The market for health care services in the U.S. is consolidating at a breakneck pace. A total of 1,498 health care mergers and acquisitions were announced in 2015—a new record for health care M&A deal volume. (The previous record-holder was 2014, with 1,318 deals). Spending on M&A transactions in 2015 reached $563.1 billion, another new record.
These mergers have resulted in dramatically increased concentration in the industry, at multiple levels. Hospitals are acquiring other hospitals. (San Francisco, for example, now has only three significant hospital chains).
In turn, bigger hospitals are buying up specialty medical practices, turning previously-independent physicians into employees. The number of independent physicians has declined, from 57% in 2000 to 37% in 2013, according to a study published by Accenture last summer. By the end of this year, Accenture predicts that the percentage of independent physicians will drop to 33%.
More than 200,000 physicians in the U.S. are now employees, and three in four medical residents will start their career as employees of a medical group, hospital or faculty plan. In 2000, one in 20 specialists were hospital employees; by 2012, the ratio was one in four. By the end of this year, that ratio will likely be lower still.
Meanwhile, the number of physicians, relative to demand, is shrinking. The Association of American Medical Colleges (AAMC) predicts a national shortage of between 124,000 and 159,300 physicians by the year 2025. This trend leaves big institutional health care providers in a race to hoover up a diminishing supply of doctors to meet the demand for health care services of a growing and aging population. They are using covenants not to compete in employment agreements to fortify their competitive positions not only against doctors, but against each other.
Big employers can use their superior bargaining power to extract big concessions from employed physicians. The fewer the number of employers of physicians, the fewer employment options for physicians. Naturally, this has detrimental effects on a physician’s career and family.
But it also harms patients, as well. Physician non-competes frustrate the right of patients to choose their own physicians. Geographic restrictions in non-competes are there in order to make it so burdensome on the patient to visit a departing physician’s new practice that the patient will simply give up and continue seeing the physician’s former employer instead, even if that isn’t what the patient prefers.
Non-competes don’t only frustrate patients’ freedom of choice: they also disrupt continuity of patient care--a critical ingredient to good treatment outcomes. Patients who receive care from a physician whom they know and trust are more likely to comply with that doctor’s recommendations, such as by losing weight and taking medications regularly. Patients are also more likely to seek out preventive care from doctors with whom they have a long-standing relationship. Continuity of care has also been shown to reduce emergency room visits and hospitalizations, and to reduce the cost of healthcare generally--especially for seniors.
And, of course, less competition among health care providers in a geographic area means higher costs in that area. Higher cost means less accessibility – and less care – overall. In this light, it’s hardly irrational to view physician non-competes as a threat to public health.
Courts Often Aren’t Much Help
Courts typically view the doctor-patient relationship as a business asset of the doctor’s employer, just like any other customer relationship. This leads them to look primarily at market concentration as the measure of public harm that could result from enforcing a non-compete, rather than the harm that would be visited upon any of the departing physician’s individual patients as the result of the covenant’s enforcement.
Courts have been known not to enforce a non-compete if the loss of a physician’s services in a particular geographic area would result in the complete loss of services of that kind in the area, or if it would result in a monopoly over services of that kind in the area. Some courts have struck down non-competes where enforcement would deprive a community of the availability of a doctor at all times for emergencies.
But other courts have been far less enlightened. For instance, the Supreme Court of Illinois has ruled that a shortage of physicians resulting from non-competes in any particular geographic area within that state would be self-correcting, because it would encourage “young doctors” from outside to relocate to that area. (One must ask: if Mr. Market is really this good at allocating physicians, then how come there are such things as Health Provider Shortage Areas, Medically Underserved Areas and Medically Underserved Populations?)
Fortunately, not all courts are this casually dismissive toward patient welfare and choice. Courts in a number of states will consider the unique nature of the doctor-patient relationship and the harm that can result when that relationship is severed purely for commercial gain by a non-compete. The Arizona Supreme Court, for one, has observed that the “doctor-patient relationship is special and entitled to unique protection,” and has ruled that covenants not to compete involving physicians in that state must be strictly construed in light of their effect on that relationship.
