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Anatomy of a Noncompetition Clause: Now's the time to review your employment contract
From: ENT Today, August 2010
by Steven M. Harris, Esq.
A physician who was recently offered a lucrative position with an otolaryngology practice in his community asked me to review his current employment agreement to determine if it contained any prohibitions against accepting the job. His previous employment contract contained a noncompetition clause that, justifiably, caused him and his prospective employer some concern. As it turned out, in his case, and in many others, the noncompetition clause was not as restrictive as it appeared at first glance. The provision was penetrable and my client joined the new practice with a clear conscience that he was not in violation of his previous contract.
What Is a Noncompetition Clause?
A noncompetition clause, also known as a covenant not to compete or a restrictive covenant, is a provision in a contract that precludes one party from engaging in competition with another party by working in a particular field, within a specific geographical area and for a stated period of time. A well-written noncompetition provision will prevent a physician from practicing within a certain geographical area surrounding the current practice (typically described by a stated number of miles from the practice site) and for a prescribed period of time after the termination of the physician’s employment with that practice (typically described by a stated number of years).
Sometimes, the physician will be permitted to practice within the parameters of the restricted geographical area or time period if the physician or the physician’s new, prospective employer “buys out” of the clause. This is an especially good option when the reasonableness of the noncompetition is not black and white and both parties want to avoid the expense of litigating the enforceability of the noncompetition clause. Otherwise, if the physician breaches the noncompetition clause, the former practice will usually first seek injunctive relief to require the physician to abide by the agreement that prohibits the physician’s new employment, then follow with a request for any related monetary damages.
In states where noncompetition clauses for physicians are enforceable, the provision must protect the employer’s legitimate business interest, be specific in geographical scope and have a narrowly tailored durational scope. If the language in the clause is vague or does not clearly describe the exact terms of the restrictions on practice, the clause may be unenforceable or open to greater interpretation than either party anticipated.
Protecting a Legitimate Business Interest
Some examples of a legitimate business interest include the employer’s goodwill; namely, the retention of patients and the protection of referral sources. Moreover, since noncompetition clauses are not looked upon with favor by courts because they operate as restraints on trade, the language needs to be narrowly tailored to protect the employer’s legitimate interests.
Noncompetition clauses must also specify the restricted geographical area where the physician is prohibited from practicing. Whether a geographical scope is overly broad, however, will depend not only on the state’s laws but also on the location of the medical practice and its surrounding community. Typically, contracts will provide a mile radius surrounding the medical practice as the restricted territory. But, determination of whether or not a geographical limitation is “reasonable” is dependent on the location of the practice. A five-mile radius in an urban area like Dallas might be home to millions of people, whereas a five-mile radius in rural Texas might only be home to a few thousand people.
Typical red flags include:
- Prohibition to practice anywhere in a specific state;
- Prohibition to practice within a territory comprising excessive miles from the current practice; and
- Prohibition to practice within certain counties.
A noncompetition clause should also identify the time period in which the physician must refrain from practicing within the restricted geographic area. Whether or not the durational scope is reasonable will vary from state to state. Generally, as long as the restricted time frame is two years or less after termination of the contract, the time restriction will be considered reasonable. States vary on whether time restraints exceeding two years are reasonable, and, unfortunately, there is no bright line test as to what constitutes as a reasonable time restraint.
The pitfall I encounter most often when it comes to time restrictions is excessiveness based on the state’s laws and the circumstances of the physician and the employer. In negotiating the restricted length of time in a noncompetition clause, it is more common to have a longer time restriction for a physician selling a medical practice than it is for a physician entering into an employment relationship.
In addition to the restrictions placed upon the physician in transition, great care must be taken by the practice seeking to hire a new physician. States recognize the legal theory of interference with a contract. Accordingly, if you are recruiting a physician who is subject to an employment agreement with his or her current practice, you must be very careful while recruiting. If a prospective employer is aware of an existing employment contract that contains practice restrictions on a recruited physician, the practice could very well be held responsible for damages if a dispute arises among the parties.
Words, Words, Words
The addition or omission of a single word in a contract can make a world of difference. I reviewed the noncompetition clause in a physician client’s former employment agreement that precluded him from “being employed by a medical practice engaging in otolaryngology within a five-mile radius of XYZ group for two years.”
Because this provision did not preclude my client from being retained by another practice as an independent contractor, being employed by a hospital or opening up his own practice, I was able to structure several post-employment options for him that were not in violation of his employment agreement.
While it may seem like just semantics, a few words can change your future. Before you put pen to paper, be sure to have any contract containing a noncompetition clause reviewed by a lawyer who is well versed in your state’s laws. If you have already signed an agreement with a noncompetition clause and you are considering your next career move, a lawyer may be able to shed some light on a seemingly impenetrable clause.
Steven M. Harris, Esq., is a nationally recognized health care attorney and a member of the law firm McDonald Hopkins, LLC. He may be reached at email@example.com.