Interpreting and Enforcing Physician Noncompetes: The General Framework
In this episode, we discuss health care noncompetes and how courts have handled noncompete disputes. We also discuss potentail noncompete legislation in Indiana.
Mary Kate Liffrig
Attorney with Hall Render.
Attorney with Hall Render.
Mary Kate Liffrig: Hi, and welcome to Hall Render’s HR Insights for Healthcare Podcast, covering labor and employment law cases and trends for professionals working within the healthcare industry. I’m Mary Kate Liffrig.
Dana Stutzman: And I am Dana Stutzman.
Mary Kate Liffrig: Dana and I are attorneys with Hall Render, the largest healthcare focused law firm in the country. We both practice employment law and regularly advise healthcare clients on a variety of labor and employment law topics. Please remember the views expressed in this podcast are those of the participants only and do not constitute legal advice.
Mary Kate Liffrig: Dana and I are here today to talk about healthcare provider noncompetes. I’ll be asking most of the questions today, and Dana will be the one responding. So, before we dive into the substantive portion of our podcast, Dana, can you just tell us a little bit about this part of your practice?
Dana Stutzman: Sure. And thanks for having me on the podcast. I appreciate it. In broad strokes, work in private practice for the Hall Render law firm in healthcare employment, and that consists primarily of two parts. On the front end, there is what I would consider the day-to-day consulting stuff, meaning a hospital or a physician practice group calls in, they have an issue. Maybe, it has to deal with a employee with a drug issue or a pregnant nurse or what have you. So, we’ll talk through options and strategy and consult on the front end. And then on the back end, once the dispute gets into either administrative charge in front of the EEOC or it gets into state court or federal court, that’s the second half of my practice where we’ll actually get into the trenches. We’re going to court and “fight” the good fight so to speak.
Dana Stutzman: So, as it relates to this part in this podcast, dealing with noncompetes and restrictive covenants, part of the consulting that I do deals with, on the front end, drafting and negotiating restrictive covenants and noncompetes with physicians. Nine times out of 10, the drafting that I’m doing is at the request of the healthcare employer. So, easy example would be, for example, a hospital that wants to bring on a physician. That’s kind of the front end contract work that I’ll do as it relates to the noncompetes.
Dana Stutzman: And then on the back end, if the relationship ends and there is a contractual restrictive covenant or a noncompete in place and the hospital or the physician practice group needs to or wants to try and enforce it, then I’ll get involved on the back end as well. Sometimes, those things can get amicably resolved through back and forth negotiations, but sometimes, unfortunately, a lawsuit actually has to get filed, meaning the employer, hospital, district practice group, they actually have to go on the offensive to try and enforce the terms and conditions of the contract and the noncompete. So, that’s kind of in a nutshell how my practice kind of flows and in particular, how the noncompete portion fits into that puzzle.
Mary Kate Liffrig: Great. Well, thank you for that context. So, you had proposed this topic today to talking about healthcare provider noncompetes. What prompted you to want to podcast on this particular topic? Is it just a worthwhile subject, or is there an update you want to report on?
Dana Stutzman: So, the short answer is yes as to both. In my home state of Indiana, there’s actually proposed legislation both in the House of Representatives and in the Senate that would make some pretty substantial changes to the legal landscape in terms of physician noncompetes and physician restrictive covenants. It’s new to the state. And so, it’s still in the works because those things that by legislature, if the laws are passed and become law, then a healthcare employer’s ability to put restrictive covenants and noncompetes into healthcare provider contracts is going to be limited. And depending on which legislation actually becomes law, it could be outright prohibited. So, that’s currently kind of in the pipeline in the works. So, that was one of the reasons why I wanted to bring up this topic.
Dana Stutzman: But then also just taking a step back, it’s a worthwhile topic to podcast about because so many of our healthcare clients invest a lot of time, money, training, and effort to try and help build up the client base, build up the physician’s practice, and that’s a protectable interest, which is something we’ll talk about in a little bit. So, just I think having a good framework, a view from 50,000 feet, would be helpful for that. So, those are the two reasons why I had asked if we could kind of put this into the queue for a podcast topic.