But unless you live in one of the few states that prohibit physician non-competes as a matter of law, whether or not a particular physician non-compete is enforceable will depend on the unique facts and circumstances of the case. That makes the outcome of any dispute over its enforceability difficult to predict in advance. This lack of predictability – and the typically high cost of challenging a non-compete in court – can make even a facially unenforceable non-compete a burden on a physician’s career prospects.
The AMA Isn’t Much Help
Non-competes between attorneys violate lawyers’ rules of professional conduct throughout the United States. This is because the American Bar Association (ABA) has incorporated a general prohibition against non-competes in its Model Rules of Professional Conduct. Most states model their rules of conduct for attorneys on the ABA’s Model Rules.
The relationship between attorney and client is an intimate and confidential one, much like the relationship between physician and patient. One would assume that the American Medical Association (AMA) would have adopted a strong ethical stance against non-competes in physician employment agreements comparable to the ABA’s position on non-competes among lawyers. But one would be wrong.
Certainly, the AMA has challenged the ethics of physician non-competes over the years. In 1933, the AMA resolved that restrictive covenants which prevented free choice of physician were unethical.
However, when the AMA’s Judicial Council revisited the issue in 1960, it backed away from that position, ruling that a “reasonable agreement not to practice within a certain area for a certain time, if it is knowingly made and understood,” wouldn’t be unethical. Then, in 1980, the AMA reversed itself again with a Judicial Council opinion which flatly declared that physician non-competes were not in the public interest.
The AMA’s current position on this issue, which it adopted in 1996, can be found in Opinion 9.02 of the AMA’s Code of Medical Ethics. This Opinion condemns non-competes for their tendency to restrict competition, disrupt continuity of care and deprive the public of medical services. And it discourages them generally— except insofar as they are reasonable in duration and geographic scope, and reasonably accommodate patients’ choice of physician. This rule essentially tracks the “rule of reason” test which most state courts employ to determine the enforceability of non-competes.
Thus, the AMA has largely left it for each state to decide for itself what is reasonable when it comes to physician non-competes. In cases where physicians have argued that enforcement of a non-compete would violate the AMA’s ethics rules, courts have usually refused to adopt that argument, reasoning (in essence) that if the AMA’s ethics rules are not binding on its own members, why should the courts take these rules seriously.
Legislation Helps, But Are Legislatures Willing?
State legislature can take the proverbial bull by the horns and outlaw the use of non-competes in physician employment agreements. Several states—namely Colorado, Massachusetts, Delaware, Arkansas and Alabama—prohibit physician non-competes outright. California, Montana, North Dakota, and South Dakota prohibit the enforcement of employee non-competes generally, not just with respect to doctors. And while Virginia, Tennessee and Texas do not ban enforcement of physician non-competes, they do limit the conditions under which they can be enforced.
But while state legislatures may be able to strike a blow against anti-competitive practice in medical care, surprisingly few have been willing to do so.
Just last month, the state of West Virginia took legislative action to preempt the Federal Trade Commission (FTC) from blocking the merger of two large hospitals in the state. In the FTC’s view, this merger would create a near monopoly over acute-care, inpatient hospital services and outpatient surgical services in and around Huntington, West Virginia—leading to higher health care costs and reducing the hospitals' incentives to improve quality of care in that community. Nevertheless, in a move characterized by detractors as a case of “special interest politics,” West Virginia lawmakers decided to shield this and other hospital mergers from all antitrust scrutiny.
West Virginia's misguided efforts will likely fail. (State legislation can't be used to prevent federal enforcement agencies from enforcing federal law). But, if anything, this case illustrates the difficulty of fighting the consolidation wave among big hospitals on the legislative front. Can employed doctors, hoping for legislative relief from the competitive restraints big hospitals have placed on them, expect to fare better than the FTC?
What May Help: Collective Bargaining
Maybe the best way for employed doctors to resist the imposition of non-competes is to rely on a tried-and-true technique first perfected in the industrial sector: Collective bargaining. The National Labor Relations Act (NLRA) protects the rights of employees, including doctors employed by healthcare facilities, to engage in “concerted activity,” even if they are not members of the union. “Concerted activity” is when two or more employees take action for their mutual aid or protection regarding terms and conditions of employment. A single employee may also engage in protected concerted activity if he or she is acting on the authority of other employees, bringing group complaints to the employer’s attention, trying to induce group action, or seeking to prepare for group action.
