Making non-compete agreements work

By Mary-Jo Rebelo, Esq.

Your medical practice is busy, perhaps too busy, and now you and your fellow doctors are considering bringing on a new physician or two to care for existing patients and maybe even bring on a few new ones. Assuming the relationship goes well, those new doctors will add tremendously to your practice. But what if the relationship doesn’t go well, and your new doctors decide to leave your practice, set up shop around the corner from your office, and take your patients right along with them? Without the proper non-compete agreements in place, you and your fellow doctors may have little recourse against doctors who quit your practice only to become your competition. This article outlines Pennsylvania requirements for preparing non-compete agreements and may help your practice avoid some of the common pitfalls that can prevent non-competes from standing up in court.

How Non-Competes Protect Physician Practices

Non-compete agreements, sometimes referred to as restrictive covenants, are essentially a mechanism to protect a practice’s confidential and proprietary information or business relationships by precluding an employee from engaging in certain competitive activities for a specific period of time after the employment relationship ends. In short, non-compete agreements help you protect your relationships with your patients, and with other health care providers you or other specialists within your practice might depend upon for referrals. Some physician practice groups are reluctant to ask physicians to sign non-compete agreements and may feel awkward asking a colleague to restrain his or her ability to make a living, particularly now that people change jobs so frequently. Others may feel that patients might frown on any agreement that would prevent doctors from seeing patients, particularly when many practices put patients on long waiting lists to see a doctor. Whatever reluctance your practice may feel, the reality is that you could face real economic challenges if a physician leaves your practice only to open a competing office in your neighborhood. A non-compete agreement offers the best protection for your practice should a dispute arise.

The Importance of Specificity

In the event of a non-compete dispute, the courts will consider the specific language in the non-compete agreement. The court’s decision to enforce the agreement will be in large measure a factual one. Therefore, the language in non-compete agreements for physicians must be very specifically drawn. If the language in the agreement is vague and doesn’t clearly spell out the exact terms of the agreement, it is unlikely that the agreement will leave you any recourse to enjoin a doctor from opening a practice in your area. When non-compete disputes do occur, they are extremely fast-paced affairs that require injunctions to be sought immediately in court. In Pennsylvania, there are four basic requirements that must be satisfied for a non-compete agreement to be enforceable:

The agreement must be ancillary to the main purpose of a lawful transaction, such as an employment relationship. When an agreement is tied specifically to the commencement of the employment relationship, the courts are more likely to enforce the agreement. Tying the non-compete agreement to the time you enter into the employment relationship obviates the need for separate consideration or compensation. While a non-compete agreement may be enforceable when entered into some time after the employee begins work, Pennsylvania law requires additional consideration to be supplied to the employee.

Consideration of compensation must accompany the agreement. The courts acknowledge that non-compete agreements are of a real value to an employer. Therefore, they expect that a practice will offer doctors adequate consideration in exchange for signing the agreement. Moreover, the courts are not likely to enforce a non-compete agreement if adequate consideration is not provided upon signature. The best time to present a non-compete agreement is at the commencement of the employment relationship because the courts consider the job itself to be consideration enough, so long as the person is signing the agreement as a new employee.

However, when a doctor is already a part of your practice producing revenue, and you then ask him to sign the agreement, the agreement is not likely to be enforced by the courts unless it is apparent that you offered the doctor some additional consideration in exchange for what he or she is giving up by signing the agreement. Consideration can be provided in the form of additional compensation, a cash bonus or a salary increase, or better benefits, such as additional vacation time, more stock options, or even an increased or lump sum contribution to a 401(k).

The agreement must be reasonably limited in both duration and geographic territory. Because non-compete agreements may impact a person’s ability to earn a living, the courts are unlikely to enforce an agreement unless the limitations placed on an employee are specific and reasonable. The two most critical issues the courts will look at are the duration and geography limits imposed. When a dispute arises, the courts will consider both duration and geography together to make their decision as to whether the limits are reasonable.

