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The Right Way To Apply Noncompete Provisions

MANAGED CARE October 1996. © MediMedia USA
Legal Forum

The Right Way To Apply Noncompete Provisions

Neil Caesar, J.D.

Neil Caesar, J.D.

As health care reform continues to reshape the way medical services are delivered, physicians will find it important to choose carefully the alliances they join and the managed care arrangements in which they participate. Previous columns have discussed the likelihood that health reform will push physicians toward seeking the best alliances and contracts, with promises of volume and semi-exclusivity in exchange for risk assumption and quality assurances by the physicians. Consequently, the huge open physician panels featured in many current managed care arrangements will shrink substantially. The particular relationships and contracts that medical groups forge will often make the difference between thriving and merely surviving in the coming years. Physicians will need to protect their alliances and relationships with extreme care.

This has important implications for physician employment and subcontract relationships. A medical group that works carefully to establish a premier reputation, join the most progressive and highest-quality alliances, and negotiate favorable, semi-exclusive arrangements with a handful of quality managed care plans must take particular care to ensure that its physicians do not leave the group and then compete with it. Otherwise, the departed physician will undermine the arrangements the medical group has nurtured over the years. If a number of patients previously seen by the medical group want to switch over and follow the departing physician, this will hurt not only the medical group's revenues but also its status with its alliance colleagues and managed care plans. In general, as the market evolves, providers will find themselves in a small number of highly leveraged affiliations. This means that almost any competitive effort by a departed physician to encroach on those established affiliations will economically harm that physician's former employer.

Will it stand up in court?

The most common response to this problem is to impose on the departing physician a restrictive covenant limiting competition. Restrictive covenants are becoming vital to any physician employment agreement. Yet these clauses are often misunderstood. I have heard many physicians claim that such clauses won't stand up in court, or just make the employee mad and don't do any good. In most jurisdictions, nothing could be further from the truth. While virtually all courts strongly favor free competition, most are willing to enforce restrictions that are reasonable and fairly negotiated between the parties. (In some states, such as California, restrictive covenants are seldom enforced because of strong court bias favoring unrestricted employment. This is the exception, though.)

An effective package of restrictive covenants actually includes three different kinds of restrictions: noncompete provisions, nonsolicitation provisions, and confidentialityproprietary information protections. The noncompete restriction probably is the most common covenant found in physician employment agreements. It is important for a medical group seeking to enforce such a provision to ensure that it is clearly reasonable for both the group's needs and the employee's needs. A medical group does have a legitimate interest in preventing its physician employees from departing with a slew of patients which the group helped that physician acquire. Often, the employee's visibility in the community is due to his or her association with the medical group. The medical group may have introduced the physician to referral sources, hospital connections and/or its existing patient base. In whole or in part, the medical group essentially staked the physician to his position in the community. Even if the physician has developed a loyal following, it still flows from the medical group's past and continued efforts.

The 'shingle' alternative

The simplest way to view this is to compare the ease of startup that physician enjoyed as an employee with the much greater effort necessary if the physician had simply come into town as a solo practitioner and hung out a shingle. Indeed, I find it helpful for the employment contract actually to set forth some of these justifications for the noncompete, to show a reasonable context for imposing the restriction.

It is also important for the restriction to be reasonable in geographic scope and in its duration. In specifying a geographic area in which a former employee can't practice for a certain period of time, most practices just draw a wide circle on a map to establish their territory. However, this often is dangerous. The premise behind the noncompete is that the medical group has a certain specifically defined market in which it has achieved demonstrated market penetration, and that it is unfair for the former employee to appropriate this market for his or her own purposes. Thus, the restricted geographic area must truly reflect the medical group's market penetration.

Often, when the restriction is in the form of a circle (for example, a 10-mile radius from Anytown, USA), there is a risk that this circle will include some areas in which the group does not enjoy significant penetration. In this case, many courts will throw out the entire noncompete provision. The same danger comes when an entire county or a portion of a county is included. In other words, be very careful that you carve out an area that truly reflects your present competitive focus.

Often, I find it fairer and safer to plot the practice's market area using patients' zip codes. A medical group usually can determine from its records that a small number of zip codes — say five to ten — capture an area from which 60 to 80 percent of its patients are drawn. Thus, listing those zip codes in the restrictive covenant can accurately reflect the group's true market penetration. And when the group limits its prohibition to the most important zip codes, rather than trying to capture every last zip code from which any patient is drawn, it shows a reasonable attitude that goes a long way toward ensuring enforceability. It is perfectly appropriate to reflect these prohibited zip codes with a map attached to the contract. However, be sure that the contract makes clear that the prohibition is as defined in the text, and that the map is purely for the employee's convenience.

Next month's column will continue this discussion of noncompete contract clauses.

Neil B. Caesar is president of The Health Law Center (Neil B. Caesar Law Associates, PA), a national health law/consulting practice in Greenville, S.C.

MANAGED CARE October 1996. ©1996 Stezzi Communications