Trends in Non-Compete Enforceability

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How to enforce non-compete agreements

What is the best way to enforce a non-compete agreement? That’s simple: start with an enforceable non-compete agreement.

Of course, preparing an enforceable non-compete is easier said than done. Like most issues where competing business interests and legal rights converge, limiting an employee’s future employment opportunities is not as simple as signing a contract. This is especially true when the non-compete agreement affects a healthcare provider.

Primer on Non-Competes

There are no national standards governing non-compete agreements. Rather, each state has its own requirements and limitations. Some states ban non-compete agreements in any form and in any industry as an unfair restraint on trade; other states, while claiming non-competes are disfavored, will enforce them if the terms are reasonable under the circumstances.

In an enforcement action, courts generally attempt to balance the employer’s desire to protect its legitimate business interests from unfair competition against the employee’s desire to work in his or her chosen profession and location. Courts will enforce non-compete agreements that actually protect the employer’s legitimate business interests, and that are reasonable in terms of both duration and geography.

The employer’s protectable business interests include such things as confidential information, specialized training the employee received at the employer’s expense and customer relationships. Whether the time and geographic limits placed on the employee are reasonable is determined on a case-by-case basis.

In some states, the court will strike the non-compete in its entirety if it does not protect the employer’s legitimate business interest or if the time and geographic limits are unreasonable. In other states, the “blue pencil” rule allows a court to modify the terms of the non-compete to make them acceptable under that state’s laws.

Tricky Provider Non-Competes

Non-competes with healthcare providers add a layer of complexity to the court’s analysis. A non-compete between a provider and the employer implicates serious public policy concerns that are not present in other non-competes; namely, the public’s access to medical care and the patient’s right to choose his or her own provider.

In response to these additional concerns, some states prohibit healthcare provider non-competes, while other states further limit the restrictive covenants that can be enforced against providers.

The evolution of healthcare provider non-competes in Tennessee provides an excellent example of how states attempt to balance the employer’s desire to protect its business interests, a physician’s desire to practice in a chosen field and location and the patient’s desire to receive medical services from a chosen provider.

In 2005, the Tennessee Supreme Court, in Murfreesboro Medical Clinic, P.A. v. Udom, 166 S.W.3d 674 (Tenn. 2005), invalidated a non-compete agreement between a physician and a private medical clinic. While the agreement passed muster under the general rules for non-competes, it failed under public policy concerns for greater access to medical care, and the patient’s right to choose and have an ongoing professional relationship with a doctor.

The Udom court also noted that since 1980, the American Medical Association (AMA) has taken the position that physicians’ non-compete agreements negatively impact healthcare and are contrary to the public interest, though the AMA has not said such non-competes are inherently unethical.

The Tennessee legislature responded to the Udom decision by enacting TCA § 63-1-148, a statute which made non-compete agreements with healthcare providers enforceable if specific requirements are met.

The Tennessee statute has undergone several amendments. As of the date of this article, non-competes affecting healthcare providers in Tennessee are enforceable if (1) the restriction is contained in an employment agreement or other written document; (2) the duration is two years or less; and (3) the geographic restriction is the greater of either a 10-mile radius from the provider’s primary practice site, the county in which the provider’s primary practice was located or, if there is no geographic restriction, the provider is restricted from practicing at any facility where the employer provided services while the provider was employed.

The Tennessee statute also establishes a rebuttable presumption that non-competes in conjunction with the sale of a provider’s practice are reasonable and enforceable. The effect of this presumption is that the purchaser who benefits from the non-compete does not have to prove that restrictive covenants are reasonable. Instead, the provider must prove that the non-compete is unreasonable under the circumstances at the time the parties entered into the purchase agreement. Shifting the burden to the provider increases the chance that a non-compete in a purchase agreement will be enforced.

Enforcing Provider Non-Competes

So, how can you improve the chances that your healthcare provider non-compete agreement will be enforced? First, start with an enforceable non-compete agreement.

Because the validity of a non-compete generally, and specifically as it relates to healthcare providers, is determined by state law, avoid using form agreements. Rather, draft any non-compete agreements with an awareness of and in conformity with the state’s laws in which the business resides.

Second, while the law in many states is that the offer of employment is sufficient value in exchange for the provider’s agreement to abide by the restrictive covenants, strengthen the non-compete by adding extra value. For example, consider a signing bonus or a severance package as further inducement for the provider to sign the non-compete. Other strategies include a “buy-out” provision where the former provider agrees to pay a certain amount if he or she decides to establish a new practice in violation of the non-compete agreement. This is, in effect, a liquidated damages clause.

Of course, the efficacy of any strategy depends on state law. Consult with an attorney before drafting, negotiating and executing a health care provider non-compete. Even the cost conscious should realize that drafting an enforceable non-compete is far less expensive than litigating an uncertain enforcement action.

Bottom line, litigation can be very expensive and time-consuming. The typical enforcement action involves a claim for breach of contract and a petition for a temporary restraining order followed by a permanent injunction. These claims often include expedited discovery from both sides and a mini-trial on whether the court should issue a temporary injunction. Then the case will be submitted to a judge or jury who may or may not be sympathetic.

As is often said, an ounce of prevention is worth a pound of cure. Drafting an enforceable health care provider non-compete on the front end can save litigation costs and headaches down the road.

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About Author

John Paul Nefflen, esq.

Business litigator with Burr & Forman LLP (Nashville, Tenn.). With over 15 years of experience, he represents health care clients in federal and state courts.

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