February 2020, Volume XXXIII, No 11

Medicine and the Law

Physician employment contracts

Legislating noncompete provisions

he utility of a physician noncompete provision in a contract may look much different depending on the perspective of the viewer. On the one hand, we may have a physician two years out of residency who is terminated without cause and now will be forced to relocate because the noncompete provision effectively restricts the ability to practice in the same geographic region. Many new physicians lack bargaining power, so they may not have leverage to negotiate these agreements, and then, as in this example, may be forced to relocate to find new employment.

On the other hand, we may have a specialty heart clinic that took on a young, inexperienced physician and, over the course of a prolonged employment period, invested, trained, and assisted this physician in establishing a practice. Without a noncompete provision in the employment contract, upon expiration or termination of the employment contract, that employed physician can leave and open up a competing practice across the street, taking the client base of the clinic.

Each of the above scenarios presents an argument either for or against the use of noncompete provisions in physician agreements. Currently, issues of fairness related to enforcement of noncompetes are decided by the courts, however, the Minnesota Legislature is considering changing that through the introduction of a law invalidating physician noncompete provisions.

Legal background of noncompete provisions

A noncompete provision is a contractual obligation that places a restriction on a physician’s ability to practice in a certain geographic area over a period of time. These provisions will most commonly be found in physician employment agreements, although they can also be found in partnership agreements and other types of joint venture or commercial relationships with physicians.

Many new physicians lack bargaining power.

While physician noncompete provisions are enforceable in most jurisdictions, there are a few states with outright prohibitions and other states where the threshold for enforcement effectively creates a bar to enforcement. Most states that allow noncompete provisions use a three-part inquiry to determine if the provision is enforceable, which asks:

  • Whether there is a legitimate business interest to protect;
  • Whether there was consideration (benefit) rendered to the employee; and
  • Whether the agreement is reasonable in duration and scope.

In some jurisdictions, an overly broad restriction will be struck in its entirety. Other jurisdictions, called “Blue Pencil States,” allow judges to rewrite an unreasonable restriction so that the restriction is reasonable.

Minnesota is a Blue Pencil State, and although noncompetes in employment agreements are strictly construed against the employer, reasonable noncompetes are routinely enforced. The reasonableness of each agreement will be determined based on the particular facts involved; but terms of two–three years are usually enforceable when agreed to in the context of an employment agreement. Additionally, there must be independent consideration for the noncompete—e.g., the noncompete will not be enforceable if presented after employment commences without some additional benefit to the employee.

Contesting enforcement

When determining if there is a protectable interest, the fundamental question is whether the enforcement would actually protect an employer interest. Although there are not many recent published Minnesota cases analyzing enforcement of physician noncompete provisions, a 2018 Indiana Court of Appeals case affirmed the lower court ruling and held that an anesthesiologist group’s noncompete could not be enforced in order to prevent one of its employees from working at a hospital after the anesthesiologist group had already lost its contract to serve that hospital. The Court reasoned that since the anesthesiologist group had already lost its contract, there was not a business interest to protect at the time the employee was hired. It will be interesting to see if other jurisdictions adopt the logic this ruling is based on.

In some instances, the protectable interest issue overlaps with the reasonableness issue. For example, if the vast majority of an employer’s patients reside within a 10-mile radius, then is a 50-mile radius for the noncompete necessary to protect the employer’s interest? Also, is a three-year noncompete necessary if the departing employee’s patients have already transitioned to a new physician? These are the types of issues a court will consider in deciding whether to enforce a noncompete.

The bill

House File 557 and Senate File 350, the bills that are under consideration in the Minnesota Legislature (collectively the “Bill”), provide that all physician noncompete provisions are void as a matter of law. The Bill was originally brought in the Minnesota House of Representatives on Jan. 31, 2019, where it was subsequently referred to the Health and Human Services Policy Committee on March 11, 2019, and then referred to the Labor Committee on March 14, 2019.

The Labor Committee amended the Bill to add in a provision indicating that the prohibition would only apply to noncompetes entered into after enactment of the Bill. At that point, the Bill was referred back to the Judiciary Finance and Civil Law Division of the House of Representatives for a second reading and, upon the adjournment of the 2019 regular session, was set for a day in the following year, at which point it would again be up for review. The companion bill in the Minnesota State Senate followed a parallel path with the introductory reading on Jan. 22, 2019, and referral to the Health and Human Services Policy Committee.

The attorney fee clause should be carefully reviewed.

On Thursday, Feb. 13, 2020, the Bill was reintroduced at the Judiciary Finance and Civil Law Division of the House. As of this writing, in the Senate, the Bill is waiting for consideration by the Senate Judiciary Committee, which has not yet been scheduled.

Remaining protections for employers (if the Bill passes)

Although they serve a somewhat similar function as a noncompete, the Bill does not address non-solicitation clauses, so the framework for enforcement of those clauses will remain unaffected if the Bill passes. Non-solicitation clauses generally prevent providers from soliciting patients that they treated when working for their employer. Courts view non-solicitation provisions more favorably than noncompete provisions because they are usually narrower in scope than a geographic-based restriction. Notwithstanding the foregoing, Court will still invalidate a non-solicitation provision if it is unreasonable. When analyzing whether a breach of a non-solicitation provision occurred, the court will look at whether it was the physician or patient that initiated the contact following termination of the agreement. Courts are unlikely to find a breach of the non-solicitation clause when contact is initiated by the patient, because of the public policy in favor of patient choice.