It is important to know that the NLRA does not cover employees who are “supervisors,” as that term is defined under the statute. (Basically, a “supervisor” is any employee having the authority to hire, fire discipline other employees on behalf of the employer). But it does protect supervisors who refuse to violate the NLRA against employer retaliation.
One physician may not be able to negotiate a non-compete out of his or her employment agreement all alone. But a substantial segment of a large employer’s physician workforce – acting in concert under the NLRA – may be able to. When it comes to non-competes, big employers commonly use concerted action against the interests of employees. Why shouldn’t employees do the same?
David M. Briglia is an employment lawyer who represents physicians and other healthcare professionals in negotiating their employment, non-compete and practice acquisition contracts with hospitals, health systems and group practices, and in litigating breach of contract, non-compete and employment law claims. The Law Office of David M. Briglia serves doctors and other healthcare professionals in Washington, D.C. and Maryland. The article above is for informational purposes only, and is not intended, nor can it be relied upon, as legal advice. It is also not intended as an advertisement, solicitation or invitation to enter into an attorney-client relationship.
The short answer to the question posed in the title of this article is “it depends.”
There is no bar to enforcing a non-compete against a physician in Maryland. Covenants not to compete in physician employment contracts are subject to the same “rule of reason” test that Maryland courts (and the courts of most other states) apply to covenants not to compete in employment agreements in every other industry. While courts in at least other states have grappled with the serious public policy implications of non-competes in the medical profession, Maryland’s courts have said nothing about them. In fact, to count the number of reported decisions from Maryland courts that address covenants not to compete in physician employment contracts, you won’t even need one full hand.
In Maryland, as in most states, the rule is that a covenant not to compete in an employment contract, under which an employee agrees not to engage in a competing business against her employer upon leaving employment, will be enforced if (1) the restraint is no wider as to area, duration and prohibited activities than is reasonably necessary to protect the business of the employer, (2) the covenant does not impose undue hardship on the employee, and (3) the covenant does not harm the public interest. Ruhl v. F.A. Bartlett Tree Expert Co., 245 Md. 118, 123-124 (1967).
No statute in Maryland limits the enforcement of non-competes against physicians. And the Court of Appeals (the “Supreme Court” of Maryland) has made clear that it is not inclined to fashion a blanket rule against non-competes in any profession, including medicine. In the Court’s view, that’s the General Assembly’s job. See Holloway v. Faw, Casson & Co., 319 Md. 324 (1990).
In Maryland, claiming that a non-compete is overbroad isn’t always a perfect defense to its enforcement. Maryland courts are willing to “blue pencil” an overbroad non-compete—that is, strike out logically and grammatically severable words and sentences to make the non-compete enforceable. In at least one reported case, the Court of Special of Appeals (Maryland’s intermediate appellate court) has gone so far as to rewrite an overbroad non-compete so as to reduce its duration from five years to three, but on appeal the Court of Appeals declined to rule on the propriety of that approach, and hasn’t ruled on the matter since. See Holloway v. Faw, Casson & Co., 78 Md. App. 205, 239 (1989); Holloway v. Faw, Casson & Co., 319 Md. 324, 353 (Md. 1990). Courts in Maryland are also permitted to enter an injunction with a scope that is less than that of the non-compete, if the court believes that the non-compete may be overbroad in one or more respects. In these ways, Maryland courts, under the right circumstances, will partially enforce an overbroad non-compete.
A Legitimate Need for Protection?
Like all states that follow a “rule of reason” approach to enforcing covenants not to compete in employment agreements, Maryland will only enforce a covenant that is needed to protect a legitimate business interest of the employer. However, the range of business interests that count as “legitimate” in Maryland are quite narrow: Non-competes are enforced by Maryland courts only against those employees who provide unique services, or to prevent the future misuse of trade secrets, routes or lists of clients, or solicitation of customers. Becker v. Bailey, 268 Md. 93, 97 (1973).
