Know Your State's Law on Non-Compete Clauses

Ed Rabinowitz

Non-compete clauses for physicians are nothing new; they've been in physician contracts for years. But those clauses are now being enforced more frequently.

Non-compete clauses for physicians are nothing new; in fact, they’re quite common. They’ve been in physician contracts for years, particularly where relocation is an issue. But those clauses are now being enforced more frequently, according to Amy Galloway, a director with the Florida-based law firm Tripp Scott.

“It used to be that if one of these relocation agreements didn’t work out, everybody kind of packed their bag and went on their way,” Galloway says. “But now hospitals are aggressively enforcing them.”

Sign of the times

To understand how non-compete clauses work, Galloway offers the following illustration. Imagine a very good surgical oncologist, who does a lot of work in a local hospital, decides he needs to bring in another person — a specialist in female urological surgery. The hospital agrees to guarantee the specialist’s salary for one year and assist in relocation, but in exchange, it requires the specialist to sign a four- or five-year non-compete clause that covers a specific service area or territory.

“The hospital’s thinking is, until we get repaid in terms of volumes over the four or five years, we want that non-compete,” Galloway explains. “If someone tries to approach that specialist a year or two down the road, and the specialist says, ‘Hey, I got a better offer with so-and-so down the street,’ the hospital will enforce the non-compete.”

Hospitals, says Galloway, are under increased regulatory scrutiny to make sure that they’re not “giving away money,” so they feel they need to enforce the contract.

“There is actually case law that says you cannot have [non-compete clauses] in contracts but never enforce them,” she says. “You can’t go after one doctor when you didn’t go after the six doctors who left before him. There needs to be consistency.”

Protecting the turf

Emergency room physicians, Galloway says, have almost always had non-compete clauses in their contracts, mainly because the corporate emergency room provider needs to protect its turf. However, they’re generally not enforced.

“Emergency department docs move around all the time,” she says. “I call them the cowboy doctors. They love being an emergency doc, and one day they want to be somewhere else, like live in Wyoming for a couple of years. It’s a very fluid sub-market.”

That is not so in the corporate world where Galloway says there are large, very valuable managed care contracts that health care organizations want to protect — especially if a physician did not have an existing presence in the community when he or she joined the organization. The courts are very likely to say that the health care facility has a legitimate business interest to protect; a valuable contractual relationship. The facility brought the doctor into the area, trained the doctor and set him or her up with community contacts. The courts are going to uphold that non-compete clause.

“If I represent a doc who’s contacting me because he has an offer from a practice down here, or I’m negotiating his relocation contract, I’m going to recognize that the employer is going to want a non-compete clause,” Galloway says. “I recognize to some degree that the young guy has to be in there in good faith, and he doesn’t want to set it up where it looks like he’s getting ready to pirate. So in those instances I’m going to negotiate those clauses as narrowly as possible to protect the employer’s legitimate business interests, but not so broadly that after my guy gets married and has two kids he has to leave the state or leave south Florida.”

Protecting the purchase

Where non-compete clauses can be extremely valuable and beneficial to physicians, says Galloway, is in the case of an older physician selling the traditional medical practice to a younger physician. The younger physician worked for the older doctor for seven or eight years, and based on the succession model the two worked out, the younger physician will purchase the practice. In that case, she says, the younger physician is going to want a non-compete clause.

“The last thing he wants is for the older doctor to play golf for a year, then realize he’s bored out of his skull,” Galloway says. “All of a sudden a hospital wants to pick him up to be inside, or he wants to go to work for his good friend Joe, or put his name on a couple of ads and do some promos. The new doctor is now paying for a lot less practice than what he thought.”

The bottom line for physicians, says Galloway, is, “You have to know what the law is in the state where you’re starting your practice.”