Clarifying restrictive covenants

Dr. Derm has a large dermatology practice with eight employee dermatologists. Each employee physician has signed an agreement that stipulates his/her duties, salary and benefits. Each agreement also has a restrictive covenant that states that if the employee physician chooses to leave, he/she cannot practice within 10 miles for two years after the separation from Dr. Derm’s practice.

Dr. Disgruntled signed such an agreement, chose to leave Dr. Derm’s practice and opened up his own practice 1 mile away. Dr. Derm filed a lawsuit against Dr. Disgruntled alleging breach of the restrictive covenant. He seeks not only monetary damages but also an injunction against Dr. Disgruntled that prohibits his practicing dermatology within the 10-mile radius of Dr. Derm’s office. Will the restriction hold up?

Doctors frequently sign non-compete agreements. This is an inherent part of most physician employment agreements and physician employees should expect to sign them. Ever since the famous case of Carlin v. Weinberg, most reasonable physician employee restrictive covenants have been held up by many state courts.

Time and distance restrictions

In Carlin v. Weinberg, two New Jersey dermatologists were in practice together - one as an employer and one as an employee. The employee left and opened a new office within his employment contract stipulated geographically prohibited area. The employer dermatologist sued. The court looked at the restrictive covenant and said that as long as the “time” and “distance” restriction were reasonable, the restrictive covenant was enforceable. Therefore where a 10-mile restriction in New Jersey might be reasonable, a similar 10-mile restriction in New York City (with its dense population) would not be.

Although Carlin v. Weinberg is an often-quoted case, today every state treats such restrictions differently. In California, for example, most are unenforceable. In North Carolina, on the other hand, if the agreement is not unduly restrictive, it is upheld. Today the healthcare landscape has dramatically changed. As doctors sell their practices, restrictive covenants become part of the process. The subtext is that if you are fired or leave, you will need to exit the community. You will be forced to sell your house, uproot your children from their schools and start over. However, a recent ruling may change this.

The Federal Trade Commission (FTC) recently weighed in and the ripple effect has yet to be understood.

Decision on monopolies

On Dec. 4, 2012 the FTC formally voted to approve a settlement of a complaint they brought against Renown Health, a healthcare system in Nevada. The complaint alleged that the three-hospital system established some type of illegal monopoly for heart-care services. Renown had bought two cardiology groups, whose 31 doctors gave Renown control over 88 percent of the market for cardiology, the FTC stated. The FTC ruled that such a monopoly controlled market share. Monopolies are often not allowed by the FTC.

Rather than ordering Renown to unwind the acquisitions, the FTC voted unanimously to allow up to 10 of its Renown cardiologists to disregard the non-compete language in their employment contracts. The FTC said voiding 10 non-compete agreements would restore competition for cardiology in the Reno metro area.

Eight physicians have already notified Renown they intend to work for other area hospitals, and two others are planning to move into private practice. The CEO of Renown Health said: “We understand the pressures the FTC is under, but it would be helpful to the industry if various government agencies would speak with one voice on whether or not consolidation is a good thing in the era of healthcare reform. On the one hand, we are being pressed to consolidate and integrate, and on the other we are being restrained by outdated laws regulating physician and hospital relationships.”

What is clear is that the enforceability of non-compete agreements will likely continue to evolve as healthcare keeps changing. At this point the enforceability of the restriction on Dr. Disgruntled is likely to be determined by which state he chooses to practice in.