This is the fifth post in a multi-part series discussing the “rule of reason” test that governs the enforceability of restrictive covenants in physician employment contracts in most states.
In the first post of this series, I introduced the three prongs of the rule of reason test. I mentioned that the first prong of this test requires that the covenant be no more restrictive in terms of time, geography and proscribed activities than is reasonably necessary to protect a legitimate business interest of the physician’s employer. The second post in this series talks about which business interests healthcare employers can legitimately use non-competes to protect. The third post discusses the factors that might convince a court that a covenant is overbroad with respect to time, geography and/or activity, and therefore unenforceable. The fourth post of this series discusses the second prong of the rule of reason test—the “undue hardship” prong—which asks whether the restrictive covenant imposes a hardship on the physician employee that is too excessive to justify enforcement of the covenant.
Now, in this fifth post of the series, I’ll discuss the third and final prong of the rule of reason test—the “public interest” or “public injury” prong. A restrictive covenant in a physician employment agreement is not enforceable if it harms the public interest.
One would think that this factor would render all physician non-competes unenforceable. If a departing physician can no longer treat the patients of her former employer because of a non-compete, doesn’t that deprive those patient of the right to see the doctor of his or her choice—a right that nearly everyone (outside the healthcare industry, anyway) regards as sacrosanct?
Not only do non-competes frustrate patients’ freedom of choice, but 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 doctor 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.
Considerations of patient choice and patient welfare have motivated the American Medical Association to criticize (with wavering vehemence) 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 (adopted in 1996) can be found in Opinion 9.02. 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.
As I’ve mentioned before, courts typically view the doctor-patient relationship as a business asset of the doctor’s employer, just like any other customer relationship. This leads courts to emphasize market concentration as the measure of public harm under the third prong of the rule of reason test, often more so than the harm that will be visited upon any of the departing physician’s individual patients as the result of the covenant’s enforcement. So, if the loss of a physician’s services in a particular geographic area through a non-compete would result in the complete loss of services of that kind in that area, or if it would result in a monopoly over services of that kind in that area, then the courts of most states would not enforce the non-compete. Some courts are also on record as striking down non-competes on account of public injury where enforcement of the covenant would deprive a community of the “availability of a doctor at all times for emergencies.”
But the rule of reason test is not applied uniformly among the states—as we’ve already seen. This is no less so with the test’s public interest prong. Missouri and Illinois have distinguished themselves as highly tolerant of physician monopolies created by the enforcement of non-competes. The Supreme Court of Missouri has enforced a physician non-compete even though it created a shortage of surgeons in one area of the state, reasoning that—since shortages existed throughout the state--one community’s unfortunate loss of a surgeon would be another community’s fortunate gain. In doing this, the court effectively eliminated the public interest prong from the rule of reason test in Missouri.
The Supreme Court of Illinois has mirrored this reasoning, and one-upped it in irrationality, by ruling that physician shortages in any particular area are self-correcting (and therefore can’t injure the public) because they encourage “young doctors” from outside to relocate to that area, thus alleviating the shortage. (If Mr. Market is really this good at allocating physicians, then how come there are such things as HSPAs, MUAs and MUPs?)
Fortunately, most courts aren’t this casually dismissive toward patient welfare and choice. Courts in many states do 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.
For example, the Arizona Supreme Court has observed that the “doctor-patient relationship is special and entitled to unique protection,” and has therefore ruled that covenants not to compete involving physicians in that state must be strictly construed in light of their effect on that relationship. In striking down a restrictive covenant between a physician and his gastroenterology group practice employer, the North Carolina Court of Appeals said that the “doctor-patient relationship is a personal one and we are extremely hesitant to deny the patient-consumer any choice whatsoever.” The New Jersey Supreme Court has also directed the lower courts in that state to examine “the degree to which enforcement of the covenant would foreclose resort to the services of the departing physician by those of his patients who might otherwise desire to seek him out at his new location.” The courts of Idaho will also limit an employer’s non-compete insofar as it impedes continuity of care and access for patients to the health provider of their choice. And in one case, the Court of Appeals of Arkansas overturned the non-compete of an orthopedic surgeon prohibiting him from practicing medicine within thirty miles of a particular city because the court viewed the covenant as an “an undue interference with the interests of the public right of availability of the orthopedic surgeon it prefers to use.”
Whether a court will perceive public injury in the enforcement of a non-compete often depends on the nature of the services the physician provides and the geographic reach of the restriction. In this way, the third prong of the rule of reason test overlaps with the first. If you’re a dermatologist, a non-compete that spans a radius of 30 miles from your prior employer’s office may not be seen as causing public injury: Traveling 30 miles to see a dermatologist probably isn’t going to kill anybody. But if you’re an oncologist, or an interventional cardiologist with a non-compete that prevents you from practicing your uncommon sub-specialty throughout an entire state, then a court may very well invalidate your non-compete on public interest grounds.
Thus, the fewer the doctors within the restricted area who offer services comparable to yours, and the more seriously ill your patients typically are, the more powerful your argument against the enforcement of your non-compete is likely to be under the public interest prong of the rule of reason test.
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.