Non-Competition Clauses – Make No Assumptions

By Patricia S. Hofstra

The enforceability of non-competition clauses depends on a number of factors. Non-competition clauses are viewed in the context of anti-trust laws as a restraint of trade and disfavored.  Consequently, the entity seeking to enforce a non-compete must be able to prove a legitimate business reason for the non-compete. A number of states flat out prohibit non-competition agreements, while other states enforce non-competition agreements on a case by case basis. In some states where non-compete provisions that restrict the physician’s right to practice medicine are considered void and not enforceable as a matter of law, employers may be able to sue the departing physician for monetary damages suffered because of the competition.

In states where non-competition clauses are permitted, the non-competition agreement must be supported by consideration or compensation and must be reasonable in scope. Scope refers to the length of time that the employee is prohibited from competing and the geographic radius of the non-compete.

With respect to the term of the non-competition clause, as a general rule, if the restricted time frame is two years or less after termination of the contract, the time restriction will likely be considered “reasonable.” However, state laws vary on whether time restraints in excess of two years are enforceable. The shorter the term of the non-compete, the more likely it will be enforceable. Because non-competes are reviewed by courts on a case by case basis and take into consideration the specific facts and circumstances pertinent to the non-compete, even in a state where non-competes are considered enforceable, there is no guarantee that a court will enforce the non-compete.

The enforceability of the geographical scope of a non-compete will vary substantially depending on location. Urban areas will have a different enforceable geographic scope than rural areas. The reasonableness of geographic scope may also vary depending on the physician’s specialty.

Courts will also consider patient needs in determining whether a non-compete is enforceable. A non-compete clause which prohibits a health care provider from continuing to provide care for a patient, no matter where the care will be provided, will likely be considered unenforceable as unjustly burdensome to the patient. Courts may also take into consideration the physician’s specialty and the ability of patients to receive care from other physicians in that same specialty, when determining the enforceability of a non-compete.

Non-competes relating to practice acquisition are considered generally more enforceable than non-competes relating solely to employment contracts. When an entity pays to acquire a physician practice, the physician practice should assume that the acquiring entity will vigorously seek to enforce the non-compete.

Litigating the enforceability of a non-competition clause is expensive, very time consuming and the outcome of the litigation is an uncertainty. Often litigation extends beyond the term of the non-compete.

In addition to the legal considerations associated with non-competition clauses, there are patient and public relation implications that merit consideration. Some physicians have circumvented non-compete provisions by taking their cause to the public.

When considering a non-compete either as an employer or employee or when selling or acquiring a medical practice, the parties need to consult legal counsel and also understand that there are no guarantees that any non-competition clause will be enforceable in its entirety or at all and there are no guarantees that a non-competition clause will be considered unenforceable. Never enter into a contract with the assumption that the non-compete clause is unenforceable and never assume that a non-competition clause will be enforceable. When seeking to enforce a non-compete, make the non-compete as least restrictive as possible to protect a legitimate business interest and document that legitimate business interest.

Patricia S. Hofstra represents a broad range of healthcare clients, helping them with day-to-day legal issues, including corporate matters, mergers, transactions and regulatory compliance.

This article was originally posted on the KZA Blog on November 7, 2018.