We previously looked at the factors analyzed in determining whether non-competes are enforceable. The healthcare industry has become extremely competitive in the delivery of high-quality and cost-efficient care to patients, in the recruitment of physicians by clinics and hospitals, and in the development of referral sources by physicians, clinics, and hospitals. Often, clinics or hospitals spend substantial money, resources, and time to recruit a physician. Once on board and for the first couple of years thereafter, the physician is often paid more money than he or she generates for the clinic or hospital while they are becoming familiar with the hospital/clinic, while they are becoming familiar with the area, while they are becoming familiar with administration of the hospital or clinic, while they are becoming familiar with the referral sources (other physicians), and while they complete any additional specialized training. Put simply, the clinic or hospital is investing in the physician for long-term growth, both in terms of quality patient care and financially.
After the first couple of years and once the physician has developed and groomed those relationships, the physician typically generates more revenue than he or she is being paid by the clinic or hospital. Thus, for the hospital or clinic, a non-compete, restrictive covenant, or liquidated damage provision in the employment contract with the physician helps protect the investment that the hospital or clinic is making in the physician, the substantial financial risk they take on the physician, the future treatment of patients, and the future revenue stream.
An often overlooked aspect of a non-compete, restrictive covenant or liquidated damage provision is also the protection that the contractual provision provides to the community and patients as a whole. If such provisions were unenforceable or not implemented, clinics or hospitals would have a hard time recruiting the best available physicians to their area and would be reluctant to invest the time and money into those physicians to get them familiar with the relationships (patients, administration, referral, etc.) due to fear of the physician simply leaving and starting a competing practice. A disconnect between referring physicians or the physician and the administration is not conducive to the delivery of high-quality and cost-efficient healthcare.
Additionally, there often is a limit as to the number of a particular type of physicians a community can support. For instance, a community of 100,000 people may only need one cardiothoracic surgeon to provide the requisite cardio-thoracic surgeries for that community. If that cardiothoracic surgeon breaches his or her contractual provision, it will make it very difficult for the clinic or hospital to recruit a replacement because the community simply cannot support another cardiothoracic surgeon. The patients then are left only with the choice of following the breaching physician, costing the non-breaching clinic or hospital revenue and potentially interfering with the continuity of care for that patient. The primary focus in the healthcare industry must be on patient care which is furthered by reasonably tailored contractual obligations on both the physician and the clinic/hospital to make sure all parties are on the same page and working together towards bettering patient care.
Why Are Restrictive Covenants Are Breached:
Common reasons for non-competes, restrictive covenants, or liquidated damage provisions being violated by a physician include financial incentives for both the physician as well as the competing clinic or hospital, malcontent with the employing clinic or hospital, and/or bad legal advice to the physician.
With regard to the financial incentive, the delivery of high-quality healthcare is also often lucrative. The physician sees the revenue that he or she is generating versus the portion that is paid to administration, overhead, other physicians, etc., and decides to set up a competing practice. Due to the relationships established in the community, the physician would rather stay in the community and pay a liquidated damage provision or fight against a breach of contract claim rather than move to a new community and start over. The physician sees the legal battle as a cost of doing business versus starting over.
Competing hospitals or clinics, particularly in smaller communities, are often aware of the revenue being generated by certain physicians and will offer to pay the physician more money, give bigger bonuses, or some other incentive for the physician to leave their present employment and commence employment with the competing hospital or clinic. In certain instances, the competing hospital or clinic may also agree to fund the defense of any lawsuit or pay the liquidated damages for that physician because the financial benefit in hiring the physician is that substantial.
Physicians and administration, from time to time, do not see eye-to-eye on certain issues within the practice of medicine. This can cause tension and may give rise to the physician leaving, even if it means violating a non-compete, restrictive covenant, or liquidated damage provision.
There also, unfortunately, are simply instances of a physician receiving bad legal advice regarding the enforceability of such a provision. Physicians are highly trained and highly educated individuals in their practice. But they are not attorneys. The physician is trusting the attorney to guide them through the process. And not every attorney is familiar with the intricacies of this highly fact-dependent area of law and may not provide the sagest advice.
