business

Noncompete clause may not restrict you

A column examining the ins and outs of contract issues

By — Posted Feb. 16, 2009.

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A physician client recently asked me to review his former employment agreement with a medical practice to determine if he was precluded from joining another practice in the same community.

The doctor was highly sought after by this practice because the community was otherwise underserved by his specialty. However, his previous employment contract contained a noncompetition clause that made him and his prospective employer rightfully concerned. As it turned out, in his case, and in many others, the restrictive covenant is often not as restrictive as it looks. He was able to set up in his new practice, and you might be able to do the same.

In this column, I will dissect a typical noncompetition clause and describe places where its language doesn't necessarily keep a doctor from setting up in the same area. It's a guide not only for the physician who wants to leave a practice but not leave town, but also for the practice that wants to make sure its restrictive covenant is legal and enforceable.

A noncompetition provision will typically prevent a physician from practicing within a certain geographic area, for a prescribed time after the termination of the doctor's employment with that practice.

Often, the physician will be permitted to practice within the parameters of the restrictions if the physician (or a new, prospective employer or practice) buys out of the clause.

In states where noncompetition clauses are enforceable, the provision must meet certain legal tests. They must protect the employer's legitimate business interest, be specific in geographic scope and have a narrowly tailored durational scope. If the language is vague or does not clearly describe the exact terms of the restrictions on practice, the clause may be open to greater interpretation.

So what is a legitimate business interest? For a noncompetition clause, the language should be geared to protect the employer's revenue stream and the retention of its patients.

In my client's employment agreement, a provision in the noncompetition clause read (with names substituted to protect their confidentiality): "Dr. Jones may not provide medical services to any person or entity competing with ABC Medical Group."

The issue with this language is twofold. First, the determination of what constitutes "competing with" is too subjective, and there are no instructions as to how to define that phrase. Second, "medical services" is too broad, based on the physician's and the practice's circumstances.

At the time Dr. Jones signed the contract, he was board certified in internal medicine and nephrology. But the practice, being exclusively an internal medicine group, only employed him as an internist. However, Dr. Jones' new employer wanted to employ him as a nephrologist.

Because the new employer wanted to employ Dr. Jones as a nephrologist, this is arguably not "competing with" ABC Medical Group.

Place and time

Noncompetition clauses also must specify the restricted geographic area where the physician is prohibited from practicing. However, whether the scope is overly broad will not only depend on the state's laws, but also the location of the medical practice and its surrounding community.

Typically, contracts will provide a square-mile radius as the restricted territory. But, whether a limitation is "reasonable" is a relative term. A five-mile radius in New York City might be home to millions of people, whereas a five-mile radius in a New York suburb might only be home to a few thousand people.

Although the following may seem obviously overly broad to some, I have reviewed contracts with the following geographic limitations, all of which should be considered red flags:

  • Prohibition to practice anywhere in the U.S.
  • Prohibition to practice anywhere in a specific state.
  • Prohibition to practice within certain counties.

The exclusion to practice in certain counties might be overly broad in some situations, but might be acceptable in others. For example, a client was selling his stock, and the goodwill of a medical practice and part of the purchase agreement provided that he would be unable to practice in Los Angeles County. The restriction was overly broad, considering that Los Angeles County is more than 4,000 square miles and includes more than 80 cities. However, depending on your state, it might be acceptable to have a restriction for a county that is small geographically or in population.

A noncompetition clause should also identify the time frame in which the physician must refrain from practicing within the restricted geographic area. Whether the durational scope is reasonable will vary from state to state as it is determined by state law.

Generally, as long as the restricted time frame is two years or fewer after termination of the contract, the restriction will be reasonable. But after the two-year mark, states begin to vary on whether additional time is reasonable.

In negotiating the restricted length of time in a noncompetition clause, it is more common to have a longer time restriction when a physician is selling his or her practice than for a physician entering into an employment relationship.

In any part of the contract, the addition or omission of a single word can make a world of difference.

I reviewed an ob-gyn client's noncompetition agreement that precluded him from "being employed by a medical practice engaging in obstetrics or gynecology within a five-mile radius of XYZ Medical Group for two years." What this provision does not preclude is being retained by another practice as an independent contractor, accepting employment by a hospital or opening up a practice.

While it may just seem like semantics, a few words can change your future. Be sure to have any contract containing a noncompetition clause reviewed by a lawyer who is well-versed in your state's laws.

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