What are restrictive covenants?
The most common healthcare restrictive covenant is a non-competition covenant. It prevents a departed provider from providing services within a certain proximity to the practice for a set period of time. While this restriction may seem contrary to American free enterprise principles, most courts have recognized that “reasonable” healthcare restrictive covenants serve an important purpose and are therefore generally enforceable.
The purpose of a non-competition covenant is to protect against unfair competition. A provider, while working at a healthcare practice, gains access to confidential practice business information and develops close relationships with a practice’s patients. A departing provider can exploit this confidential information to lure patients away from the practice. A non-competition covenant is designed to protect the practice from this unfair competition.
When are they enforceable?
Enforcement of non-competition covenants is a state, not federal legal issue. Several states have laws that either prevent, or significantly restrict, the enforceability of non-competition covenants. Those states that permit the enforcement of such covenants will do so only if the covenant is reasonable in scope, in duration, and in geographic area. The covenant also cannot unduly burden the general public or the individual physician.
A non-competition covenant is reasonable in scope if it is limited to the services that the provider actually rendered while employed by the practice. For example, if a physician is board-certified in both internal medicine and radiology, but provided only radiology services at a particular practice, a covenant that prevents the departing physician from providing internal medicine services would be unreasonable in scope.