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.
It’s easy to make a short list of the important clauses in a physician employment contract. These are clauses involving economic rights and basic duties. Salary, incentive bonus, call responsibilities, signing bonus, relocation allowance, expense reimbursement, malpractice coverage, buy-in option – the list goes on. But the most important clause in an employment contract, hands down, is one you will usually find in the very back of the agreement, buried among the clauses that attorneys and clients alike usually refer to as “boilerplate” and often (to their detriment) treat as insignificant “legalese.”
What clause is that? It’s the integration clause. Here's how it typically reads:
This Agreement constitutes the entire agreement between Employer and Physician with respect to matters relating to Physician's employment, and it supersedes all previous oral or written communications, representations or agreements between the parties.
It’s usually that simple. Its effect, however, can be profound. Sometimes called the “entire agreement” or "merger" clause, its purpose is to preclude either party – employer and employee alike – from relying on any promise, understanding or representation which the other party may have made in the course of negotiating the contract, unless that promise, understanding or representation is, in fact, included in the contract.
So what about the oral assurance that the hospital’s CMO made to you that physicians in your specialty who are employed by the hospital are only expected to cover call every fifth weekend? What about the practice group manager’s statement that scheduling vacations among the groups employed physicians is never a problem? What about that promise which was made to you in an email when you were first considering the position that you would be considered for partnership after two years of employment? What about various representations and promises that were made in the letter of intent? Were all of them faithfully incorporated into the definitive contract? If not, then these things will be without any legal effect, thanks to the integration clause.
The purpose of an integration clause is to take advantage of a legal doctrine of contract interpretation commonly referred to as the “four corners” rule. Under the “four corners” rule, a court will determine the meaning of a written contract solely by reference to the text of the contract itself, without relying on other evidence. So-called “extrinsic evidence” of what the contract is supposed to mean – or what the contract is supposed to have said – will not be considered by the court at all. This would include documents such as letters of intent, term sheets, emails and text messages exchanged between the employer and employee before the contract was signed, as well as oral statements that the parties may have made to each other during that time, as recounted by witnesses.
Thus, if the employer fails to live up to any promise that it made before the contract was signed that is outside the “four corners” of the contract, and that contract contains integration clause, then that promise is of no further legal effect. You will not be able to terminate the agreement for breach if that promise is subsequently not honored (which it may well not be). If you were relying on any extra-contractual representations about (for example) the employer’s financial condition or patient volume, then you will not be able to terminate the agreement for breach if these representations turn out not to have been true when they were made. Plus, the presence of an integration clause may frustrate – or at the very least complicate – your ability to bring a fraudulent inducement claim or defense against your employer for that reason. (But not, however, in Maryland, where the presence of an integration clause in a contract cannot be used to defeat a fraudulent inducement claim relating to that contract. See Greenfield v. Heckenbach, 797 A.2d 63, 144 Md. App. 108 (2002)).
The point here is not to persuade you to try to negotiate the integration clause out of the contract. You’ll never be able to do that. The point instead is to encourage you to review the contract carefully before you sign it, and make sure that all promises, understandings and factual premises that you are relying on in entering into the contract – and certainly all that are contained in a letter of intent or term sheet which preceded the contract – are clearly reflected in writing in the contract. And if you are relying on prospective employer’s oral assurances of good faith and fair dealing in the future, and statements to the effect of, “you’re just going to have to trust us about this,” think again: A court will only enforce the literal provisions of a fully integrated, written contract. You will only get one bite at the apple.
The Law Office of David M. Briglia represents physicians, physician assistants, nurse practitioners and other professionals in the healthcare industry in the negotiation of employment contracts, separation agreements, practice buy-ins and partnership and shareholder agreements, and in litigation involving employment and contract disputes in Maryland and Washington D.C. The article above is for informational purposes only, and cannot be relied upon as legal advice.
The January 10, 2016 issue of the New York Times features a story about a nearly two-year-long battle that a group of hospitalists has waged against their employer’s decision to place them under the control of an outside management firm. It’s a story that traces the history of the role of hospitalists in the U.S. healthcare industry, and provides the backstory of the creation of one the first hospitalist unions in the country.
The hospital that is the subject of “Doctors Unionize to Resist the Medical Machine” is PeaceHealth Sacred Heart Medical Center in Springfield, Oregon. In the spring of 2014, its administration announced it would seek bids to outsource its 36 hospitalists to a management company that would become their employer.
The outsourcing of hospitalists has become relatively common in the last decade. The motivation for doing it are at least partly business-related: efficiency gains, cost savings and higher margins. But, as the article points out, it is also a response to growing payer pressure on hospitals to measure quality and keep people healthy after they are discharged. Meeting quality measures requires data collection and management—something many hospitals, especially smaller ones, aren’t equipped to do, but which many outsourcing companies are. According to the Society of Hospital Medicine, 25 to 30 percent of all hospitalists have worked for multistate management companies in recent years.
