By Robert M. Linn, Esq..
With pressures from managed care mounting and competition within the medical profession becoming increasingly keen, physicians today are increasingly opting to sell their practices to hospitals or other large health care providers in return for the financial security and other benefits that such transactions provide. Under the customary arrangement, most physicians continue working for the acquiring entity for an extended period of time and otherwise agree not to compete with the institution that has just paid usually hundreds of thousands of dollars for their practice. Generally speaking, such arrangements are beneficial for both the individual physician and the acquiring institution and fulfill the expectations that both parties had entering into the transaction.
However, situations occasionally arise in which individual physicians who have sold their respective practices do not receive the benefit of the bargain for which they have contracted or are otherwise dissatisfied with the continuing employment arrangements with the acquiring institution. Under these circumstances, physicians frequently consider reentering private practice, but are faced with the legal hurdle of circumventing the non-compete agreements that invariably they executed as part of the sale of their practice. In determining whether such non-compete agreements are legally enforceable, physicians would do well to consider the following six basic considerations:
Adequacy of consideration. In order for the non-compete agreement to be legally enforceable, the individual physician must have received adequate legal consideration in return for the sale of the medical practice. There is no bright line legal test to distinguish between what constitutes adequate consideration from consideration that would be deemed insufficient. Generally speaking, physicians who have received hundreds of thousands of dollars in return for the sale of their practice will have a difficult time arguing that they have received inadequate consideration. However, if the physician was to receive a pay-out over time and the acquiring institution has failed to adhere to the agreed upon payment schedule—either because of financial problems or a change in strategic direction—the physician may be able to argue that the non-compete is unenforceable for lack of consideration.
Contractual covenants. Physicians generally agree to sell their practices with the understanding that they will remain in the employment of the acquiring institution and will continue to provide medical services under certain agreed upon conditions. Where the physician only agreed to sell the practice if certain work-related conditions were to apply, he or she may be in a position to argue that the non-compete agreement should not be enforceable if the institution has failed to honor its end of the bargain. However, it is likely that a court will only be sympathetic to such an argument if the altered work conditions fundamentally altered the nature of the relationship between the individual provider and the health care institution. Relatively minor discrepancies between the physician’s and hospital’s expectations about the nature of their relationship will not afford the physician with a means of avoiding the strictures of the non-compete agreement.
Length of non-compete. Generally speaking, non-compete agreements are only legally enforceable to the extent they are reasonable as to time and geographic scope. To the extent the non-compete agreement is unduly broad from a temporal standpoint, a court of law may refuse to enforce the agreement as written. Once again, there is no bright line test as to what constitutes a reasonable time restraint. In a sale of a business context, a two-to-three year non-compete would probably be viewed to be reasonable. However, a non-compete agreement that lasted for a period in excess of that time might be viewed as excessive, thereby affording the individual physician with a basis for challenging the enforceability of the covenant.
Geographic scope of non-compete. Any non-compete signed by a physician in a sale of a business context should delineate the geographic area within which the physician is prevented from competing. Given the local nature of the health care services market, non-competes in this context generally restrict the physician from setting up a competing practice within the general service area of the acquiring institution. If the non-compete includes a geographic restraint that exceeds this scope, a court may view it to be unenforceable. Although a nationwide restraint may be reasonable for certain types of highly specialized medical practices, in many circumstances it would be viewed as unduly broad and, therefore, legally unenforceable.
Timing considerations. In order to be legally enforceable, the physician should enter into the non-compete agreement at the time that the practice is sold. In effect, the purchase price should serve as the consideration for restraining the physician from engaging in competitive activity. If there is a material delay between the time that the physician receives a lump sum monetary amount in return for the sale of his practice and the execution of the non-compete agreement, a court may decide that the physician has not received adequate consideration in return for the non-compete and rule the agreement to have no validity.
Scope of practice. Generally speaking, physicians selling a practice would be unlikely to reorient their professional careers so as to enter a different area of medicine. However, where a physician in general practice elects to sell his practice so that he or she can obtain additional training to become a psychiatrist, the selling physician arguably would not be competing with his old practice were he or she to subsequently start a new, more specialized practice. Non-compete agreements are only designed to prevent “competition.” If the physician is not truly competing because of a change in career direction, an argument could be made that he or she is continuing to adhere to terms of the non-compete agreement but is simply not precluded thereunder from opening a practice involving a different area of medicine.
The six criteria described above are the standard determinants of whether a non-compete agreement entered into in a sale of business context is legally enforceable. Depending upon the specific facts and circumstances of the case, other bases for challenging the agreement may apply. Accordingly, while it is likely that a court of law will be inclined to enforce such agreements in most situations, certain extenuating circumstances may apply that will warrant a different outcome.
Robert M. Linn, Esq., is a senior shareholder and director of the Pittsburgh law firm of Cohen & Grigsby, P.C.