The Scoop on Non-Compete Clauses in Physician Employment Contracts

Every business has an interest in retaining its customer base, and medical practice groups and hospitals are no different.

Physician restrictive covenants—also known as physician non-compete clauses—restrict doctors that leave medical practices and hospitals from practicing medicine within a specific geographic period after their employment ends.

Without these clauses, businesses argue that their patients would simply follow the doctor and they would lose business. The legal enforceability of non-compete clauses varies widely by state; however, the following are some basics regarding physician restrictive covenants and their enforceability.

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What Is a Physician Restrictive Covenant?

A physician restrictive covenant is a section or clause in the physician’s employment contract which states that the employee (physician) will agree not to engage in the practice of medicine in competition with the current employer. These clauses can be either extremely broad or specifically narrow in scope. Typically, the physician restrictive covenant will prevent a physician from working in a particular field (medicine), for a specified period of time, within a specified geographic area after the physician’s employment is terminated.

Some physician non-compete clauses state that the doctor may not practice medicine within one square block of the medical office for one month. Broader non-compete clauses will restrict a physician from practicing medicine within any of the states where the employer does business. Most physician-restrictive covenants fall somewhere between these two examples.

Can a Physician Non-Compete Clause Be Legally Enforced?

While the legal enforceability of a physician non-compete clause varies from state to state, a determination of enforceability will rest on the facts and circumstances of the case, as well as a reasonableness standard. For example, courts will typically not uphold a physician non-compete clause that would prohibit a physician from supporting a family and earning a living.

While courts are generally opposed to any kind of restraint of trade, they are also hesitant to interfere with the freedom of persons to enter into contracts. Therefore, unless there are valid reasons, courts will not invalidate an agreement that is entered into by consenting parties. However, if that agreement is considered unreasonable by the court, they may invalidate the non-compete clause of the contract.

Under most situations, a court will enforce a physician restrictive covenant if it applies to a short length of time, a small geographic area, and a specific type of medical practice. Some of the types of questions the court may consider include the following.

Is there a Legitimate Business Interest?

If a physician non-compete clause is to be enforceable by a court, it must fundamentally protect an employer’s legitimate business interest. In the case of a medical practice or hospital, it must be proved that either the goodwill or the retention of patients is protected through the non-compete clause. As previously stated, courts tend to avoid any restraint of trade, therefore, a physician non-compete clause must be narrowly tailored to protect the medical practice or hospital’s legitimate business interests.

Is the Geographic Restriction Reasonable?

Physician non-compete clauses will typically specify an exact geographic area where the physician may not practice. However, the court will consider the type of medical practice, location of the medical practice, and surrounding community. Determining what is “reasonable” is relative when analyzing non-compete clauses. For example, the population of a ten-mile radius in the heart of New York City cannot compare to the population within a ten-mile radius of a small farming community in Nebraska.

Overly broad geographic restrictions will likely not be enforceable if they place an undue burden on the physician and limit his/her ability to provide for his family. An example of an overly broad geographic restriction would include prohibiting the physician to practice anywhere in the United States, in a different country, anywhere in a specific state, or in an excessive mile radius of the medical practice or hospital.

Is the Time Period Restriction Reasonable?

Physician non-compete clauses identify a specific period of time in which the physician may not practice within the designated geographic area. Again, each physician restrictive covenant will be different, and the ability to enforce the length of time will vary from state to state. As a general rule, many restrictive time periods are typically around two years or less after employment termination. While every situation and state will vary regarding whether two years would be enforceable, this appears to often be considered “reasonable” by the courts.

Is There a Trend Toward Unenforceability of Physician Non-Competes?

Non-compete clauses impact the doctor-patient relationship and can be devastating to patients who discover that their doctor is no longer with a medical practice and they have no ability to locate them. Many states are moving toward restricting physician non-compete clauses, or simply not enforcing them in courts.

The State of Massachusetts started the trend, as it statutorily prohibited any physician restrictive covenants in 1977. In the 1980s, the states of Colorado and Delaware followed suit. Rhode Island just adopted a similar law to Massachusetts in 2016.

While not outright prohibiting physician restrictive covenants, many other states apply strict standards to these non-compete clauses. In 2007, Tennessee adopted a statute limiting the physician non-compete clauses. In 2015, New Mexico followed suit by establishing a statute that prohibited several restrictions regarding non-compete clauses. The State of Connecticut also enacted legislation providing for strict limits on non-compete clauses for physicians in 2016.

These states are trending toward establishing specific restrictions on any physician restrictive covenant that allows the doctor-patient relationship to continue. Texas law states that physician non-compete clauses must still allow physicians to access patient lists for those patients they have seen or treated within the last year and access to medical records of patients with the patient’s authorization. Additionally, the State of Texas protects the doctor-patient relationship by protecting a physician’s right to continue the treatment of a patient who suffers from an acute illness after the physician has terminated employment.

However, while many states are moving in the direction to restrict non-compete clauses, the State of California is unique in that it has a complete ban on any non-compete agreements for physicians and any other employees. The state has wholly rejected the enforceability of any non-compete clause. California’s public policy of refusing to enforce any type of non-compete clauses is rooted in the state’s fundamental movement towards innovation and growth instead of restriction.

In December 2018, the Trump administration officially requested all states scrutinize physician non-compete clauses. The arguments against physician non-compete clauses were vast. A report issued by the administration described physician non-compete clauses as a barrier to competition, a hindrance to the trend of physician mobility, and an overly burdensome hurdle for patients to access care. The physician restrictive covenants were shown to limit the supply of physicians and medical providers as well as inflating healthcare costs.

Ultimately, the report, which was a combined effort between the Health and Human Services, the U.S. Treasury Department, and the Department of Labor, upheld the same doctrine as the State of California and declared that physician non-compete clauses should be unenforceable. The report officially concluded that “states should scrutinize restrictive covenants such as non-compete clauses, particularly their impact on patient access to care and on the supply of providers.”

In trend toward prohibiting or restricting physician non-compete agreements is likely due to the fact that physicians have become increasingly more mobile, and the states want to encourage the continuation of doctor-patient relationships. Even as recently as July 2019, the State of Florida passed a law prohibiting any physician non-compete clauses between physicians and employers in rural areas who practice a specific specialty within the same county. The law specifically continued to highlight that Florida wants to ensure that a patient is able to locate their physician and limit barriers to the doctor-patient relationship.

The Future of Physician Non-Compete Clauses

The trend is clear. Many states—along with several federal government agencies—are demonstrating a likely future for physician non-compete clauses nationwide with strict limitations on the restrictions that may be imposed. If you are an employer in a medical practice or hospital, or a physician seeking employment, the contract you establish should be reviewed by an experienced contract attorney who is knowledgeable in your state’s specific laws regarding physician non-compete clauses.

If you have already signed a non-compete clause as a physician, you may have more flexibility than you think to practice after your employment ends. The clear trend of both state and federal government is moving towards keeping both healthcare costs down and encouraging the ability of patients to maintain contact with the doctors of their choosing. To determine the enforceability of a particular non-compete clause, seek the advice of an experienced contract attorney in your state.