As non-solicitation provisions would likely take on added significance if the Bill passes, we may end up seeing an attempt to expand these provisions to cover some of the protections lost following the disallowance of noncompete provisions. Because of this added significance, it will be important to carefully consider these provisions during contract negotiations.

A few specific considerations that should be taken into account:

  • If you agree to a “choice of law” provision (under which the parties specify that any contract disputes be determined in accordance with the law of a particular jurisdiction), make sure that the jurisdiction does not prohibit the provisions you will want to enforce (e.g. don’t agree to North Dakota choice of law if you want to enforce the noncompete restrictions).
  • Employed physicians with an established client base will want to ensure that the non-solicitation provision does not apply to the group of clients that the physician brings into the practice.
  • The attorney fee clause should be carefully reviewed. Without being explicit, clauses can be drafted so that only the employer can recover fees. This is often done through use of language granting fees for “any party suing to enforce its rights under the agreement.” As the employer will generally be the only party suing to enforce its rights, it is actually a one-sided provision in favor of the employer.
  • Employers should consider buyout provisions, as opposed to liquidated damages provisions, because restrictions that are agreed to as part of a business sale are looked at more favorably by the courts. Although the end result of a buyout provision is similar to a liquidated damages provision, there is a legal distinction that will likely increase the chances of enforceability.

Although employers may attempt to fill some of the gap created by loss of the noncompete through expansion of the non-solicitation clause, the dynamics involved in negotiating physician employment agreements would be significantly changed if the Bill passes. In the near term and prior to the bill passing, physician employers may want to try to re-contract with their providers to extend their noncompete status for an extended period of time. Employed providers may see this as a situation to capitalize on that and request additional consideration in exchange for agreeing to the noncompete. While there are many unknowns, the one certainty is that passage of the Bill would disrupt the current contracting dynamics.

Antonio “Tony” Fricano, JD, is a health care attorney at Lathrop GPM and has extensive experience advising physicians, health systems, and other health care organizations on physician employment and services agreements. Prior to starting with Lathrop GPM, Tony was an inhouse attorney at the largest health system in Illinois.

The noncompete bill: Addressing one inequity

Editor’s note: Sen. Abeler is among the coauthors of SF 350, which would eliminate noncompete clauses in physician contracts. A long-time champion of patient and physician advocacy, he presents some unvarnished perspective below.

Noncompete contracts. They have been around for a long time. Now even fast food restaurants use them to keep employees from working for the competition. If you’re in a low-paying job, a noncompete clause seems inherently unfair. But what about doctors? Noncompete clauses make sense for them too, don’t they? After all, if you go to work for a health care system or a system/insurer, you shouldn’t be able to just quit and continue treating the patients who want to stay with you. Is that fair? Maybe the real question is, fair to whom?

The impact of noncompetes

The noncompete contract, coupled with the consolidation of health care into mega organizations, has changed the expectations of those entering the profession. Noncompete contracts mean that young physicians or seasoned practioners could be forced to leave a region—or perhaps an entire state—if he or she didn’t get along with the contract holder, who had suddenly become their new master. What if they didn’t agree with policies that required the delay, denial, or sequencing of needed medical care for the enurement of their new employers, as opposed to the best interests of the patient? The very concept of such care denial flies in the face of what their dream was about.

It has happened slowly, incrementally, one loss of freedom at a time. And now the big health care organizations have the average physician by the throat. No longer free to practice as they choose, serve a population they would like to care for, or focus their skills as they dreamed, they are simply employees for a massive corporation.

Physicians have to decide if they want to be treated like robots or as talented, highly trained human beings with critical skills. Those in bleachers watching this competition, the patients, cheer for good to prevail. The joy for doctors will be to practice their craft in the best way they know, in the best interest of their patient, and not worry about noncompetes or other contract provisions. If not, we will have lost a lot.

Maybe it’s time for doctors to form a union. Maybe it’s time to have collective bargaining. Maybe it’s time for doctors to stand up on behalf of their patients and say, “We are not going to take this anymore.”

America once had a health care system that was the shining star of the world. Thanks to the good efforts of clinicians, there are some outcomes we can still brag about. However, we have lost a lot in the last two decades as we moved into health care becoming a profitable business for corporations and shareholders. We’ve lost more than we can measure when it comes to helping people be healthy.

At long last, many physicians have awakened to the undesirable place in which they find themselves. Those who never thought of themselves as chattel have found themselves indentured by a contract they may no longer find friendly. Finding themselves trapped in an undesirable situation that will last one, two, or more years is a circumstance they could not have anticipated as they fought for an “A” in organic chemistry.

Physicians need to help themselves and stand up. Patients need to help the change and stand up for themselves. New physician-led organizations need to form to compete with the big systems. Or the circumstances will even get worse.

If the noncompete legislation now before the Minnesota Legislature (House File 557 and Senate File 350) passes, that could be a move in the right direction.

Sen. Jim Abeler, DC, (R-District 35) is chair of the Minnesota Senate’s Human Services Reform Finance and Policy Committee and a chiropractor at Abeler Chiropractic in Anoka. 

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Antonio “Tony” Fricano, JD, is a health care attorney at Lathrop GPM and has extensive experience advising physicians, health systems, and other health care organizations on physician employment and services agreements. Prior to starting with Lathrop GPM, Tony was an inhouse attorney at the largest health system in Illinois.

Sen. Jim Abeler, DC, (R-District 35) is chair of the Minnesota Senate’s Human Services Reform Finance and Policy Committee and a chiropractor at Abeler Chiropractic in Anoka.