Although outsourced hospitalists tend to make as much or more money than hospitalists whom hospitals employ directly, their compensation is often more directly tied to the number of patients they see in a day. The cause of the hospitalist revolt at PeaceHealth Sacred Heart was the higher volume of patients that hospitalists would be expected to see under new management—from 15 to about 20 a day. The lead organizer of Sacred Heart’s hospitalists, Dr. Rajiv Alexander (who, according to the article, is known at Sacred Heart for his painstaking and often time-consuming diagnostic approach), was one of many at the hospital who viewed the prospect of higher volume as a threat to patient safety.
Some Sacred Heart hospitalists left for other jobs; but those who stayed formed a union, one of the first of its kind in the country. To everyone’s surprise, Sacred Heart’s administration agreed to abandon its outsourcing plan. Since then, the hospital and its remaining hospitalists have been involved in what the article describes as a “long, grinding negotiation . . . over the proper role of the hospital doctor” in the course of establishing a collective bargaining agreement.
Increasing hospital consolidation, more demanding payor expectations and declining reimbursements will continue to exert pressure on hospital-employed physicians, increasing their workloads and threatening their professional autonomy. All of this is a recipe for greater labor unrest.
Employed physicians should understand their rights under the National Labor Relations Act (NLRA). Under the NLRA, employees are not required to belong to a traditional labor organization in order to negotiate collectively with their employer. Two or more such employees may exercise their Section 7 rights by designating a representative and asking their employer to meet with that representative to discuss and negotiate wages and other terms and conditions of their employment. The NLRA protects employees, even in non-unionized workplaces, from retaliation by their employers for engaging in activities protected under that law. However, employees who are “supervisors” under the NLRA (basically, any individual who has the authority to recommend or perform certain supervisory functions in the employer’s interest—such as hiring, directing, promoting, disciplining, and laying employees off—and who uses independent judgment to do so) are not covered by the NLRA. More information about the NLRA and the kinds of activities it protects are available from the National Labor Relations Board, which administers and enforces the NLRA: www.nlrb.gov.
Negotiations leading to physician employment often begin not with a draft contract, but with a “letter of intent” from the employer, spelling out—usually not in a very detailed way—the anticipated terms and conditions of the employment agreement.
Letters of intent (and their siblings, memoranda of understanding and term sheets) are favored by employers because they allow them to gauge a prospective employee’s commitment to the position before going to the trouble and expense of drafting a definitive employment contract.
A letter of intent can be valuable to the prospective employee as a tool for comparing competing employment offers. The best way to for an employee to get what he or she wants in an employment negotiation is to have alternatives; and having sufficiently detailed letters of intent for each employment offer provides an easy way to make apples-to-apples comparisons among them.
But a letter of intent, if not entered into thoughtfully by the employee, can impair the employee’s ability to negotiate better terms at the contract drafting stage. This is especially true where compensation is concerned. (Asking for a rate of pay in an employment contract that is higher than what you already agreed to in a letter of intent won’t endear you to your prospective employer, and may even end the negotiation.) Worst case scenario: the letter of intent may be drafted in such a way as to constitute a binding contract. In that case, backing out of the arrangement later, without liability, if you decide that it isn’t acceptable may not be an option at all.
It’s imperative that you closely review and negotiate any letter of intent that a prospective employer presents to you before you sign it. Here are a few things to know about negotiating a letter of intent for physician employment.
1. Know What You Want.
You can’t properly evaluate an employment offer outlined in a letter of intent unless you know what you want out of the position. Are you looking for more money, or for a greater work-life balance? Do you welcome greater volatility in earnings if it means you might make money, or do you prefer greater predictability? Are you looking for a pathway to partnership? Do you want an academic appointment along with clinical responsibilities? Do you want administrative or teaching responsibilities in addition to clinical responsibilities, or do you want to eliminate clinical or non-clinical responsibilities from your work entirely? You can’t effectively negotiate until you know what you want out of the deal. Preferences that are material to your decision whether or not to accept the offer should be addressed in the letter of intent to your satisfaction.
2. Know What You're Worth.
Benchmark compensation for physicians of your specialty and in the area where the job will be located, using recent physician compensation survey data. The American Medical Association (AMA), the American Medical Group Association (AMGA) and various national physician recruiting firms all publish annual surveys of what doctors are paid. But the survey with the greatest currency and reputability in the U.S. healthcare industry is probably the Physician Compensation and Production Survey conducted annually by the Medical Group Management Association (MGMA). You can purchase this data yourself—but it can be costly. Better to work with a recruiter, consultant or attorney who has access to this data, and engage him or her at the letter of intent stage to provide you with this data.
3. Know What You’ll be Paid.
For some physicians (a number that is probably shrinks with each passing year) how much you’ll be paid will be obvious from the face of the letter of intent. You’ll be compensated on a straight salary basis, with no incentive pay or other contingencies based on quality or productivity that might cause that figure to go up or down in any given year.