Mary Kate Liffrig: Yeah, perfect.
Dana Stutzman: It is probably a bit premature to comment on the Indiana legislation at this point. It’s very fluid. It’s in flux, and I think the dust won’t settle on that until the legislature closes out its session in about mid-March I believe. So, I thought, again, we could just talk more generally about healthcare noncompetes in this podcast. And then once the dust settles from a legislative standpoint in Indiana, we can do a follow-up podcast to talk more specifically about Indiana legislation, what that means, and then also provide some context in terms of what some of the other states are doing across the country.
Mary Kate Liffrig: Sounds like a plan. So, from a substantive perspective, let’s start with, could you walk us through in broad strokes what a healthcare noncompete dispute even looks like?
Dana Stutzman: Sure. And I kind of use this same example with some of the Indiana legislation that was pending, had a chance to talk with the house committee that was listening and reviewing the proposed legislation. And the example short story that I gave is this one, here. So, you have typically a dispute, it looks like this. The employment agreement is entered into between the employer, for example, a physician practice group or a hospital. And the employee typically is the physician, right?
Dana Stutzman: That contract that the parties agreed to contains salary information, benefit information, start date, but also frequently will contain noncompete provisions. More generically, I’ll sometimes use them interchangeably when I say noncompete and restrictive covenant provisions. They’re similar but not exactly the same, so for purpose of the podcast, I’ll use them kind of back and forth interchangeably.
Dana Stutzman: But noncompete specifically talks to a restriction on the ability to compete. They’re also often go hand in hand with that non-solicitation provisions, meaning you, physician, cannot solicit our patients or our clients after you leave. And also, you cannot solicit our employees after you leave. So, those are additional restrictive covenants that would be kind of tucked into an overall restrictive covenant provision of a contract. And then there’s also confidentiality provisions in there as well that say you’re not going to take our confidential patient information, our addresses, and that kind of stuff.
Dana Stutzman: So, those things often will get incorporated into a contract. Employer, employee, everybody’s aware that the restrictions are in the contract, right? It’s not like they’re printed off in invisible ink or anything like that. Contract gets signed. Physician will then work for some period of time. Maybe, it’s a matter of months. Maybe, it’s a matter of years or multiples of years. In that timeframe, the physician will accept the salary that’s promised, the benefits it’s promised, CME dollars, additional training. Perhaps, there’s tuition assistance or loan forgiveness type of benefits that are provided. So, the physician receives those benefits and then for whatever reason, will decide to quit their practice at that particular employer and move on.
Dana Stutzman: Again, in this example, I’m talking about what happens at that point is that the physician will open up shop within the restricted area or the physician will go to work for a competitor, a competing hospital, a competing physician practice group within the restricted area. And sometimes, the physician will go so far as to solicit former colleagues and patients to try and jump ship and come over to wherever the physician ultimately lands. At that point, the employer, again, hospital, physician practice group, cry foul because the physician is in breach and is violating the terms of the contract and is infringing on what the courts will call the employer’s goodwill, right, and we’ll talk about that in a minute.
Dana Stutzman: And so sometimes, when that happens, the contract has a buyout clause that says, “Well, physician, if you want to ‘buy’ your way out of this noncompete clause, then you have to pay us, the employer, a certain amount of money,” right? In those instances, if it turns into a lawsuit, it’s because the physician is arguably in violation of the restrictions in the contract and is also refusing to pay the buyout clause, right? So, that’s kind of in a nutshell what a typical physician noncompete dispute and lawsuit looks like.
Mary Kate Liffrig: So, in that situation, what would a court do, right? There’s an allegation of a breach of a contract. What are courts looking at, and what are they doing in this situation?
