Non-compete agreements, while frowned on by the AMA, continue to be used frequently in many states. A variety of state courts regularly enforce non-compete agreements, with certain exceptions.
Why Do Non-Compete Agreements Exist?
♦ To ensure that employees don’t become an unfair competitive threat in the geographic area they previously serviced after their employment has been terminated;
♦ To make it more difficult for competitors to unfairly obtain knowledge of one’s business practices by hiring away employees;
♦ When a business is sold, to ensure that the seller does not form a rival company that would unfairly undermine the buyer’s business plans for the acquired business;
♦ To ensure that franchise buyers adhere to territorial guidelines so as not to impinge on sales of other franchise operators.
Implications in the Healthcare Field
Non-compete agreements are often required when physicians are hired in as employees, or even when partnerships are formed.
In many jurisdictions, courts will not enforce non-compete agreements that are unreasonable or where the threat of damage to business interests is not adequately defined. To be “reasonable”, the non-compete agreements cannot exceed what is necessary to protect the legitimate business interests of the business or employer. Non-competes may only protect against unfair competition, not all competition. Courts take into account many factors in determining what is “reasonable.” These include:
♦ The degree to which the restrictions in the non-compete would interfere with the ability of the employee to use his talents and earn a living
♦ The geographic scope of the restrictions
♦ The duration of the restrictions (usually 3 years or less, but for physicians, generally one year or less)
♦ The severity of the penalties for breaching the non-compete agreement
♦ The degree to which the business interests of the enforcing party would be harmed if the non-compete were not enforced.
Specifically, for physicians, courts have recognized that a medical employer may have one of three legitimate interests: (1) protecting against loss of patients to a departing physician; (2) protecting its investment in the physician’s training; and (3) protecting confidential business information. Public policy considerations sometimes weigh in the analysis as well, such that restrictions against highly specialized physicians whose skills are highly valued, rare or in high demand in the community (and which might suffer without such services) may be considerably more difficult to enforce than restrictions against generalists in less specialized or unique fields.
The bottom line is, courts will evaluate non-compete agreements individually based on the unique facts presented in each case. A party that is unable to show that it is protecting a legitimate and significant business interest in a reasonable way runs the risk of having the non-compete re-written by the Court or declared void altogether.
John Mucha III is a Member of Dawda, Mann, Mulcahy & Sadler, PLC. He concentrates his practice in the areas of land use planning and general civil litigation, including commercial, construction, real property, tort and non-compete matters.