For all other physicians, knowing what you’ll be paid will depend first on knowing how you will be paid: You must understand the prospective employer’s compensation model. The subject of physician compensation models is one I’ll leave for a future (and probably longer) article. It’s enough to say that at the beginning of your employment, your compensation will be based at least partly on one or more contingent factors relating to quality or productivity. The most common private-sector physician compensation models are a salary or net-income guarantee with a potential bonus or incentive add-on.
For the purpose of comparing employment opportunities, you’ll need to know what the basis of that incentive or bonus is, and how it will be triggered. Gross collections, net collections, quality measures, relative value units (RVUs), or some combination of them? If your pay will be based at least in part on RVUs, you’ll want to know the value the employer will apply to convert those RVUs into a dollar amount. You will want to benchmark this conversion figure against compensation survey data.
Keep in mind that might be able to negotiate a change to the numbers in a particular model, but you are very unlikely to negotiate a change to the model itself. That’s because compensation model design is a complicated and risky process for the employer, involving complex business tradeoffs (preserving competitiveness in the employment market while also preserving the appearance of uniform and fair treatment among the employer’s existing workforce), and the need to comply with Federal and state anti-kickback and anti-referral laws.
Also keep in mind that once you sign a letter of intent with a certain dollar amount for your base salary, negotiating an increase in that amount under the definitive employment agreement will be tough. Although letter of intent are usually non-binding, they are a terrific tool of moral pressure, especially in the hands of an employer.
If you’ll be working for a private practice, and your compensation will be guaranteed by a hospital under a hospital recruitment agreement, you’ll want to know this at the letter of intent stage as well. It means you will need to review and sign a hospital recruitment agreement that will be among you, your employer and the hospital, in addition to the employment agreement between you and your employer.
The letter of intent stage is also the right time to negotiate other dollar-denominated inducements like signing bonus, student loan subsidies, relocation expense reimbursement and CME allowance. If any part of these benefits are subject to recapture in the event that you leave, you’ll want to what that “vesting” schedule is for them.
And although you’ll also want the letter of intent to spell out other fringe benefits to which you’ll be entitled—health, life and disability insurance, 401(k)/403(b) match—the best you’ll usually get is a statement to the effect that you’ll get whatever group benefits the employer makes available from time to time to its other professional employees. If that’s the case, ask for a separate summary of the benefits which the employer currently offers.
4. Know How Much You'll Be Expected to Work.
The letter of intent stage is the perfect time to talk about the length of your average work week. How many hours will you generally be expected to work, and how will your time be distributed among your various clinical, academic, and/or administrative responsibilities?
A significant contributor to your overall workload will be your call coverage responsibilities. You’ll want to negotiate a “not to exceed” figure for the number of nights and weekends you will be on call (with an allowance for additional call, if needed, to cover for your colleagues who are on vacation). It’s easier to do this at the letter of intent stage than it is when negotiating the definitive contract. Be warned that many employers will only provide in the letter of intent that you will share in call on an “equitable rotating basis” with the employer’s other physicians. This provides little assurance that you won’t be saddled with crushing call responsibilities sometime in the future if your employer decides to reduce the size of its professional staff.
Finally, you’ll want to know how much paid leave you’ll be entitled to. You’ll want to know whether any of that leave, if unused in a given year, can be transferred to a subsequent year, or if it can be cashed out instead.
5. Know Your Malpractice Coverage.
An employer will usually cover your medical malpractice insurance premium during the term of your employment. You’ll want the letter of intent to stipulate the applicable coverage limits, usually expressed in “per claim/in the aggregate” numbers.
Most malpractice claims are made on a claims-made basis; as such, they will only cover claims that arise during the term of your employment. To cover claims arising after you leave which relate back to alleged errors or omissions during your employment, you’ll need a “prior acts endorsement”—more commonly known as “tail coverage.” When you leave the job, will the employer pay the premium for tail coverage, which is typically 150-200% of the policy’s then-current premium? Will there be any conditions on your entitlement to tail coverage? For example, will you need to remain employed for a certain number of years before your employer will pay it? You’ll want this spelled out in the letter of intent.
6. Know What Should Stay Out.
There are some things you usually won’t want a letter of intent to mention. Generally, the less said in your letter of intent about a post-employment non-compete, the better. This is because these geographic restrictions on employment are usually tightly negotiated and should get an attorney’s review. Employees typically do not have their letters of intent reviewed by attorneys (although there is no reason why they shouldn’t). The exception to this is if you are dead-set against a non-compete, and will not entertain the offer any further unless the employer is willing to forgo the protection of one in the definitive agreement. In that case, get it in writing at the letter of intent stage.
You also don’t want any language in the letter that suggests that it is a binding arrangement, or an exclusive one. You want the letter to make clear that it is non-binding in nature. Even the inclusion of a binding paragraph to the effect that you will negotiate in good faith with the employer toward a definitive employment contract should be avoided. Keep your options open and your right to play the field unburdened.
The Law Office of David M. Briglia represents physicians, physician assistants, nurse practitioners and other professionals in the health care industry in the negotiation of employment contracts, separation agreements, practice buy-ins and partnership and shareholder agreements, and in litigation involving employment and contract disputes in Maryland and Washington D.C. 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.