Dana Stutzman: Sure, that’s a good question. And what I’ll say is in the absence of legislation, meaning if you happen to be in a state like currently Indiana is, and there are lots of other states across the country that are like Indiana, meaning there is no legislation, there are no laws on the books that talk about what is okay and what’s not okay to include in a physician noncompete or a physician restrictive covenant, in the absence of legislation, there are, in my experience and in my view, like five main points, five main takeaways that kind of illustrate how the courts have handled a situation like the one that I just kind of spelled out for you, right?
Dana Stutzman: So, point number one, restrictive covenants in the employment context, meaning it’s a contractual arrangement between employer and employee as opposed to business to business, but in the employment context, restrictive covenants are viewed as restraints of trade. And they’re disfavored under the law because they’re viewed as restraints of trade.
Dana Stutzman: So, right out of the gates, the employer has a pretty heavy lift, a kind of a high hurdle to clear because the default view by the courts is, “We don’t like these restrictive covenants. We, the courts, are going to narrowly construe the terms and conditions of the restrictive covenant agreement.” And so, if it’s overbroad, it’s going to be a problem and it’s going to get shot down, right? So, that’s point number one, meaning disfavored under the law, courts narrowly construe.
Dana Stutzman: Second point is that when dealing with these disputes, courts have adopted a reasonableness standard. And they will look at these cases, these physician restrictive covenants and physician noncompete cases, on a case-by-case basis. So usually, what the courts look at is in order for a restrictive covenant to be reasonable and enforceable, the time limitations have to be reasonable. The geographic limitations have to be reasonable, and the activity restrictions have to be reasonable. And they have to be narrowly tailored to the facts of the situation.
Dana Stutzman: And so, again, when I talk about time limitations, simply put, I mean, how long has a restriction in place? Is it one year, two years, 10 years? Geographic limitations, oftentimes, it’s the scenario would be, “Physician, you cannot provide competing services within a geographic radius of 10 miles or 15 miles from where you practiced for us,” right? So, that’s a geographic restriction. An activity restriction, as the name implies, restricts the physician’s activities. What type of services is the physician restricted or prohibited from providing?
Mary Kate Liffrig: Gotcha. And so, just to put this in practice, can you give me an example of an unreasonable or an overbroad noncompete?
Dana Stutzman: Sure. And again, in states, and the vast majority of states are like Indiana and there are no legislative controls in place, and so, it’s just a function of case law, right? And so, an easy example, one that comes to mind is there was a case several years back where it was a physician practice group. They employed an eye doctor to provide, as one might expect, eye doctor type services. But the activity restriction in the doctor’s restrictive covenant prohibited him post-employment from providing medical services of any kind or character.
Dana Stutzman: And so, in that instance, the court said, “That’s unreasonable, unenforceable, because it’s overly broad.” The activity restrictions that the employer was trying to enforce were too broad because the eye doctor did not provide garden variety healthcare services or medical services for the employer. All that the eye doctor provided was eye doctor services. So, in that instance, court struck it down. It said, “It’s too broad. It exceeds the protectable interest that the employer has. Therefore, we’re not going to force this,” right? So, that’s one example of an overbroad noncompete.
Dana Stutzman: Other examples in terms of time limitations, broad strokes, one year most likely, okay. 18 months, most likely okay. Two years, probably okay. You get out above and beyond that, and you start to kind of getting into a more of a murky area of the law, right? So, if there was one that said, “For 20 years, you can’t do the type of stuff that you’re doing for us,” well, I have a pretty high degree of confidence that that would be struck down in terms of a time limitations being overbroad, right?
Dana Stutzman: And same thing from a geographic limitation, in the physician context, if you have a geographic restriction that says, “You won’t practice anywhere in the entire continent of North America,” well, most courts I think would find that to be an unreasonable restriction, especially in the instance where the employer, hospital, physician practice group, only has a market of central Indiana or Southern Michigan or something like that. So, does that help? Does that answer the question?