The “unique services” justification has rarely ever been invoked in Maryland to uphold a non-compete. The only reported instance of the Court of Appeals having done so is in Milward v. Gerstung International Sport Education, Inc., 268 Md. 483 (1973). That case involved a summer camp administrator who had been hired by the complaining employer because of he had achieved local celebrity as a junior-league soccer coach, and the employer expected that celebrity to exert a draw on camp patrons. Subsequent decisions by Maryland state courts make clear that the “unique services” doctrine is limited in applicability to one-of-a-kind employees with similar celebrity appeal. Specialized education and training (like the kind possessed by physicians) are not qualifications that in and of themselves establish uniqueness; nor are employer-provided training or experience, or skills gained on the job. See Ecology Services, Inc. v. Clym Environmental Services, LLC, 952 A.2d 999, 1010 (2008); Labor Ready v. Abis, 767 A. 2d 936, 946 (2001). So, if you are a physician, it isn’t likely that the “unique services” doctrine will justify the enforcement of a non-compete against you—unless, perhaps, you are Dr. Oz.
It is also unlikely that the need to protect patient lists and other trade secret information will justify enforcing a post-employment non-compete against a practicing physician. Clinicians without high-level management responsibilities will rarely have access to information of their employer that is legitimately a trade secret. In any event, it would be unusual for a physician employment contract that contains a non-compete to not also include confidentiality and patient non-solicitation clauses. The latter should suffice to protect any legitimate interest that the employer has in confidential information. Maryland courts have demonstrated a preference for enforcing confidentiality and reasonable non-solicitation clauses rather than non-compete clauses when such clauses are present in the same employment contract.
Usually, the only legitimate interest that a healthcare employer will have in enforcing a non-compete against a healthcare professional will be for the protection of patient goodwill. The rule in Maryland is that if part of the compensated services of the employee consists of the creation of goodwill of customers, then a protectable interest justifying a non-compete may exist. Silver v. Goldberger, 231 Md. 1, 7, 188 A.2d 155 (1963). In determining the employer's need for the protection in a professional services business, the question is whether the personal contact between employee and client is so strong that the employee can control the business of the client as a personal asset, such that, upon leaving the employer, the employee might be able to take the client with her. See Holloway, 319 Md., 349-351 (citing 41 A.L.R.2d 15, 72, §14 (1955)).
In Maryland, a legitimate need for a non-compete is typically found in cases involving employees who regularly serve the same customers over time. In these cases, the period of time considered to be a reasonable duration for the non-compete is the period reasonably necessary to sever that attachment. How long that might be depends on the facts and circumstances of the particular case. For example, in Holloway (a case involving a certified public accountant) the Court of Appeals found a period of three years to be reasonable, but not the full five years stipulated in the employee’s non-compete.
Where the employer’s business is driven by the occasional, irregular needs of the customer, rather than by a relationship between the customer and any particular employee, Maryland courts have been reluctant to enforce non-competes against employees—at least where there is no evidence that the employee has attempted to solicit away the customers of her former employer. See Tawney v. Mutual System, 47 A.2d 372 (Md. 1946), Silver, 231 Md., Becker, 268 Md. For example, in Tawney, the Court ruled that a restrictive covenant that required the former manager of a small loan company "to refrain from engaging directly or indirectly in any business competitive with that of the employer in the Baltimore City trading area for a period of two years" was unenforceable as written. In these cases, an employee cannot be restricted from competing beyond the time it would take for a new employee to reasonably become acquainted with the employer’s existing customers. In Tawney, the court pegged this length of time as being only a few days.
What does all this talk about accountants and loan officers have to do with doctors? In medicine, there are physicians who come into regular contact with the same patients over a sustained period of time. Primary care providers are the most obvious example. The success of a primary care practice often depends on the existence of goodwill between a patient and a specific physician of the practice. Part of the compensated services of an employed primary care physician might fairly be said to include the creation of patient goodwill which might follow the physician upon her departure. For the employers of these physicians, a legitimate need for the protection of a post-employment non-compete would seem to exist. In these cases, the Court of Appeals’ decision in Holloway should bear on the outcome.
