Against the backdrop of consolidation in the anesthesia market, the unilateral reduction by some employers of agreed-upon compensation for physician anesthesiologists during the initial COVID-19 outbreak, and termination by some hospitals of their relationships with their longstanding anesthesia groups, a longstanding debate about the pros and cons of noncompetes has reemerged. Employed physician anesthesiologists whose employers had cut their pay, notwithstanding contracts ensuring a guaranteed base salary, protested that they should be released from the restrictive covenants in light of the employers' breach. Physician anesthesiologists who lost their positions when hospitals terminated their groups' contracts argued that they should not be subject to noncompetes. Anesthesia group employers, on the other hand, continue to seek noncompete protection to “promote stability in the workforce” and the group's operations, by limiting the ability of its personnel to “jump ship” for a higher salary or bonus across town or to compete directly with the group for the group's key contracts.
This article will provide a brief overview of the many issues relating to physician noncompetes. The thesis is that the answer to the ultimate question – are they good or are they bad – depends on the questioner's perspective. A secondary theme is that the restrictions that limit physicians' options post-termination may extend well beyond a restriction on providing services in a particular location during a particular time period.
What is a noncompete? A restrictive covenant or “noncompete” (the two terms are used interchangeably in this article) is a contractual provision that limits the ability of a person, typically an employee, from providing services at locations other than where the employer has assigned the employee. During the term of employment, a noncompete is usually of less concern (unless employment is on a part-time basis). The more controversial part of a noncompete is the restriction on where the individual may provide services after employment terminates.
Are noncompetes enforceable? State law governs the enforceability of restrictive covenants. In general, they are enforceable if they are reasonable in terms of time – the time period during which the individual is restricted from practicing at certain locations – and geographic scope. Some states do not permit restrictive covenants with employees (though they may permit them in the context of a sale of the practice) or impose other limitations for certain employees (for example, in the case of physicians, some states require that the physician be able to buy out the noncompete at a reasonable price).
Two concepts are central to the enforceability of employment noncompetes:
First, it is necessary to understand how state courts approach noncompetes. Do they enforce them only as written or will they enforce them to a reasonable extent? If the latter, will the courts only “blue pencil” the noncompete (strike overly broad portions of the restriction) or will courts use their discretion to refashion the restriction to a reasonable extent? If a physician anesthesiologist is considering an overly broad noncompete in a state in which noncompetes are enforced only as written, the physician must carefully consider whether to negotiate for a narrower noncompete, which is more likely to be enforceable, as the original noncompete may not be enforceable.
Second, employers generally must demonstrate a “protectable interest” to enforce a noncompete. If the employer loses its primary hospital contract, the employer may not be able to demonstrate such a protectable interest.
A noncompete in the context of a sale of a business is approached differently than in the context of employment. A buyer is unlikely to purchase a business if the seller can compete directly with the buyer immediately following sale. Physician anesthesiologists should be aware that these types of restrictions generally are enforceable, even in states that do not enforce employment noncompetes, though the sale noncompetes must be reasonable in terms of scope and duration.
Scope of the noncompete. The wording of a noncompete is critically important. Physicians frequently focus on the part of a restrictive covenant that bars them from practicing at certain locations once employment terminates. A noncompete often contains other provisions, which may extend beyond specific locations or geographic areas. For example, a noncompete may include, in the case of physician anesthesiologists:
A restriction on providing anesthesia services at designated locations or in a designated radius. The radius may be in a defined geographic location or it may be a radius around the facilities at which the employer and its affiliates provide anesthesia services. Contracts often do not identify the specific facilities, which can have quite unexpected consequences if the employer adds new facilities or combines with another group.
In some cases, a restriction may be written to apply to facilities at which the employer provided services during the term of the physician's employment (an “Employer Facility”).
In larger practices, that restriction may apply only to Employer Facilities within a designated radius of where the physician worked while employed. The larger the practice, the more facilities that may be covered by such a restriction.
A restriction on investing in an anesthesia practice in that same area.
Nonsolicitation restrictions that bar the physician from:
Soliciting employees or contractors of the employer or its affiliates;
Soliciting any “client facility,” physician referral source, or business opportunity of the employer or any of its affiliates; or
Diverting any client facility or business opportunity of employer or any of its affiliates.
This wording is simply an example of how broadly a noncompete may be framed. The scope of the restriction will differ significantly for an employee of an anesthesia practice practicing at one or two facilities than for an employee of an anesthesia practice with affiliate practices scattered over multiple states and providing services at more than 100 facilities.
The restriction on providing services within a designated geographic location may be understandable. What does it mean, however, if the physician anesthesiologist is restricted from soliciting “client facilities” of the employer or its affiliates? Does it mean that the physician anesthesiologist cannot seek a contract with such a client facility in another state? What does it mean that the physician anesthesiologist cannot “divert” opportunities from the employer or its affiliates? Does that restriction mean that the physician anesthesiologist cannot bid to provide services at a facility if the employer or its affiliate is bidding? How would the physician anesthesiologist even know who is bidding on an opportunity?
