THE ENFORCEABILITY OF NON-COMPETES IN PHYSICIAN EMPLOYMENT AGREEMENTS: PART 2: WHAT IS A PROTECTABLE INTEREST?
(This is the second in a multi-part series discussing the factors that courts look at when deciding whether a restrictive covenant in a physician employment contract is enforceable.)
As I noted in the first post of this series, courts in most states have adopted the “rule of reason” approach to analyzing post-employment non-competes in employment contracts, and will only enforce a non-compete of it protects a legitimate business interest of the employer. An employer can’t use a non-compete just to stifle competition from its former employees; but it can use a non-compete to preempt competition that could be considered unfair because it misappropriates a valuable asset of, or undermines a significant investment by, the employer.
So what interests count as protectable? With physician non-competes, four are widely recognized:
1. Patient Relationships.
Courts treat the relationship between a physician employer and its patients as a protectable business asset. Courts recognize that the relationship between a doctor and his or her patients can be a close and intimate one, and that a departing physician-employee can exert a “hold” on his or her patients after the physician’s departure.
This concern over patient poaching has led a few courts to go so far as to enforce a physician non-compete even at the risk of causing harm to the departing physician’s patients. (“But,” you might ask, “doesn’t that completely ignore the third prong of the rule of reason analysis, the one that one that looks at the injury to the public that enforcing a non-compete might cause? Well, yes, I think so. Fortunately, most courts aren’t as blinkered as that. But more on this topic in a later post.)
Whether or not a healthcare employer has a protectable interest in patient relationships is often a function of specialty. Some specialties just don’t lead to the formation of economically valuable, transferrable physician-patient relationships. Radiology is one example; emergency medicine is another. You will find examples of courts declining to enforce non-competes against emergency room physicians due to the absence of a meaningful doctor-patient relationship. In fact, Tennessee goes so far as to outlaw the enforcement of non-competes against emergency physicians by statute. (But be careful: courts may enforce covenants not to compete between emergency room doctors and the physician services group that has placed them in a hospital—the protectable interest in such a case being between the physician services group and its hospital client, rather than between physician-employee and any emergency room patient).
You’ll find a difference of opinion among courts as to whether a non-compete can be enforced so as to prevent a physician from treating pre-existing patients—that is, individuals who were patients of the physician before he or she joined the employer. Some courts will enforce non-competes that extend to pre-existing patients; others won’t. In Florida, for example, the state's statute on non-competes defines “legitimate business interest” to include only those specific prospective or existing patients with whom the employer has a substantial relationship.
2. Referral Networks.
In specialty practices that depend on a network of referring physicians for patients, an employer’s referral network can be a protectable interest sufficient to justify the enforcement of a non-compete against a departing physician-employee. As with patient relationships, the presence of this interest depends on specialty. If your employer is exclusively a primary care practice, this interest won’t be operative. But if you’re in a surgical practice or another specialty, it’s likely to be a different story.
3. Proprietary Information.
Just like other businesses, employers of physicians can use non-competes to protect the confidentiality of business information. Here’s where contractual non-competes and trade secrets law converge. (Non-competes really are just a crude and redundant form of trade secret protection when you get right down to it). Courts will enforce non-competes to protect unauthorized disclosure of confidential, competitively-sensitive business information. However, I’m not aware of a modern case in which a court has done so except where a former physician employee has misappropriated information that actually constitutes a trade secret under the Uniform Trade Secrets Act in force in that state.
An interesting example of this is the Delaware Chancery Court’s decision in Dickinson Medical Group v. Foote. Dr. Foote was her hospital’s only board-certified oncologist (and by her account, the only board-certified oncologist south of Dover, Delaware) before she left her employment with that hospital, taking with her a computer print-out of all of the patients she had treated with chemotherapy while she was employed there. Dr. Foote argued that she did this because she had a professional and ethical responsibility to offer continuity of treatment to her patients. (This is a reasonable argument: Under AMA Ethics Opinion 10.01, a physician may not discontinue treatment of a patient as long as further treatment is medically indicated without giving the patient reasonable assistance and sufficient opportunity to make alternative arrangements for care.)
The hospital, however, argued that the patient list was trade-secret information. The judge agreed, and enjoined Dr. Foote from contacting her former patients. In doing so, he observed:
[The hospital’s argument] lacks the ring of humanitarianism that once was associated with the practice of medicine. Prior to this application, I never had reason to equate a list of persons suffering from cancer and other illnesses with a proprietary 'customer list' as that term is normally employed in the world of commerce. But I guess business is business, regardless of the form it takes.
Lesson learned: If you decide to leave your employer, do not take patient lists, referral lists, or other confidential business information of your employer with you. Doing so will greatly improve your prior employer’s odds of getting your competitive practice enjoined—if not under a non-compete, then under trade secrets law. Inducing the employees of your former employer to leave its practice and take up with yours is also grounds for trouble under state unfair competition laws.
(Note: Lack of access to patient records can put the employee-physician in an ethical and liability bind. Your employment agreement should spell out who is responsible for contacting your patients when you depart from the employer’s practice. Failing to notify a patient of your impending departure may violate laws in your state concerning patient abandonment. Arguing that you contacted a former patient in violation of a temporary restraining order or preliminary injunction because you believed in good faith that you had an ethical obligation to do so might be a successful defense against charge of criminal contempt—but never willingly put yourself in a position where you need to lean on that argument. Your employment agreement should also give you the right to access patient records from your employer if you should need them to defend yourself against a malpractice claim or administrative proceeding after your employment ends.)
In addition, if you are joining a medical practice known for a unique, proprietary procedure with the hope of acquiring the know-how to offer that procedure in your own practice, think carefully about the wisdom of doing so. Trade secret misappropriation and unfair competition claims, in addition to a breach of contract claim, may spoil your plan.
If you are not involved in the management of your employer’s business, and if all that you’ve learned from your association with your employer are procedures and other practice-related information widely known and used in your area of specialty—or in the practice of medicine generally—then the argument that your employer has a protectable interest in confidential information is weakened considerably.
4. Investment in Training.
It used to be that courts would view a restrictive covenant as a reasonable sacrifice that a younger physician makes in order to receive valuable training from an older, more experienced physician. (For an example of this line of thinking, see the Wisconsin Supreme Court’s decision in Oudenhoven v. Nishioka from back in 1971).
But these days, how much explicit professional training does a newly-minted, board-certified specialist really get directly from his or her first employer? More recent decisions find a protectable interest in training only where the physician-employee is trained in surgical and other procedures that aren’t readily available outside the employer’s organization—basically, trade secrets.
So, to sum up, here are the factors that tend to make it less likely that a court will view your employer as having a protectable interest that justifies the enforcement of a covenant not to compete against you:
In reference to the first bullet above, if you are a family physician, pediatrician, psychiatrist, oncologist, geriatrician, nephrologist, pulmonologist or other physician whose practice tends to result in close, sustained relationships with individual patients, don’t despair: Although your employer may have a protectable interest in patient relationships such as would support the enforcement of a non-compete against you, you may have an argument under the “public injury” prong of the rule of reason analysis that might limit the scope of that enforcement, or preempt it altogether. More on that in a later post.
David M. Briglia is an employee-side attorney representing physicians and other healthcare professionals in negotiating their employment contracts with hospitals and group practices and litigating contract 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, Rockville, Gaithersburg, Columbia, Baltimore and Frederick, and throughout Montgomery County, Prince George's County, Howard County, Anne Arundel County and Baltimore County. This blog is intended for informational purposes only and cannot be relied upon as legal advice.