The legal landscape for non-compete restrictions has been undergoing change. Legislatures and courts have been taking a renewed look at these restrictions, and in some cases aggressively limiting the type and scope of non-competes including those for physicians. While limitations are springing up, non-competes continue to be valid in most states. As a result, physicians must still be mindful and strategic when entering into contracts containing non-compete clauses.
What is a non-compete?
Non-competes are a type of contract provision known as a restrictive covenant which can apply during employment and after employment ends.1 Non-competes are designed to restrict physicians from competing by precluding them from working for a competitor, or setting up a competing medical practice, usually for a specified time period after employment ends within a designated geographic area.
Most physicians are familiar with non-compete restrictions having either agreed to such a restriction in an employment contract or having sought to impost such a restriction as a business owner to protect their medical practice. The unfortunate nature of non-competes is that they can have a significant impact on the professional and personal lives of physicians because they can preclude a physician from working for a desired employer in a preferred locale and cause a physician to have to move a residence with family in tow.
Contract provisions for physician non-competes are multi-faceted. One feature is a description of the restricted activity which can range from the practice of medicine or specialty to, more broadly, any activity including consulting or administrative services (e.g., medical directorship) and/or ownership of a practice or facility. Another aspect of non-competes is the duration of the restriction which typically ranges from one to two years. Some non-competes identify restricted competitors by name. One of the most critical features of non-competes is the designation of the restricted geographic area which may be based on zip codes, counties or mileage from specific locations.2
Non-competes are regulated by state law including common law developed through cases adjudicated in each state. There are wide variations in laws applicable to non-competes. In some states, they are void, in others fully enforceable, and yet in others somewhere in between. Physicians should be familiar with their own state’s non-compete laws and be aware that they could be subject to different (perhaps more stringent) non-compete laws if they move to another state.
In states where non-competes are enforceable (i.e., valid), non-compete restrictions have generally been upheld so long as employers can justify a legitimate, protectable business interest and provide enough evidence to establish the reasonableness of the non-compete. Some states have codified what is considered reasonable, including the duration and mileage restrictions. In others, the determination has been left to the courts and can involve a complex analysis taking into consideration the extent of restricted activity, an employer’s catchment/service area, population density of the state and/or the locale (e.g., rural versus large metropolitan area), public policy considerations and other factors specific to the parties.
In certain states, non-competes are banned and considered void if included in a contract. California3 enacted such a ban in 1941, essentially declaring that contract provisions restraining someone from engaging in a lawful profession, trade or business, are void (except in the event of sale of a business, dissolution of a partnership or dissociation of a partner). Oklahoma4 voids non-competes so long as the employee does not directly solicit the employer’s established customers. In Idaho,5 only non-competes with key employees are permitted but must be reasonable. In Utah,6 non-competes extending for more than one year post-employment are void (subject to limited exceptions). North Dakota7 voids non-competes except in the event of sale of business goodwill or between partners upon, or in anticipation of, partnership dissolution.
There has been recent legislative activity in some states newly seeking to limit non-compete laws. Legislation was introduced in 2018 in Pennsylvania and Vermont to void non-competes in a manner akin to California. A bill recently introduced in New Jersey included a one-year post-employment limitation on non-competes. While these new initiatives have not yet passed as law, the trend toward more limitations on non-competes seems to be gaining ground.
Limitations on physician non-competes8
In some states where non-competes are otherwise lawful, they may not be enforceable against physicians. This has been the case in Massachusetts9 since 1977, where contract provisions are void if they restrict a physician from practicing medicine in any geographic area for any period after termination of a partnership, employment or professional relationship. Delaware10 and Colorado11 enacted similar laws in the 1980s, although both of those states permit the imposition of competition damages (known as liquidated damages).12 In 2015, New Mexico13 enacted a law that resulted in non-compete provisions being unenforceable against physicians (and other healthcare practitioners) unless the agreements are between shareholders, owners, partners or directors of a practice, although the law does permit liquidated damages. And, in 2016, Rhode Island14 enacted a law like the one in Massachusetts restricting physician non-competes, but with an exception for the sale and purchase of a physician practice and limitation on the non-compete for a maximum of five years.