Even if a restriction is framed in terms of a radius around locations at which the physician has worked, the question then becomes whether the employment agreement specifies where the physician will work, or whether the employer has discretion to assign the physician to other locations. Employers frequently want flexibility to deal with changing circumstances and needs. That ability to assign the physician to multiple locations can have the effect of expanding the scope of a noncompete.
The point is that the scope of the “noncompete” restrictions may be far broader than an employee may originally anticipate. Although the restrictions may not all be enforceable, the former employer may try to enforce them, in which case the next section becomes important.
Who pays to enforce the noncompete? Physician anesthesiologists should pay close attention to the “remedies” provision that follows any noncompete. Typically, the remedies provision allows the employer to obtain injunctive relief to block any violation. The question is: Who pays for the employer's efforts to block any claimed violation of the noncompete? Does the physician pay for all costs the employer incurs in enforcing the noncompete, including attorneys' fees, in all circumstances, even if the employer does not succeed in enforcing the restrictive covenant, or only if the employer prevails? The allocation of responsibility for such costs also may appear in a “prevailing parties” provision, in which the prevailing party is entitled to receive its costs, including attorneys' fees, from the nonprevailing party.
This type of provision makes it more costly for a physician to challenge a noncompete. From an employer's perspective, it is only fair to recover the costs of enforcement if the employee violates the restriction, and the employer may believe that the scope of the restriction is reasonable, even if a court disagrees. An employee's perspective will be quite different if the employee finds the restrictions to be unclear or overly broad.
Whether or not an employer can shift the expense to the physician, it is worth noting that an individual physician is using the physician's own resources, whereas the employer is spending “corporate” money.
What services are covered? As many physician anesthesiologists develop competency in administrative and business roles, it is important to review noncompetes to assess if they cover just clinical services or all services the physician provides. Does the restrictive covenant preclude the physician from accepting employment as a medical director or a hospital administrator?
For physician anesthesiologists, especially those who may be double-boarded, does the noncompete bar them from providing clinical services in another specialty, such as pain medicine or critical care, or in another setting – such as an office-based practice – distinct from where a hospital-based employer provides services?
Does breach excuse the employee from complying? In the wake of the pandemic and employer efforts to minimize costs by imposing salary reductions unilaterally for several months, affected physician anesthesiologists asked if the employer's breach of the employment agreement – failure to pay in accordance with the agreement – excused compliance with the restrictive covenant. The answer depends on state law, how the contract is worded, and the nature of the breach.
If the agreement provides that the restrictive covenant is an agreement independent of other provisions of the contract and that an employer breach does not constitute a defense to the employer's enforcement of the noncompete, it will be harder for the employee to argue that the employer's breach excuses compliance.
In some states, courts have ruled that an employer that has materially breached a contract and is seeking to enforce a noncompete is not entitled to relief. Facts will be critical to the outcome, and a minor breach likely will not excuse compliance.
What if there is no noncompete? In some instances, physician anesthesiologists may not have a written employment agreement or their agreement may not have a restrictive covenant. Such physicians should be aware they may have a duty of loyalty to the employer under common law and that such duty may be breached if the physician solicits the facilities at which the employer provides services or other employees.
The duty of loyalty may limit an employee's actions while the employee is planning to compete in the future.
Other issues. The following are other points that physician anesthesiologists should consider.
Is the noncompete mandated by the group's agreement with a facility? If the hospital at which the group provides services requires that the group and its physician anesthesiologists not compete with the hospital and that the restriction apply to group employees even after they terminate employment, the group will have little flexibility to negotiate.
What about independent contractors? Can anesthesia practices impose a noncompete on an independent contractor?
Noncompetes are more commonly associated with employment, but a practice may well want protection from an independent contractor.
A noncompete would be a factor in assessing whether or not the individual is properly classified as an independent contractor.
Under what circumstances can the noncompete apply for longer than the stated period?
The time period of the noncompete may be “tolled” by breach of the noncompete. A noncompete restriction frequently is drafted to apply for a period of time extending from the later of 1) the termination of employment or 2) the entry of judgment enforcing the noncompete.
Does the community's need for anesthesia services outweigh the enforcement of the noncompete agreement? If so, does the need only mean that a court will not enforce the noncompete but will leave open the potential for the physician to be liable for damages?
Negotiating noncompetes. An anesthesia group employer is unlikely to negotiate the terms of a noncompete with an individual physician if all members of the group have agreed to the restriction. A part-time employee or independent contractor may have more leverage. A prospective employee may want to narrow other related provisions, such as the locations to which the noncompete applies, the length of time the employee must work at a location (other than the primary assigned location) before a noncompete applies, and circumstances in which the noncompete does not apply (e.g., if the employer breaches or if employment terminates due to termination of the group's facility agreement).
Summary. In the end, whether a noncompete is good (protecting the anesthesia practice) or bad (limiting an individual physician anesthesiologist's post-employment opportunities) depends on the perspective of the person asking the question. Understanding the scope of the restriction and whether it is likely to be enforceable can better position physician anesthesiologists to assess their post-termination options.