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Enforcement of noncompete agreements

By Alan B. Rosenthal, Esq.

Physician noncompete agreements have long been held up to scrutiny by Pennsylvania courts concerned about the effect of precluding physicians from practicing within certain communities. Recent rules enacted pursuant to the federal Stark Law, coming on the heels of several court decisions involving physician noncompete agreements, pose a serious challenge to medical providers seeking to protect their competitive advantage through noncompete agreements with their physician employees.

A noncompete agreement (also known as a covenant not to compete or a restrictive covenant) is one which precludes one party, typically an employee or the seller of a business, from engaging in competition with another party, usually the employer or the buyer of the business. Because noncompete agreements interfere with a person’s ability to pursue his or her livelihood and constitute restraints of trade, courts are often loath to enforce them. For this reason, a properly drafted noncompete agreement should be limited in its breadth and scope. To be enforceable, a noncompete agreement should specifically define what activities are prohibited, narrowly define the geographic area to which its restrictions apply, and remain in force for a specific but limited period of time.

Although noncompete agreements are typically associated with the business world (especially salesmen) rather than with the professions, medical practices have long attempted to enter into and enforce noncompete agreements with their physician-employees, with mixed results. These noncompete agreements usually provide that upon termination of the physician’s employment, the physician either will not serve any of the practice’s patients, or will not practice within a certain geographical area surrounding the practice, for a prescribed period of time (often a year or two). Some noncompete provisions will permit the physician to continue practicing in the same geographic area, if the physician pays the employer a specified amount (commonly known as a buyout) upon the termination of the employment relationship.

Stark Law Impact on Physician Noncompete Agreements

Recent regulations enacted pursuant to the so-called Stark Law have called into question the enforceability of many physician noncompete agreements. Officially known as Ethics in Patient Referral Act of 1989, the Stark Law (named for its sponsor, Rep. Pete Stark of California) contains an anti-kickback provision that prohibits a physician from referring Medicare patients to providers in which the physician has a financial interest. Like many statutes, the Stark Law contains exceptions. One of these exceptions concerns physician recruitment. The Stark Law regulations permit a hospital to remunerate a physician in an effort to induce that physician to relocate his or her practice to the hospital’s geographic area and to become a member of the hospital’s medical staff. If the recruited physician becomes employed by or associated with an existing medical practice, this monetary payment from the hospital to the physician essentially subsidizes that practice by covering relocation expenses that the practice would otherwise incur.

To qualify under the Stark Law exception, however, the medical practice which hires the recruited physician may not impose additional practice restrictions on the recruited physician, other than conditions related to the quality of care. This means that the recruited physician may not be compelled to enter into a noncompete agreement with his or her new employer.

In light of these new Stark Law regulations, medical practices should conduct a review of their standard employment agreements before contracting with any recruited physicians. Since standard employment agreements often contain noncompete provisions, it is highly conceivable that a practice could unwittingly violate the Stark Law regulations simply by having the recruited physician sign a standard employment agreement. Likewise, practices should review their existing employment agreements with their physicians to determine if any of those violate the Stark Law regulations. If they do, the practice will either want to enter into a written amendment of the agreement that excises the noncompete provision, or enter into a new employment agreement with the physician that does not include such a provision. (Be advised, though, that for a new agreement to be legally enforceable, it will need to be supported by separate consideration: typically, a lump sum cash payment from the practice to the physician.) Medical practices are advised to consult knowledgeable legal counsel about reviewing their employment agreement to determine if they are compliant with the Stark Law regulations.

Noncompete Agreements in the Physician Context

Even if a physician noncompete agreement is unaffected by, or survives scrutiny under, the Stark Law regulations, it is by no means assured that a medical practice will be able to enforce such an agreement. In the typical noncompete case, the employer will seek to enforce the noncompete agreement when a former employee attempts to work for a competitor of the employer in violation of the terms for the noncompete agreement. Such enforcement usually comes in the form of a request for injunctive relief that expressly prohibits the new employment, rather than a request for monetary damages arising out of the employee’s alleged breach of the agreement. To prevail on its request for injunctive relief, the employer will need to prove: (i) a likelihood of success on the merits of its claim that the employee has breached the noncompete agreement; (ii) that the employee’s work for the competitor will harm the employer in a way that cannot be adequately compensated through the usual remedy of monetary damages (this is commonly known as irreparable harm); (iii) that the harm posed to the employer by the former employee’s conduct outweighs the inconvenience that the former employee would face if the noncompete agreement were to be enforced; and (iv) that enforcing the noncompete agreement would promote, rather than undermine, the public interest.

