What Doctors Should Know About Non-Compete Agreements

Most physician employment contracts contain a non-compete clause as a condition of employment.  It is easy to overlook, but it places limits on a doctor’s ability to find future work or practice in a location of choice and therefore should be carefully considered.

A non-compete clause is a type of a restrictive covenant that prevents a doctor from practicing in a specified geographic area for a specified duration.  Other types of restrictive covenants include non-solicitation clauses, which prevent physicians from soliciting patients, employees or referrals, confidentiality clauses and even clauses that prevent a doctor from maintaining his or her privileges at a hospital upon termination of employment.

States such as Alabama, California, Colorado, Delaware, Massachusetts, North Dakota, Tennessee and Texas, limit or prohibit restrictive clauses in an employment agreement. The American Medical Association Code of Ethics discourages covenants not-to-compete, finding that they “restrict competition, disrupt continuity of care, and potentially deprive the public of medical services.” The AMA also considers such clauses “unethical” if they are “excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician.”

In New Jersey and New York, however, restrictive covenants are valid and enforceable provided certain requirements are met.

In New Jersey, the State Supreme Court has held that post-employment restrictive covenants are enforceable if they are reasonable and they are considered reasonable if such covenants (a) protect the legitimate interests of the employer; (b) impose no undue hardship on the employee; and (c) do not injure the public interest.

A somewhat similar standard exists under New York law. A covenant not to compete will be enforced to the extent that it is reasonable in time and area, is necessary to protect the employer’s legitimate interests, is not harmful to the general public and is not unreasonably burdensome to the employee.

Each jurisdiction, however, weights the importance of the relevant factors somewhat differently and each restrictive covenant is considered on a case-by-case basis.

An additional wrinkle to the aforementioned requirements is the Federal Stark regulations which allow a hospital to financially help a physician group to induce a physician to “relocate his or her medical practice to the geographic area served by the hospital [and] become a member of the hospital’s medical staff.” While the physician practice is allowed to include a restrictive covenant in the employment agreement with the recruit it may not impose any “unreasonable practice restrictions on the recruited physician.”

Physicians should carefully analyze these and other clauses of their employment contract with a qualified attorney before committing to the deal.