say that the main issue for hospitalists is whether they can live with the language if push comes to shove.
If you take a job in Alaska knowing that you’re not going to settle down there, a non-compete might be no big deal. But if you join a program in your home town and sign a broadly drawn non-compete or non-solicitation provision, it could haunt you for years down the road.
“Some things are easy to negotiate around in a contract, but if there’s one thing that’s going to bite you, it’s potentially a non-compete,” says Joel Leonard, JD, a health care attorney and partner with Holland & Knight in Portland, Ore. “It can really change your life.”
If you can’t get rid of the non-compete, try to at least make it something you can live with. One way to do that, Mr. Leonard recommends, is to build in “an escape hatch for your next best alternative job”—whether that’s at the hospital down the street or an academic center 40 miles away.
He recommends that hospitalists also carve out an option that allows them to work as an office-based internist in the same area.
“You’re far better off trying to modify it before you sign it so that you have a version you can live with that fits your circumstances,” Mr. Leonard explains. “You don’t want to be in a situation later where the other side has a lot of ammo and you’re hoping for a miracle.”
Here are some other tips to evaluate and deal with potentially problematic restrictive covenants affecting hospitalists:
Request that the non-compete be limited to the hospital in which you will be working. Also make sure that it affects only the provision of hospitalist services, and not admitting privileges in general.
Richard Rohr, MD, director of the hospitalist service at Milford Hospital in Milford, Conn., adds that the covenant should not encompass hospitals with which the hospitalist group does not contract, or for which it doesn’t provide services. “It should be limited to those facilities to which the group has actually introduced the hospitalist to the hospital and the referring physicians,” he says.
Watch out for unrealistic or over-reaching time and geographic restrictions. A good example is a radius that extends far beyond the hospital’s service area. Andrew Knoll, MD, JD, a former hospitalist who now is a health care attorney with Scolaro, Shulman, Cohen, Fetter & Bernstein PC in Syracuse, N.Y., says he has seen particularly onerous non-compete clauses that prevent physicians from working within 50 miles of a practice for as long as five years—or even the life of the physician. “In situations like that,” he says, “the courts likely will not enforce them, but they might reduce them, so you’re still out the cost of fighting them.”
Don’t sign non-compete provisions that extend beyond two years following termination of employment. This is the time period most courts have deemed reasonable.
Also factor in time employed by the group, Dr. Knoll advises. A hospitalist who leaves after five years with a group, for example, should no longer be considered as having taken the practice’s goodwill and run off with it, he explains. By that time, hospitalists are surely trading on their own competence and connections.
Get help from a lawyer. Regardless of the restrictive covenant—and whether it appears benign or onerous—seek the counsel of a qualified attorney. “Before you accept one of those clauses, it’s very important to have it reviewed by an attorney in that state who is familiar with court decisions in that state and with what’s being done elsewhere,” Dr. Rohr says. He adds that it’s a particularly good idea to get legal help if liquidated damages are involved. “That’s where it’s really worth a few hundred dollars to have a good