Of these four criteria, it is typically the first two that drive the outcome of most noncompete cases. The fourth factor, the public interest, rarely has much impact, since most cases involve purely commercial issues between private parties (the employer and its former employee). But unlike the typical noncompete case involving a former salesman going to work for a competitor, physician noncompete cases do not involve purely private business matters. Rather, physician noncompete cases do threaten to impact the public interest, insofar as enforcement of a physician noncompete can have the effect of removing a physician from a particular community. This is particularly true where the physician is engaged in a specialty with few practitioners, or where the geographic area described in the noncompete agreement is one that is underserved. In such instances, courts reason that the loss of the physician employee’s services which would arise from enforcing the noncompete agreement outweighs the employer’s interest in protecting itself from competition.

Thus, in the case of New Castle Orthopedic Associates v. Burns, the Supreme Court of Pennsylvania held that a noncompete agreement between an orthopedic practice and its former physician employee would not be enforced. The court based its decision largely on the fact that there was a shortage of orthopedic specialists in the geographic area encompassed by the noncompete agreement, as evidenced by referring physicians who testified that it took anywhere from four weeks to four months to obtain appointments for their patients. Concluding that this fact alone was sufficient to preclude enforcement of the noncompete agreement, the court stated: “In an era where the availability of and the rising cost of medical services are matters of national concern, the law must consider the impact of the enforcement of these non-competitive clauses upon the problem. Paramount to the respective rights of the parties to the covenant must be its effect upon the consumer who is in need of the service. This is of particular significance where equitable relief is being sought and the result of such an order or decree would deprive the community involved of a desperately needed service.”

Nearly thirty years later, in an era of rising health care costs and escalating malpractice insurance premiums, these words continue to ring true.

The New Castle Orthopedics case has been interpreted as defining the public interest factor in purely quantitative terms. That is, when a court evaluates the public interest factor with respect to a physician noncompete agreement, it will examine whether enforcing the agreement will leave a sufficient number of other practitioners available to serve patients in the specific geographic area. Significantly, the question of whether individual patients might prefer to continue seeing the particular physician who is subject to the noncompete agreement is immaterial. This makes sense: Allowing individual patients’ preferences to control could well prevent the enforcement of all physician noncompete agreements, since every physician presumably have at least some patients who would prefer to remain under that physician’s care even after the physician changes employment.

Such reasoning was employed in a recent case issued by the Superior Court of Pennsylvania. In WellSpan Health v. Bayliss, a health care system sought an injunction to prevent its former employee from engaging in the practice of perinatology within the system’s home county and the surrounding four county area for a two year period. The physician, who had a subspecialty in maternal fetal medicine, had entered into a noncompete agreement with the system which covered the described geographic area. Determining that the health care system did have a valid interest in protecting its patient referral base from unfair competition, the Superior Court nevertheless concluded that the geographic reach of the noncompete agreement was excessive and unreasonably impacted one of the counties (Lancaster County) covered by the noncompete agreement.

Affirming the trial court’s decision to exclude Lancaster County from the scope of an injunction enforcing the noncompete agreement, the Superior Court reasoned: “The public interest strongly militates against the enforcement of the covenant in Lancaster County. Dr. Bayliss was the only perinatologist in Lancaster County, a fact that led the [trial] court to infer that he would have more than enough work just caring for the residents of that county85Undisputed evidence indicated that the area was underserved in the area of maternal fetal medicine85Thus, based on well-founded factual conclusions, the trial court determined that the non-competition covenant, as applied to Lancaster County, was unreasonable and against the public interest.”

Medical providers or practices seeking to enter into noncompete agreements with their physician employees are strongly encouraged to consult with counsel first, to determine whether those agreements violate the new Stark Law regulations, and whether they will be enforceable under common law. Those providers and practices that include noncompete provisions into their standard employment agreements should likewise consult counsel to determine if they are Stark Law-compliant.

Alan B. Rosenthal, Esq., is an attorney with Babst, Calland, Clements and Zomnir, P.C., based in Pittsburgh.

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