Protect your practice with a restrictive covenant

July 10, 2017

The most common healthcare restrictive covenant is a non-competition covenant.

 

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.

 

How long can they last?

With regard to duration, the non-competition covenant should last only as long as is needed to ensure that the departing provider is competing on the basis of his or her own skill and efforts, and not on the basis of material that he or she had access to while employed by the former practice. A rule of thumb is that the covenant should last  either for the same length of time as the term of the provider’s original contract  or for two to three years, whichever is shorter.

How broad an area can they cover?

Turning to geographic reasonableness, the non-competition covenant should only prohibit a healthcare provider from continuing to provide services in the same general area where he or she provided services before leaving the former practice.  A  rule of thumb, used in many states, is that the restricted area should be no larger than the area from which the old practice draws 80% of its patients.

What about public harm?

The non-competition covenant also must not unduly harm the public. This would occur if there were a shortage of the provider’s specialty in the subject area. For example, if a physician was the only pulmonologist in an area, then a covenant that would prevent the physician from practicing pulmonary medicine in the area for a period of time likely would be unenforceable.

Finally, the non-competition covenant must not unduly burden the provider subjected to it. Of course, in a general sense, any non-competition covenant burdens a provider subjected to it. The question really is whether circumstances have changed since the provider entered into the covenant such that enforcing it would impose a significant, unanticipated burden.