With regards to whether there is any leeway if a physician breaches one of these provisions, certainly. Any attorney who guarantees that a certain outcome will occur 100% of the time is not being straight. The enforcement of non-competes, restrictive covenants, and liquidated damage provisions are highly fact dependent upon the particular situation. Thus, to state that there is never any leeway would be inaccurate. For instance, perhaps there is only one oncologist within a 100-square-mile radius. And the contractual provision prohibits the physician from practicing within 30 miles of his or her clinic for a period of 10 years. There would be a strong argument that 10 years is too long and not reasonably necessary to protect the clinic or hospital. There would also be a public policy argument that the community needs the oncologist to ensure continuity of care for those patients with cancer and that having to drive 100 miles for treatment would be a hardship. Thus, the well-informed practitioner will review these types of facts in any situation involving the enforcement of a non-compete, restrictive covenant or liquidated damage provision.
What If The Restrictions Are Too Restrictive?
The litigation of non-competes, restrictive covenants, and liquidated damage provisions is highly fact dependent upon the particular case and usually involves a substantial economic impact. Each case needs to be reviewed and analyzed within that specific context. The contractual provision needs to be examined for reasonableness in temporal and geographic restrictions. The contractual provision also needs to be analyzed to determine whether there are actually legitimate business interests to be protected. And, the public policy concerns regarding enforcement or not need to be addressed.
For instance, a 10-year non-compete over the entire United States of America for a physician to practice any type of medicine would likely be unenforceable. But a two-year restrictive covenant within 35 miles of a defined locale that the physician practiced at likely would be enforced.
The practitioners engaged in drafting and negotiating these clauses need to thoroughly look at the physician’s proposed practice area, specialty, the distance of likely patients, and other fact-specific considerations in determining what is reasonable and necessary. Do not simply copy and paste the same provision for a research physician that was used for a specialized surgeon or for a general physician. This does not give the requisite considerations to what the provision is meant to protect, why it is necessary, why it is reasonable, and why it should be enforced.
What about Liquidated Damages?
In the healthcare industry, I personally prefer the use of a liquidated damage provision versus a restrictive covenant or non-compete. With a liquidated damage provision, the physician can still practice medicine within the defined area or during the defined time but pays a defined amount to their prior employer (six months’ salary or some set amount). This allows the physician to keep practicing and treating patients while at the same time protecting the substantial investment the clinic or hospital made in recruiting and training the physician by receiving reimbursement. Further, it often limits or minimizes costly, and time-consuming litigation as the liquidated damage amount is already defined.
Factors to Consider:
Generally speaking, in most industries, non-competes, restrictive covenants, or liquidated damage provisions are looked at with disfavor by courts as limiting an employee’s options, competition, and the free market. Physicians often believe the same is true in healthcare. But courts regularly enforce non-competes, restrictive covenants, or liquidated damage provisions in the healthcare industry for a number of reasons:
1) physicians are highly educated, knowledgeable individuals with substantial bargaining power and less likely to get taken advantage of by an employer during the negotiation of one of these provisions. The same is not always true in other industries in which the non-compete, restrictive covenant, or liquidated damage provision is not discussed with the employee and only shown to him or her on the first day of employment, amongst a myriad of other initial employment documents;
2) the protection to the community of the provisions provided in the recruitment of new or replacement physicians is substantial. As discussed, clinics and hospitals invest substantial funds in recruiting to the area and training the physicians after hiring. Clinics and hospitals may not invest such funds if they knew after taking the time and funds to introduce the physician to the community, referral sources, administration, etc., the physician simply set up a competing clinic without reimbursement from the physician or a contractual provision to prevent such competition;
3) the provisions are usually better drafted and more tailored to the specific situation involving the physician, whereas oftentimes, in other industries, the same restrictive covenant was used for a high-level manager and a low-level employee. Utilizing a form of contractual provision irrespective of the level of an employee provides a good argument that the provision is not reasonably necessary to protect the legitimate business interests of the employee. These circumstances are often not at the front of a physician’s mind as they are rightfully focused on patient care concerns. That is why it is important for clinics, hospitals, and physicians alike to have a clear understanding of the contractual provisions in place and their enforceability.
Requiring, signing, and seeking to enforce non-competes, restrictive covenants, or liquidated damages is fact-dependent. Understanding the risk and the reward of the same is paramount when making a move to a new employer or, for the employer, requiring that the same be signed as part of the employment. And because there are frequently substantial amounts at stake when one has been breached (or alleged to have been breached), litigation frequently ensues.