But there are also physicians whose contacts with patients are occasional and short-lived, and driven wholly by the irregular needs of the patient and not by any sustained relationship between physician and patient. Emergency room physicians are perhaps the best example, but many surgeons and other kinds of specialists would qualify as well. In these cases, The Court of Appeals’ decisions in Tawney, Silver and Becker should govern the outcome, and should render a non-compete largely unenforceable except to prevent the actual solicitation of the employer’s patients by a former physician-employee.
Less than a Handful of Cases
As mentioned above, reported cases in Maryland involving physician non-competes are few and far between.
Warfield v. Booth
The first such case is Warfield v. Booth, a decision from the Court of Appeals from back in 1870. 33 Md. 63 (1870). Warfield is a non-compete case, but not one involving a restrictive covenant ancillary to an employment agreement. Instead, Warfield concerns the sale of personal goodwill as part of the sale of a private medical practice. In Warfield, the defendant physician sold the goodwill of his practice in Lisbon, Maryland to the plaintiff, also a physician. In exchange for the sale of the defendant’s goodwill, the sales contract provided that the defendant would not practice medicine in Lisbon. But the defendant did resume practicing, and so the buyer refused to continue paying the purchase price on installment, and brought a breach of contract action against the defendant for violating the non-compete.
Part of the defendant’s argument was that the covenant violated public policy. The Court of Appeals disagreed, finding that the non-compete did not violate public policy because it was limited "in its extent and operation" to the defendant's practice in Lisbon. (The Court of Appeals in Holloway would rely in part on its decision in Warfield in determining that non-competes in the accounting profession should not be treated as unenforceable per se as against public policy, reasoning—in essence—that if, in the past, the Court had been willing to enforce a non-compete against a doctor, why shouldn’t it do so against a CPA?)
Lofton v. TLC Laser Eye Centers, Inc.
The second reported case in Maryland involving a covenant not to compete in the healthcare industry came over one hundred years after Warfield: Lofton v. TLC Laser Eye Centers, Inc., a decision out of the United States District Court for the District of Maryland from February, 2001. 2001 U.S. Dist. LEXIS 1476.
The plaintiff in Lofton was an ophthalmic technician with training in refractive eye surgery. The defendant, TLC, was—and still is—a nationwide network of ambulatory laser eye surgery centers. Lofton was hired to work in TLC’s center in Rockville, Maryland. Lofton’s employment agreement with TLC included a non-compete that prohibited Lofton, for one year after the end of his employment, from working for any medical clinic, outpatient, ambulatory or diagnostic facility equipped with an excimer laser or other laser intended to be used for laser vision correction procedures, within a fifty mile radius of any TLC site.
Lofton worked for TLC for less than a year. He was terminated allegedly because he failed to attend all of the required seminars during a conference. Shortly thereafter, he took up employment with Lasik Plus, Inc., a direct competitor of TLC, in its office in Gaithersburg, Maryland. Lofton promptly lost his position with Lasik after it received a letter from TLC’s counsel complaining about Lofton’s employment with Lasik. Lofton then sued TLC alleging a number of claims, including fraudulent inducement, breach of contract, racial discrimination and tortious interference with contract and prospective economic advantage.
Much can said about the overbreadth of TLC’s non-compete with Lofton. That it banned him not only from performing refractive eye surgery, but from working in any capacity for an employer in the laser eye surgery business was almost surely overbroad as to restricted activities. That it covered a geographic radius of 50 miles of any TLC site, including ones at which Lofton never worked, was almost surely overbroad in terms of geographic scope. One can also question whether TLC had a legitimate need for the protection of a non-compete in the first place: Lasik surgery is usually a once-and-done service that doesn’t result in the formation of long-term relationships between patient and physician, and Lofton’s employment agreement also contained a confidentiality clause that should have adequately protected TLC’s interest in whatever of its trade secrets Lofton may have been exposed to. Perhaps for these reasons, TLC stipulated early in the litigation that it would not seek to enforce the non-compete against Lofton.