Mary Kate Liffrig: Yeah, it does. Thank you. And I interrupted. I think you were listing out of your five main points. Maybe, you were on point three.
Dana Stutzman: Three, that’s right. That’s right. Thank you. So, point three is, again, we’re just talking about kind of the main points that kind of come out of these court decisions, right? So, point three is that courts have recognized that hospitals, employers, physician practice groups, do have legitimate business and “goodwill interests” worthy of contractual protections afforded by these physician restrictive covenants and noncompetes.
Mary Kate Liffrig: For context, is it these legitimate business and goodwill interests that are driving the reasonable restrictions, like the time limitations and the geographic limitations, is that what essentially establishes those restrictions?
Dana Stutzman: Yeah, absolutely. Right, and so, that’s what a court will look at is, what kind of market share does the employer have? What services is the physician employed to provide? And then as a result of that, what’s a reasonable geographic scope that’s worthy of protection, right? And so, there’s this, at its core, an underlying tension between the employer and the physician employee on the key question of, well, whose practice is it anyway, right?
Dana Stutzman: And so, what the doctors will say is that it’s their practice. It’s their patients. They’re the ones that did the training. They went to medical school. They did the residency. They did the fellowship. They put in all the hard work, study time, and effort, and those are their patients that they treat. Therefore, it’s their practice.
Dana Stutzman: That is in tension and some conflict with the position that the healthcare employers take because they say, “Well, not so fast. If I’m the hospital for this practice group, it’s our practice. It’s our patient base as well. After all, we bought the land. We bought the bricks. We built the facilities. We bought the fancy laser machines. We provide the staffing. We provide the tools. We invested in your training. We invested in your advertising, the billboards, your CME. We paid off your loans. Those are all things that we did to help build up the practice. But for our investment in you as a provider, you wouldn’t have a practice to speak of, so to speak.”
Dana Stutzman: And again, very simplified examples of what I’m talking about. But at its core, that’s kind of where this tension is, right? And so the docs say, “My practice, my patients.” Healthcare employers say, “It’s our practice. It’s our patients because we’re the ones that are investing the money in infrastructure to build this up.”
Mary Kate Liffrig: Interesting. So, what have court said on that question?
Dana Stutzman: For the most part, the courts and the judges have agreed with the employers, meaning the hospitals’ and the physician practice groups’ arguments on that front. And what I mean by that is, is the courts have said that yeah, when you have a hospital that invests money in advertising, in training, in building facilities so that the physician has a place to practice, those investments are in fact worthy of protection. That is the goodwill, right? Those patient lists, the electronic medical records, the data, those are all worthy of protection. And so, as long as the restrictive covenant is narrowly tailored to protect those goodwill interests, then the courts will uphold it, right? So, I think that was point three talking about legitimate business interests that the employers can protect by way of these restrictive covenants.
Dana Stutzman: The fourth point out of five, the fourth point is that courts have also recognized that money is not always going to be the thing that cures all evils, meaning money is not always going to be an adequate remedy in a physician noncompete dispute. And when the money isn’t enough to make the employer “whole”, then the courts will issue the injunction, right? And all that an injunction is, is a court, basically, it’s a full stop order. Court says, “In an order to the practitioner physician, thou shalt not practice within so many miles of the hospital and for so many months,” right? So, that’s what an injunction basically means.
Mary Kate Liffrig: Can you give us an example of when money wouldn’t be enough to make someone whole?
Dana Stutzman: Sure. Yeah. This is a key point, especially if you are an administrator at a hospital or administrator of a physician practice group. This is the key point, and this is a subtle one because a lot of times, especially an example where an employment contract has a buyout clause that a physician, if you pay X number of dollars, we will let you out of this contract or we will let you out of the restrictive covenant, the tough spot that the employer finds itself in is in the instance where there’s a buyout physician leaves practice, and let’s hypothetically say, opens up shop right across the street. Employer sends a letter. It says, “You’re in violation. You need to stop. And also, you have a buyout, and you need to pay us.”
