Noncompete provision in contract might not be legal

A column examining the ins and outs of contract issues

By — Posted Dec. 3, 2007.

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Noncompete clauses -- contract terms that prevent a physician leaving a practice from setting up shop within a certain radius for a minimum amount of time -- are not illegal in every case. But there are many instances when such clauses do violate the law, and often the practice and physicians signing off on them don't know it.

That is because there is no single, guiding law covering noncompete clauses. Their legality is covered by a patchwork of state statute and case law, along with federal restrictions on physician self-referral under the Stark laws.

Some states have statutes that severely restrict or disallow noncompete clauses completely -- Alabama, California, Colorado, Delaware, Massachusetts, North Dakota, Tennessee and Texas.

But even in those states that allow noncompete clauses, statute and case law put restrictions on how much time and distance they might cover. States such as Louisiana and South Dakota specifically stipulate, for example, that noncompete agreements can last a maximum of two years. But in many cases the limit on restrictions is defined as only what is "reasonable," and there might or might not be clear guidance from state supreme courts on how reasonable is defined.

American Medical Association policy says "covenants not to compete restrict competition, disrupt continuity of care and potentially deprive the public of medical services." It says noncompete agreements are unethical if excessive in scope.

Also, state laws might require a practice to include a buyout provision in a physician's contract if it includes a noncompete clause. That means a physician would be permitted to practice immediately upon leaving his or her former practice if the doctor pays a specified amount upon termination of the contract.

A physician client of mine was relocating and was offered an employment agreement by a medical practice in his new hometown. He was handed a contract that ran into another noncompete minefield -- the federal Stark laws.

One exception to Stark, which prevents physicians from having a financial relationship with facilities to which they refer, involves physician recruitment and retention. This exception permits a hospital to remunerate a physician or the medical practice in an effort to encourage that physician to relocate to the geographic area served by the hospital and become a member of the hospital's medical staff.

Often, hospitals are interested in providing financial support to aid in recruiting new physicians to the community. The rationale is that if the recruited physician becomes employed by an existing medical practice, this monetary payment from the hospital essentially subsidizes relocation and marginal operating expenses that would otherwise not be incurred.

For the physician recruitment exception to apply, a number of conditions must be satisfied.

When a recruited physician joins a group practice, the practice may not impose "additional practice restrictions" on the physician, but may impose conditions related to the quality of care.

While there is some uncertainty in the health care legal community about what constitutes a "practice restriction," it is explicitly clear that requiring a relocating physician to enter into a noncompete agreement with the practice group is a "practice restriction," and hospital subsidization is not allowed in such a situation.

In the case of my client physician, whose relocation was being covered by a hospital under this Stark exception, I advised him not to sign the contract as written because it contained an illegal noncompete clause.

What if you've already signed?

Because standard employment agreements often contain noncompete provisions, it is highly conceivable that a practice unwittingly could violate Stark or state law 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 law.

If they do, the practice either will want to enter into a written amendment of the agreement that removes the noncompete provision or enter into a new employment agreement with the physician that does not contain the provision.

If the practice wishes neither to amend the physician's employment agreement nor to enter into a new agreement without a noncompete clause, the practice might find itself unable to enforce the clause against the doctor.

Usually, the former practice will seek injunctive relief against the physician, rather than requesting monetary damages arising out of the physician's alleged breach of the agreement -- unless a buyout agreement is in place.

Medical practices seeking to enter into noncompete agreements with their physician employees are strongly encouraged to consult with legal counsel to determine whether those agreements violate the Stark law or state law.

In the case of Stark, often a practice is faced with the difficult decision of either accepting a subsidy from a local hospital in connection with the recruitment of a new physician, or refusing it so the practice may use a restrictive covenant prohibiting certain postemployment competitive activities. Tough call.

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