In recent years, states have been split on the treatment of covenants not to compete in physician employment agreements. The vast majority of jurisdictions continue to apply a general “reasonableness’ standard often applied in other commercial contexts. Under a “reasonableness analysis, courts primarily look at two components of the restriction: (1) the time duration of the restriction; and (2) the geographic scope of the limitation. The greater the area covered and the time duration of the restriction on a physician’s ability to practice medicine, the greater the likelihood the entire covenant not to compete will be declared invalid. However, a growing minority of states have put further constraints on the enforceability of restrictive covenants in physician employment contracts. Three states, Colorado, Delaware and Massachusetts, have passed legislation that invalidates contractual provisions restricting a physician’s right to practice medicine after termination.
Some states have also judicially tightened the restrictions on covenants not to compete in physician employment contracts. For example, the Supreme Court of Tennessee recently invalidated most restrictive covenants regarding physician employment contracts. The court noted that in Tennessee restrictive covenants are not allowed for attorneys because attorneys have an ethical duty to provide their services to the public, and to restrict to whom an attorney can provide services would be injurious to the public. The court then examined the doctor-patient relationship and noted that covenants not to compete were equally injurious in physician employment contracts. The court reasoned that covenants not to compete restrict a patient’s freedom of choice, restrict the patient’s right to maintain an ongoing relationship with a trusted physician, and result in the lost public benefit of having an increased number of available physicians practicing in the community. The court reasoned that an increased number of available physicians results in greater competition and a higher quality of care.
The harmful effects covenants not to compete can potentially create for patients have also been examined by the American Medical Association. The AMA has taken the view that “restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation to a patient’s choice of physician.”
When drafting a covenant not to compete, or similar restrictions in an employment agreement for a physcian, the scope of the restrictions must be carefully considered as to prevent the terms of the agreement from being invalidated judicially. Attempt to provide too much protection to the remaining physicians and you may be left with no protection at all.
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