Dana Stutzman: Well, in those situations, a lot of times, the doctor continues to operate across the street and is unwilling to pay the money. So, employer is left with really no recourse other than to go into court and try and get an injunction to shut down the physician’s practice. At that point, a lot of times, what the physician’s attorney will do is tell the judge, “Judge, this contract has a buyout provision in it. Therefore, money will make this situation go away. Therefore, Judge, you shouldn’t issue the injunction because money will solve this problem.” Because, just backup real quick, courts will not issue an injunction if a monetary remedy will suffice, okay? So in that situation, what the employer has to do is say, “Well, Your Honor, we tried to get the money, but the money has yet to be paid, which is the whole reason why we’re here in the first place,” right? So, that’s point number one, physician is still competing and physician also hasn’t paid the money.
Dana Stutzman: But the other reason why, like I said, money is not always going to cure all evils is because in that scenario that I just described, right, where you have a hospital, let’s say, it’s the only hospital within a geographic region and the physician leaves and goes across the street, you now have another player in the marketplace who otherwise should not be there. And so yes, given enough time, the hospital would be able to show how many patients went over to the competing physician. They could show how many employees left the hospital to go over to work with the competing physician, right?
Dana Stutzman: So yes, there, you could quantify damages, but the impossible task is to determine how much loss of potential new revenue, potential new patients were diverted over to this physician’s competing practice. That’s the part where it’s impossible to quantify, right? Because again, potential new business means that, well, if I’m the hospital, “They weren’t our patients yet. We were hoping because we’re doing our advertising in our geographic area, we’re hoping that they were going to come over and treat with us and utilize our services. But now, court, because we have this unauthorized provider, this unauthorized player in the marketplace, we have no idea of how many patients and how many clients are being diverted over to that competing practice. For that reason, because we can’t quantify that, we have no way to determine how much money potentially we’re losing. That’s why, court, we need you to issue the injunction to shut down that practice so that the physician honors the terms of the restrictive covenant,” right? So, that’s kind of the long-winded answer of when the money isn’t going to be an adequate make-whole remedy.
Dana Stutzman: So, we kind of walked through four of the main takeaways, which just leaves the last and final point. And that has to deal with kind of the public policy considerations that go into physician noncompetes, physician restrictive covenants. The battlegrounds here basically look like this, physicians for probably decades have attacked physician noncompetes and restrictive covenants on public policy grounds, meaning they’ve taken the position that when it comes to physicians, noncompetes and restrictive covenants are unique and should be found per se, meaning on their face, unlawful because it’s not just dealing with employer and employee interaction as might be the case with, I don’t know, a salesperson, right?
Dana Stutzman: But when it comes to a physician and hospital or a physician and healthcare employer, the restrictive covenant interferes, so the argument goes, with the physician-patient relationship because it could potentially arguably disrupt continuity of care if physician leaves from one location, wants to go to a competitor. What the physicians have said is, “It’s not good for policy because that’s going to restrict the patient’s ability to continue treatment with the physician of their choosing,” right? So, that’s what the physicians have argued.
Dana Stutzman: I have actually heard a number of times, in fact, most recently, at one of the committee hearings over in the Indiana legislature, one of the doctors kind of refers to the fact that he was under a restrictive covenant. He referred to himself as an indentured servant. So, I appreciate the advocacy there, but I do think that that one is bit of a stretch, right, I mean especially because providers do great work, physicians do great work, and they’re often well-compensated. And so, indentured servant who is earning upwards of, I don’t know, depending on the specialty, what, $300, $400, $500 million a year, I don’t know that, really, that argument plays so well.
Dana Stutzman: But in any event, that’s what the physicians have argued is that it impacts in a negative way the physician-patient relationship. Most courts across the country when faced with that argument, they do find there is some viability to it. But at the end of the day, the courts typically strike it down, which in fact, again, in Indiana in the Indiana Supreme Court has done just that. They’ve rejected that public policy argument that the physicians put forward twice before. The first time was back in early 1980s, and the second time was more recently in 2008.