In some states where non-competes are lawful against physicians, they may be subject to more stringent requirements as compared to non-competes generally. This is the case in Tennessee,15 which allows non-competes for physicians, but places limits on their duration (two years post-employment) and on the restricted geographic area (county of practice or 10-mile maximum from the physician’s primary practice location). In 2016, Connecticut16 enacted a law allowing physician non-competes, but only if the physician was terminated by the employer for cause or if the non-compete was entered into in conjunction with or in anticipation of partnership or ownership, and further limiting such non-competes to one year duration and 15-mile maximum from the physician’s primary practice site. Texas17 allows physician non-competes, but physicians there must be allowed to buy out the covenant at a reasonable price, have access to a list of patients seen within one year of contract termination and be permitted to continue treating specific patients for acute illness.
Understanding a non-compete
While the landscape seems to be shifting, the continuing validity of non-competes in most states means they are still a key issue in physician contract negotiations. As a result, physicians in “valid” states need to protect themselves and fully understand the impact of the non-compete included in their contract. This is the case whether the physician just received a contract for a first position after residency/fellowship, a new lateral position, renewal of a multi-year contract or an annual academic appointment letter.
Regardless of the circumstances, the first task is always the same: that is, to analyze each aspect of a non-compete to enable the physician to plan and strategize about how to grapple with it. This requires close examination of the nature of the restricted activity, duration of the restriction and extent of restricted area.
Language describing a non-compete should be clear and precise so that an objective determination can be made about where the physician could work without violating non-compete restrictions. This is particularly important when thinking about changing jobs and stepping carefully from one position to the next, which can be considerably more difficult with a vague or imprecise non-compete.
Non-competes that are ambiguous can cause other problems. One is the potential loss of future employment opportunities because prospective employers (who often ask to see non-compete language) may shy away from making an offer so as not to risk provoking a competitor.18 Another is the potential for personal liability resulting from a physician’s contractual obligation (typically included in most employment contracts) to pay costs, expenses and legal fees incurred by the new employer arising from the non-compete.
Once the potential impact of a non-compete has been ascertained, consideration should be given to cogent changes that could be made and how to go about negotiating them. Changes to be proposed to non-competes will vary, but the mileage restriction is one which often is the subject of discussion. In most instances, physicians prefer that the mileage restriction be reduced. While employers can be reticent to reduce mileage, curtailing the impact of a non-compete may be possible by limiting locations to which the mileage radius applies.19 Ultimately, the revisions requested will depend on the nature and extent of the non-compete and a physician’s personal and professional circumstances.
The legal landscape appears to be trending toward more restrictions on non-competes including those applicable to physicians. Yet, because non-competes remain valid in most states, physicians should closely review and analyze their non-compete, and consult with an attorney to ensure they fully understand the potential impact and attendant risks.
1. Other types of contractual restrictive covenants include non-solicitation provisions which restrict a physician from soliciting an employer’s patients, employees or contractual relationships, and non-disclosure provisions which restrict a physician from disclosing confidential and/or proprietary information.
2. Mileage restrictions are a radius around a point or as the crow flies. On-line map tools can be helpful.
3. California Business and Professional Code § 16600 seq.
4. 15 OK. Stat. §15-219A.
5. Idaho Code §44-2701 seq.
6. Utah Code §34-51-201.
7. N.D. Cent. Code §9-08-06.
In addition to state laws related to physician non-competes, the American Medical Association has weighed-in on the controversy in Ethics Opinion 126.96.36.199, taking a position similar to many states essentially requiring that non-competes must be reasonable. Some physician specialty societies/associations have also weighed-in including the American Academy of Emergency Medicine which published a White Paper on restrictive covenants after its July 16, 2007 Board of Directors meeting concluding that post-contractual restrictive covenants in physician contracts violate public policy and medical ethics, and have the least applicability in emergency medicine.
9. Mass. Gen. Law Ch. 112 §12X.
1 6 Del. Code Ann. §2707
1 Colo. Rev. Stat. §8-2-113.
1 Liquidated damages are usually specified in a contract at the time the parties enter into it and often based on annual compensation paid to the physician.
1 N.M. Stat. §24-1l-1 et. seq.
1 R.I. Gen. Laws §5-37-33.
1 Tenn. Code Ann. §63-1-148. The law was originally enacted in 2007 and amended several times since then. Note if there is no geographic limitation, the physician could be restricted from practicing at any facility in which the employer provided services during the physician’s employment.
1 Conn. Gen. Stat. §20-14p(b)(2).
1 Tex. Bus. & Com. Code Ann. §15.50.
1 Such challenges could take the form of an allegation of tortious contract interference.
1 Some examples of limitations the author has seen include limiting the mileage restriction to a physician’s principle hospital/office location, locations where a physician spends more than 20% of professional time, and exclude locations where coverage is provided on an ad hoc or infrequent basis.