While there has been a recent trend on a state and sometimes federal level to limit or outright ban the enforcement of restrictive covenant agreements in general employment settings, individuals in the medical profession in numerous states have enjoyed, for some time, limitations on the enforcement of non-compete or non-solicit agreements. Those states typically have legislation limiting the enforcement of non-compete, non-solicit, or similar agreements. The recent spate of increased legislative action in this area involves, as always, balancing the interests of the employer or medical practice on the one hand and the physician/medical employee and patient on the other.
In recent years, the medical profession has grown from a cottage industry whereby one or two doctors work in a practice together to much larger group settings. In some cases, hundreds of doctors may practice in the group setting, especially in urban areas. These larger groups have responded to the increased costs of practicing medicine resulting from the advent of computers and other electronic methodologies and the demands of third-party payors. As part of that response, restrictive covenants have been used as a tool to limit the harm a departed physician or medical practitioner can inflict. At the same time, it is necessary for those practice groups to demonstrate better patient outcomes to obtain payment and also to address the needs of physicians and others in the medical professions to achieve more work and lifestyle balance. Large practice groups are incentivized to protect their interests due to the significant investments being made in technology and training. Meanwhile, a physician who leaves one of these large practices may find it difficult to locate a position in the same geographic area if covered by a covenant not to compete. Specialties also impact the ability of a physician to locate other employment or to institute a new practice, as a general practice will service an entire population whereas specialty practices serve a smaller percentage of the general population. Further, the capital expenditures that are likely required to launch a new practice can make it prohibitive as well.
Patients are impacted in their choice of practitioner as they may trust one physician in a group practice, and if that physician leaves the practice, the practice will try to have that patient transition to another physician in the group. In this way, the practice may be treating the patients’ needs as a commodity, where one doctor is the same as another, while in the patient’s view, this is a personal service. The covenant is a way for the practice to try to protect its investments when a patient wishes to leave the group to follow a trusted physician who is departing. Therefore, there is a need to address what a patient wants versus the interests of the practice. The statutory approach to these issues as well as some of the case law is an attempt to address this friction between these possibly competing interests. The desires of the patient or the patient choice appears to be the trend in addressing these competing interests. Of course, each medical specialty has different requirements and rural practitioners have to address patient requirements differently than urban practitioners. In the end, there are many variables in determining the use and enforceability of a covenant not to compete.
This article, after a brief description of the types of agreements that are covered by such legislation, will summarize the current state of legislatively created exceptions for medical professionals, whether any upcoming legislation is being considered, and what the future might hold for legislative limitations on the enforcement of restrictive covenant agreements in the medical field.
Typical restrictive covenant agreements include provisions that restrict post-employment activities of a departed employee, such as non-compete or non-solicit provisions. Non-compete provisions obligate the departed employee to avoid competitive employment in a particular geographic area for a particular amount of time. Non-solicit provisions preclude a departed employee from soliciting either customers/patients, other employees, or both. In the context of medical professional agreements, the latter can include referral and other sources of business.
The position of the American Medical Association (AMA) has, for some time, mildly discouraged the unrestrained use of restrictive covenants with physicians. While not entirely opposing their use, the AMA position is made clear in a Code of Medical Ethics Opinion. Opinion 11.2.3.1 provides:
Competition among physicians is ethically justifiable when it is based on such factors as quality of services, skill, experience, conveniences offered to patients, fees, or credit terms.
Covenants-not-to-compete restrict competition, can disrupt continuity of care, and may limit access to care.
Physicians should not enter into covenants that:
a) Unreasonably restrict the right of a physician to practice medicine for a specified period of time or in a specified geographic area on termination of a contractual relationship; and
b) Do not make reasonable accommodation for patients’ choice of physician.
Physicians in training should not be asked to sign covenants not to compete as a condition of entry into any residency or fellowship program.
The AMA position is one that walks the fine line of competing interests between those of employers and physician employees. That fine line is reflected in a recent letter the AMA submitted to the United States Federal Trade Commission urging that agency, among other things, not to wield its powers in the area of regulation of the use of restrictive covenants.
Numerous states have statutory provisions that flat out ban or in some way limit the ability of an employer to restrict the post-employment activities of a physician or other healthcare professional. Those states include Alabama, Arkansas, Colorado, Connecticut, Delaware, Florida, Iowa, Illinois, Indiana, Kentucky, Massachusetts, New Hampshire, New Mexico, Rhode Island, South Dakota, Tennessee, Texas, and West Virginia. Many of those states have only recently adopted such statutory limitations, while some have longstanding legislation.
The states that ban such agreements with physicians, as opposed to simply limiting them, include Alabama, Arkansas, Colorado, Delaware, Massachusetts, New Hampshire, New Mexico, Rhode Island and South Dakota. A few of these states address the matter directly in their statutes. Massachusetts’s statute, for example, states that any agreement that “includes any restriction of the right of such physician to practice medicine in any geographic area for any period of time after the termination of such partnership, employment or professional relationship shall be void and unenforceable with respect to said restriction.” On the other hand, some states have provisions in their general statutes allowing non-competes that carve out exceptions for physicians. Arkansas’s non-compete statute contains a provision which states “[t]his section shall not: ... (2) Apply to a person holding a professional license under Arkansas Code Title 17, Subtitle 3 [Medical Professions].”
Other states impose certain statutory limitations on non-compete agreements such as time or other limits. Those states include Connecticut, Florida, Indiana, Tennessee, Texas, and West Virginia. Florida’s 2019 statute takes a unique approach to limiting physician non-compete agreements, directly addressing the differences between urban and rural medical practitioners. Instead of just imposing statutory limits on the terms of the non-compete, Florida bans such agreements for specialized physicians in a county where a single entity employs all who practice that specialty. This restriction would remain until three years after a competing entity in the medical specialty begins offering services in that county.
Yet other states make statutory exceptions applicable to certain other healthcare workers. Those include Iowa (healthcare agency workers), Illinois (nurse staffing agencies ), Kentucky (healthcare services agencies), and Massachusetts (licensed psychologists and licensed social workers). Iowa’s statute prevents healthcare employment agencies from restricting “in any manner the employment opportunities of an agency worker by including a non-compete clause in any contract with an agency worker or health care entity.” Though not a statute, New Jersey’s Administrative Code also has a regulation preventing non-competes restricting access to licensed psychologists.
As can be readily seen by the recent years of enactment of applicable legislation on the enforceability of restrictive covenants involving medical professionals, it appears that the concomitant recent trend that seeks to limit or ban non-compete and other restrictive covenants in employment in general has reached well into the medical profession. We expect that trend to continue with little abatement given the current attitude toward restrictive covenants.
Restrictive covenants in employment settings have recently come under fire at both the state and federal level. State legislative efforts have advanced in limiting or banning restrictive covenant agreements in a variety of employment settings. Those efforts have also been directed at similar restrictive agreements (such as non-compete and non-solicitation agreements) in the medical profession. In fact, it appears as though the effort to limit such agreements in the context of patient care by physicians and other medical professionals has gained a bit more traction than similar efforts in the general employment arena. Many states have already taken legislative steps toward that end. It certainly can be expected that this trend will not abate, and the overarching view reflected in the AMA ethics opinion covering restrictive covenant use may impact that trend. In the end, with enforcement becoming more difficult, limited, or fully banned, it appears that protection of the interests of the medical practice groups will become secondary to those of physicians, medical practitioners, and patients.
