When a noncompete isn't ironclad

September 7, 2007

They're tough to break, but two Indiana doctors showed one way to do it. There are other ways that could work, too.

Key Points

Doctors signing on the dotted line for their first job hate them. The AMA frowns on them. And some states have banned them outright or severely limited them. But restrictive covenants-which prohibit physicians who leave a practice from competing with their former employer for a specified time, within a certain geographical radius-are not going anywhere, at least not yet.

"In the areas where I practice-and along the East coast-they're still very common," says S. Allan Adelman, an Annapolis, MD-based attorney and former president of the American Health Lawyers Association. Attorneys in other parts of the country agree.

Common as they are, though, restrictive covenants, sometimes called "noncompetes," aren't always legally enforceable, as a recent Indiana case pointedly illustrates. In this instance, the state court of appeals found that a cardiology group had breached its obligations to two of its physician employees when it failed to process patient billings in a timely manner. That initial breach, said the appeals court, rendered the noncompete portion of the agreement between employer and employees unenforceable.

Besides looking in greater detail at the Indiana case, we'll examine a few of these other noncompete defenses, from the perspective of the employee as well as the employer. We'll also give you some expert advice on how to avoid-or at least minimize-the noncompete trap in the first place.

First upheld, then voided by a higher court

The Indiana case involves a pair of cardiologists-Ralph D. Millsaps, an interventional cardiologist, and Julio A. Morera, a pediatric cardiologist-and their group, Ohio Valley Heartcare, located in Evansville. Millsaps and Morera were not only employees of OVHC, but also two of its directors and shareholders.

The trouble began in early 2005, when Millsaps learned that there were problems with the group's accounts receivable. In a letter to the OVHC's Board, he laid out his concerns and requested an audit. Closer scrutiny revealed that, in 2004 and into 2005, the billing and collection's department had failed to process nearly $2 million in patient billings, some going back more than two years. That finding sent a shock wave through the group, resulting in the resignation or termination of the group's CEO, CFO, and billing chief. It also resulted in a spike in overhead (one month reaching as high as 83 percent); a general inability to keep up with existing debts; and, finally, a decline into insolvency.

First Morera and then Millsaps decided to bail, with six more of the remaining 15 physicians following their lead by the end of 2005. Prior to their exit, the two physicians did something they hoped would enable them to continue practicing in the same community: They filed a complaint against their former employer, asking the court to render null and void the noncompete portion of their employment agreement.

The physician plaintiffs put forth three arguments. The first took aim at the group's failure to provide timely billing and collection services, a duty it contractually owed to its physician employees. "The group breached its employment agreement first and, therefore, couldn't turn around and enforce it against the physicians," says Patrick A. Shoulders, one of the attorneys representing the two physicians.

Plaintiffs also took aim at the noncompete covenant itself, arguing that two of its terms-scope of activity and geographical area-were far too broad. With their third and final argument, the plaintiffs went for broke. "We asked the court to join recent opinions and disallow restrictive covenants in the medical profession as a matter of public policy," says Shoulders.

OVHC filed a counterclaim in response. Not only was its noncompete covenant enforceable, the group argued, but the two physicians' breach or threatened breach of it would entitle the group to attorney fees and costs.