Dana Stutzman: And the reason why the courts, for example, the Indiana Supreme Court, struck down this public policy argument that the physicians are arguing and putting forward is basically twofold. First they, the courts, said that the public’s general interest in medical services is subservient to the public interest in the freedom of individuals to contract. Translated, that means there is a more compelling policy argument that society functions best when it can rely on legally enforceable contractual agreements, right? So, if you sign the contract, then you’re contractually obligated to honor its terms. And if you didn’t like the terms of the noncompete or the restrictive covenant, then you should have either A, negotiated a different deal or B, not signed the agreement in the first place, right?
Dana Stutzman: So, again, that’s just kind of a watered down simplified version of what the courts have done in terms of why they’ve thus far have not bought into the public policy argument, right? So, like I said, the courts have basically held freedom of contract at a higher level from a policy standpoint than the physician-patient relationship argument that the physicians are putting forward.
Dana Stutzman: And then the second piece, and this is, again, kind of practically speaking wraps up this conversation, wraps up this podcast for now, what the courts have said is, “Hey, when it comes to public policy arguments in terms of what the physicians are arguing and when we have to balance, okay, freedom of contract versus the arguments that the physicians are making, those balancing decisions when it comes to public policy are better left to the legislature, right? So, if the legislature wants to make some laws along public policy lines, then the legislature is free and clear to do so.”
Dana Stutzman: Indiana, like I said, is in the process of doing just that. Other states, I have to double check the data on this. I have some outdated data from one of the cases that I researched before this podcast. But back at the time around 2008, there were only three states, only three out of 50, only three states that had, I think, physician restrictive covenant laws on the books. My sense is that since that timeframe, 2008, that number has increased. And I feel very strongly that that number is most likely going to keep increasing, meaning there are going to be more and more states that will be passing legislation to restrict the employer’s ability to implement restrictive covenants when it comes to physicians and healthcare providers.
Mary Kate Liffrig: Great. Well, this has been really helpful framework and very helpful information. We started this conversation talking a little bit about this proposed legislation in Indiana in particular, and then we’ve just looped around to it again. Just for our listeners in Indiana, can you give us a sense from a timing perspective of what we should expect since you’ve mentioned that this is an issue that the legislature is currently considering?
Dana Stutzman: Yeah, and so, don’t 100% quote me on this, but I do know that in Indiana, it’s a, I think, what they call the short session this year, which means, I think, that the legislature is going to be wrapping up its legislative duties and legislative stuff around mid-March. So, whatever legislation makes its way into becoming a law would then become effective July 1 of 2020. So, short answer is we’ll have a lot more clarity in terms of how things are going to shake out in Indiana by mid-March. And so, I think the plan is to do a follow-up podcast to talk more specifically about the Indiana changes and then also to try and kind of wrap in and tie in some additional commentary about what we’re seeing in other states across the country because obviously, we recognize that our client base in terms of Hall Render is more than just Indiana, right? So, by mid-March, we should have a better sense of the lay of the land, and we’ll be able to talk about that.
Dana Stutzman: And then whatever happens, if there is going to be something that happens and becomes law, it takes effect on July 1 of 2020. So, we’ll have a couple of months to pick it out in front of it, to talk about it, plan it, and then we’ll also figure out, again, depending on what kind of legislation passes, is the legislation effective July 1 of 2020 on a going forward basis? Does it affect all contracts regardless of when they were entered into? So, those are some of the details that we’re continuing to monitor.
Mary Kate Liffrig: All right. Well, Dana, thank you for your time today, and as a reminder to our listeners, for more healthcare employment law content, please visit our website at hallrender.com and please subscribe to our podcast. And if you’d like to be added to our monthly newsletter, feel free to send me an email at email@example.com or contact your regular Hall Render attorney.