Non-compete agreements usually stipulate a time frame in which an employee must refrain from opening a practice or working for a competitor. It is generally acceptable for restrictive covenants to range from between six months to 12 or even 24 months. However, agreements that constrain employees for three years or more will immediately raise questions of reasonableness. The courts generally expect that within six to 24 months, your business will have been able to employ measures to minimize or prevent losses or damage sustained by losing the employee. Possible exceptions might be in highly specific areas of business, such as the CEO of Ford leaving to become the CEO of GM or another of Ford’s top competitors. So long as the time frame of the non-compete is between six and 24 months, the agreement is likely to be deemed reasonable as to duration.

Non-competes also specifically limit, often by square mile radius, the geographic area in which the employee may set up his or her new office. However, the decision about what constitutes a reasonable limit on geography is often a subjective one. A five-mile radius in an urban area like Philadelphia might be home to millions of people, whereas a five-mile radius in the hills of central Pennsylvania might only be home to a few thousand potential patients. If your practice has only one office, for example, it is likely that any agreement that restrains a doctor for more than a five-mile radius will be found unreasonable.

The agreement must be reasonably necessary to protect the employers’ legitimate business interest. Courts will enforce a non-compete agreement if, along with the other factors described above, the restriction is reasonably necessary to protect an employer’s business interests. Protectable interests include trade secrets, customer good will and confidential information. It makes sense for an office of specialists to protect their business interests by limiting a physician’s ability to set up a competing practice in the same specialty nearby. However, asking secretarial or clerical people to sign non-compete agreements is considered highly suspect because the main purpose of your practice is medical care, which clerical people cannot perform. Seeking to restrain your lead cardiologist is a different matter. The rule of thumb is that any non-compete agreement must be geared to protect your clientele and the revenue stream of your business.

Best Practices

Although Pennsylvania law generally focuses on those four requirements, there are a few other best practices that you might want to keep in mind.

Unilateral enforcement. Drafting non-compete agreements and presenting them at the correct time are only part of the battle. Agreements should be enforced unilaterally and not, for example, pursued only if a top employee leaves. If you do not enforce a non-compete agreement with all employees, you may be in the unenviable position of having to defend yourself against accusations of selective enforcement, and that could potentially weaken your case by suggesting that your business is not in the habit of enforcing non-competes. It’s also not advisable to enforce non-compete agreements only with top performing employees. Doing so may encourage people to deliberately perform poorly so that you will fire them and thereby invalidating their non-compete agreement.

Specific language influences speed. If and when you do have to enforce a non-compete agreement, it will be as an emergency measure designed to immediately stop the employee from engaging in behavior that is immediately harmful to your business. It is then that the value of precise language becomes apparent. Precise language will leave little room for time-consuming interpretation and reinterpretation of your intent. It is important to be realistic, however, and to understand that non-compete disputes are intense matters that will take up a significant time. Disputes typically are handled by a Court of Common Pleas judge, who will usually issue a preliminary injunction or restraining order immediately upon learning that you have a non-compete agreement in place. Proceeding from that point through witnesses, depositions and trial toward a permanent injunction can take anywhere from 30 to 45 days.

Public policy plays a role. Overreaching the bounds of what is reasonable is a mistake. When dealing with non-compete agreements and physicians, public policy considerations come into play. The judge has the authority to simply strike portions of the agreement that he or she thinks are unfair. Courts of equity can grant limited enforcement only to those portions of the agreement that are deemed reasonable and enforceable. Physician’s practices may be held to a higher standard. No matter what your business interests, the courts will always consider, first and foremost, a community’s supply of doctors. In a city like Pittsburgh where there are numerous physicians, given the number of teaching hospitals and universities, it would not likely be considered a matter of community interest. However, in outlying areas where doctors are in short supply, the community’s interest in medical care could prevail, and courts might not enforce the non-compete.

Pennsylvania law regarding non-compete agreements, while still subjective, has been established over time by the state’s case law. Given the evolving nature of case law, it is not a foregone conclusion that firing someone would mean that his or her non-compete agreement would be null and void. The best thing for physician practices to do is to be proactive and have a well-drafted, well-thought out employment agreement that contains appropriate non-compete provisions, non-raid provisions to prevent competitors from hiring away groups of employees from your practice, and most crucially, for employers not to try to overreach. By taking the time to deal with these issues up front, your practice may even be able to prevent non-compete disputes from occurring in the first place.

Mary-Jo Rebelo, Esq., is a director of the firm of Houston Harbaugh in Pittsburgh.