Are Non-Compete Clauses Illegal?
If the courts holdings in selected states regarding non-competes are adopted by other jurisdictions, the physician recruitment industry could be impacted.
Courts in Pennsylvania and Tennessee have held that the public’s interest in specialty care was superior to the business interest of a hospital system.
In Wellspan Health v. Bagless (2005), a physician joined the above captioned health system as an employee. In the physician’s employment agreement, restrictive covenant provisions prevented him from practicing in four contiguous counties for two years after his employment for any reason. The physician resigned from the health system and immediately started a private practice. The health system obtained a court order prohibiting the physician from practicing in two of the hour counties stated in his non-compete clause. The health system appealed to the Superior Court which held against the health system.
The Superior Court based its decision on legal precedents in the Pennsylvania courts that have held non-compete clauses are, “unreasonable restraints on competition”. The burden of proof is placed on the person seeking to enforce a non-compete provision in the state of Pennsylvania. The standard used by Pennsylvania Courts states, “A party seeking to enforce a non-compete clause, must show that its’ enforcement is reasonably related to the protection of a legitimate business interest.” The courts held that Wellspan had to have a “legally protectable interest” before its non-compete clause could be upheld. The courts held that under Pennsylvania law, a patient base is a legally protectable interest under non-compete agreements. The courts also compared a medical care referral base to a physician’s relationship with his/her patients, both of which were held to be “protectable interests”. The courts in the Wellspan case noted the impact on the community enforcing the non-compete would have on depriving the community of the specialty care provided by the physician whose case was before the court. The court held that the interest of the patient was paramount. The Wellspan holding will have a precedential impact in other jurisdictions, specifically those deemed “underserved.”
Other states such as Tennessee and California have ruled against restrictive covenants for similar public policy reasons as held in the Wellspan case. The Supreme Court in medical clinic (P.A. v. David Udom). The courts held patients had a right of freedom of choice in choosing a physician and have a right to continue an ongoing relationship with their physician.
Non-compete clauses are generally illegal in California. Many businesses are not aware of this fact. The California business and professionals code 16600 states that “every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void”. The California statue does allow for some exceptions as handed down in (Morris v. Harris, 1954 127 cal. app. 476) and (Diodes, Inc v. Franzen (1968) 260 cal. app. 2d 244). The holdings in these cases prevent former employees from accepting work from any of the employer’s clients. The business and professions code 16601 also has an “exception permitting lawful non-compete agreements for company owners.” The state of Georgia also had some litigation pertaining to non-compete clauses.
The Tennessee Appeals Court also held that restrictive covenants are illegal. The courts held in (Murfreesboro Medical Clinic, P.A. v. David Udom) that “due to public policy considerations implicated by physician’s covenants not to compete along with the ethical problems raised by them, and state legislatures decision not to statutorily validate all such covenants,” are inimical to public policy and unenforceable. The state legislatures in Tennessee followed precedents of the American Medical Association (AMA). The AMA stated non-compete provisions were contrary to AMA standards which view non-competes as violative of AMA ethical standards because they “restrict competition”, disrupt continuity of care and potentially deprive the public of medical services. The courts in Tennessee held non-competes unenforceable against physicians with some exceptions.
We can see a definite trend nationwide in the courts’ rulings that non-competes are unlawful. It is anticipated that other states will adopt the laws that have been mandated by the courts in this article. The recruitment industry could be impacted by this legal trend. I interviewed an attorney in the state of Tennessee for this article. I questioned him regarding the case making non-compete clauses illegal. The attorney stated he felt the ruling in the case was unique to the facts in that case. He further stated his belief that making non-competes illegal would not result in other jurisdictions following the courts decision in Tennessee. I respectfully disagree. The holdings cited in this article is evidence of a trend that I believe will continue. If this trend does continue, medical groups will be forced to protect their business interest in ways that could impede the recruitment of new physicians. For example, groups may bring new physicians in as independent contractors. Such arrangements would not be favorable to newly recruited physicians. First, their legal exposure could be greater. Next, they could be impacted financially.
Agreements between a medical group and a physician contracted with on an independent basis would not have a non-compete provision. These types of agreements would most likely have a “non use - non disclosure” clause. These types of agreement would not prohibit the physician from practicing within a certain geographic parameter for a specified period of time. These agreements would prohibit the Independent Contractor physician from taking the groups patients and or other confidential information. This type of contractual relationship could complicate the negotiation process which might foster the excessive use of legal counsel which could impact our industry. Finally, physicians who are seeking practice opportunities may restrict themselves regarding the types of practices they pursue.
We can only speculate as to what the impact will be. We can though to a reasonable certainty anticipate that our industry will be impacted. Only time will determine if the legal trend discussed in this article will have a negative impact on the recruitment industry.