The Executive Suite: Competing against a noncompete clause

Physicians often ask my opinion regarding restrictive covenant provisions in their employment agreements. Sometimes, I review such restrictions from the perspective of a physician looking to leave a medical practice. Other times, it is the medical practice looking to protect or enforce its rights.

In most states, some form of competitive restriction can be found in physician (and other provider) employment agreements and will be enforceable if properly drafted. Competitive restrictions are typically intended to protect an employer from “unfair” competition once a provider’s employment has terminated; however, noncompete provisions can sometimes go beyond what might be considered reasonable in a particular state.

It should never be assumed that a noncompete provision is “enforceable” or “reasonable.” No lawyer can, or should, provide such a guarantee. The specialty of the medical practice, geographic location, and the facts and circumstances related to an employee’s termination can all play an important role in assessing enforceability of a restrictive covenant. Often, the length of time a physician worked for a practice, and the reason for a physician’s termination, can be important factors as well.

One of the most important concepts a court will focus on when reviewing a noncompete clause (and therefore deciding whether to enforce such provision against a provider) is whether the employer has a “protectable interest” in enforcing the noncompete.

For example, if a physician practice has a patient base composed 75 percent of patients who reside within a 5-mile radius, the court might question if they have a protectable interest in a 25-mile noncompete radius. If a medical practice solely performs specialty services, such as urology or radiology, the court might question whether it has a protectable interest in preventing a departing physician from practicing all medicine rather than just the specific medical services that would compete with the employer. This kind of analysis is key to a valid and enforceable noncompete.

Another example of a noncompete where an employer may not have a protectable interest in enforcing a covenant against a physician is when an employer loses its contract to provide services at the hospitals its noncompete was written to protect. A recent decision by the Appeals Court of Indiana (“Court”) in Great Lakes Anesthesia, P.C. v. O’Bryan, et al., 27A02-1708-CT-1956 (April 2018) affirmed a lower court ruling that an employer could not enforce its noncompete under such circumstances.

In the particular case reviewed by the Court, two married certified registered nurse anesthetists (CRNAs) were hired by an anesthesia group (the “Group”) to provide nurse-anesthesist services at Marion General Hospital in Marion, Indiana. The CRNA signed an employment agreement with a provision that if the CRNAs terminated their employment (other than for cause) they could not render anesthesia services for 24 months at the specific facilities where they had worked for the Group or within a 25-mile radius of those facilities. This would prevent the performance of services at Marion upon termination.

Shortly after starting to work at Marion for the Group, Marion terminated its contract with the Group and entered into an agreement with a different anesthesia group to provide services at Marion (the “Replacement Group”). The CRNAs asked the Group to be released from their noncompetes so they could continue to work at Marion (with the Replacement Group). The Group rejected their request as well as the Replacement Group’s offer to buy out the CRNAs’ contracts. The Group then tried to send the CRNAs to another hospital greater than a 30-minute drive from their home.

The CRNAs terminated their employment with the Group and stayed on at Marion with the Replacement Group. The Group went to court seeking a preliminary injunction to stop the CRNAs from working at Marion, but the lower court rejected the Group’s efforts. On appeal, the Court made it clear that noncompetes are strictly construed against employers and will only be enforced if reasonable, including whether the employer has a protectable interest. In particular, the Court indicated that before a covenant will be enforced, the employer must first prove that by violating the covenant the employee gained a unique competitive advantage or ability to harm the employer.

In this case, the Court essentially held that because the Group ceased providing anesthesia services at Marion, it lost any protectable interest it previously had in prohibiting the CRNAs from working at Marion. Although this is only a summary of its holding, the essential takeaway from the decision is that a physician practice may not have the ability to prevent its provider employees from continuing to render services at a particular facility once it loses the contract for that facility.

This case is a good example of why both physicians and employers need to understand what factors will allow a noncompete provision to be found enforceable. Not all cases will turn out the same, of course, and different facts can also completely alter the outcome of any court’s interpretation of a noncompete provision. For example, if the CRNAs had formed their own group to steal the Group’s contract, the court might not have looked at the facts the same way.

Groups that hold exclusive contracts should keep this case in mind when drafting their non-compete provisions and when deciding how to enforce their rights. Legal counsel should generally not encourage a physician practice client to incur legal expense and/or to sue competing physicians unless and until a full analysis of the practice’s protectable interest is conducted.