Although Lofton sheds no light on how a Maryland court would go about analyzing a physician non-compete, it does teach a number of cautionary lessons about the viability (or lack thereof) of certain claims and defenses that might be asserted in a non-compete enforcement action.
Lofton claimed that TLC, through its representative, fraudulently induced him to sign the non-compete by stating that it was not enforceable, and that TLC would not "go after" employees to enforce it. The court dismissed Lofton’s fraudulent inducement claim, ruling that these statements were not sufficiently “concrete” to constitute material misrepresentations of fact necessary to sustain a claim for fraud. The court regarded the statement of TLC’s representative that the non-compete was unenforceable as a statement of opinion, and noted the Maryland courts have consistently held a party's opinion is not a material misrepresentation of fact.
The court regarded the statement of TLC’s representative that TLC would not use the non-compete to "go after" Lofton as essentially promissory in nature— also not the sort of statement that Maryland law regards as a material misrepresentation of fact. The court further found that the “imprecise and speculative nature” of the “won’t go after” statement was such that Lofton could not have reasonably relied on it at the time he signed the agreement, thus undercutting yet another predicate element of Lofton’s fraud claim.
Lesson learned: Never trust your prospective employer’s statement that the non-compete contained in its proposed employment contract is unenforceable, or won’t be enforced in the future against you.
Lofton also claimed that TLC breached its contract by failing to provide him with sufficient consideration for signing the non-compete. That claim was perfunctorily dismissed by the court, which noted that, under Maryland law, it is well established that where a restrictive covenant is bargained for in exchange for employment, the employment will be sufficient consideration for the restrictive covenant.
Lofton further claimed that his termination violated the implied covenant of good faith and fair dealing inherent in his employment contract with TLC. But the court dismissed this claim, too, noting that the Maryland Court of Appeals does not recognize a general requirement of good faith and fair dealing with respect to the termination of an at-will employment relationship.
Because Lofton’s subsequent employment with Lasik Plus was terminated as the result of a cease and desist letter sent by TLC’s counsel, Lofton claimed that TLC had tortuously interfered with his employment contract with Lasik Plus. But the court ruled that there could be no malicious or wrongful interference, particularly with an at-will contract, where TLC did nothing more than act to enforce a colorable contract right, even where that contract right might ultimately have been adjudged unenforceable.
Lofton further claimed that the cease and desist letter defamed him by alleging that he stole confidential documents from TLC upon his departure. This claim also failed. The court ruled that, since the letter came from an attorney and was related to anticipated litigation, it was entitled to an absolute privilege from suit, even if it was in fact defamatory.
Lesson learned: In Maryland, you may be out of luck if your prior employer sabotages your subsequent employment by sending a “lawyer letter” to your current employer alleging breach of non-compete and trade secrets theft. This may be the case even if your non-compete with the prior employer is ultimately shown to be unenforceable under Maryland law (so long as your prior employer’s claim was at least “colorable”), and even if other factual allegations in the letter are known to be untrue by the lawyer.
 Every other industry that is except for the legal profession. Non-competes in my industry are prohibited under the Rules of Professional Conduct except in cases involving the buy-out of a lawyer’s practice upon retirement.
 Courts in many states are more apt to enforce a covenant not to compete that is ancillary to the sale of a business than they are to enforce a covenant that is ancillary to an employment agreement. They reason that the terms and conditions of a business sale are more likely to be bargained for at arms’ length, by parties of equivalent bargaining power, than are the terms and conditions of an employment agreement. Maryland courts, however, do not typically make such a distinction.
David M. Briglia is an attorney who represents physicians, physician assistants and other healthcare professionals in negotiating and litigating breach of contract, non-compete, trade secret misappropriation, unfair competition and employment law claims. The Law Office of David M. Briglia serves doctors and other healthcare professionals in Washington, D.C. and Maryland, including Silver Spring, Takoma Park, Bethesda, Chevy Chase, Rockville, Gaithersburg, Germantown, Columbia, Baltimore, Annapolis and Frederick, and throughout Montgomery County, Prince George's County, Howard County, Anne Arundel County, Calvert County and Baltimore County. You can reach the firm at 240-482-0581.This blog is intended for informational purposes only and cannot be relied upon as legal advice.