Physician non-competition agreements prevent a doctors from competing with his or her current employer, partners or associates during and after the end of the current relationship. Such an agreement may serve as a deterrent preventing a doctor from leaving her current employer or practice and joining another practice or starting a competing practice. Consequently, it may also prevent doctors from continuing to care for and treat current patients after they leave.
Despite the risk to patients of losing contact with their treating doctors, advocates of physician non-compete agreements argue that they reduce turnover and therefore increase stability and continuity of care for patients. Proponents also suggest that non-competition agreements legitimately protect employers’ investments in providing specialized training for doctors while preventing unfair competition, loss of the employer’s confidential business information, and the loss of patients from established practices to departing physicians.
Of course, for patients, it can be disturbing to find out that their doctor has disappeared without a word. The New York Times has reported that, in one survey across five states, 45 percent of primary care physicians were bound by covenants not to compete. This is despite the fact that the American Medical Association Code of Ethics actively discourages physician non-compete agreements that might disrupt the continuity of care for patients, limit patient access to care, or limit patient choice of physicians.
States where physician non-compete agreements are enforced
While each state has its own laws and rules when it comes to non-compete agreements, states that will generally enforce non-competition agreements against physicians include:
- New York
- New Jersey
- North Carolina
States where physician non-competete agreements are limited or unenforceable
While many states will enforce non-compete agreements against physicians, there are also states where such agreements are either void or severely limited. These states may disfavor any and all “restraints on trade” or they may assess patient choice and continuity-of-care as higher imperatives of the healthcare industry than its commercial interests.
States where physician non-competes are unenforceable or severely limited include:
- North Dakota
- South Dakota
New York Law
In New York, covenants restricting physicians from competing with a former employer or associate will be enforced if they are:
- Reasonably limited in time, geographic area, and scope;
- Necessary to protect the employer’s interests;
- Not harmful to the public; and
- Not unduly burdensome
Peconic Surgical Group, P.C. v. Cervone, 930 N.Y.S.2d 175, 2011 N.Y. Slip Op. 51059 (U) (citations omitted).
Courts presented with enforcing physician non-competition agreements will, therefore, ask the following questions within the context of the facts and circumstances surrounding a particular case.
1. Is the restriction reasonably limited in time, geographic area and scope?
Courts have held agreements of up to three years following the end of the relationship to be reasonable for physician covenants-not-to-compete. Awwad v. Capital Region Otolaryngology Head and Neck Group, LLP, 856 N.Y.S.2d 22, 2007 N.Y. Slip Op. 52492(U).
Agreements that cover only certain counties or a limited radius, such as fifteen to thirty miles from the location of the employer, have also been found to be reasonable. Id. See also Peconic, Slip Op. 2. The reasonableness of such restrictions, however, can vary according to the specific facts and circumstances of each case. For a physician practicing in Manhattan, a restriction of 30 miles may not be considered reasonable, since it would more than encompass the entire area of Manhattan and would almost certainly exceed what would be necessary to protect the employer’s legitimate business interests.
In terms of scope, courts have indicated that a broad prohibition on any practice of medicine whatsoever would generally not be considered reasonable. Awwad, Slip Op. 5. However, when the scope of the noncompetition agreement is limited to the same sub-specialty as the former employer, those agreements have been enforced. Id. See also Leiboff v. Paleaz, 249 A.D.2d 497, 671 N.Y.S.2d 336 (1998).
2. Is the restriction necessary to protect the employer’s interests?
Employers seeking to enforce physician non-compete agreements must be able to demonstrate that they have a protectable business interest beyond just a desire to avoid competition. For medical practices, such an interest may arise from proprietary techniques, investments in professional or specialized training provided to physicians, and protection of goodwill and established client relationships.
In New York, professionals such as physicians are considered to provide “unique or extraordinary” services, such that courts give great weight to the interests of employers in restricting competition within a confined area. Peconic, Slip Op. 2.
When a medical group has brought a physician to the community at great expense and where the physician would not otherwise have obtained medical privileges at the hospital but for the assistance of the medical group, the medical group has been found to have met the burden required to obtain a preliminary injunction (showing a likelihood of success on the merits, irreparable injury and a balancing of equities in the medical group’s favor) barring the physician from performing services at that hospital. Olean Medical Group, LLP v. Leckband, 32 A.D.3d 1214n (2006).
3. Is the restriction harmful to the public?
Since physician non-compete agreements can limit the rights of patients to receive care from the doctor of their choice, there is usually some case to be made that a noncompetition agreement would be harmful to the public. There could be cases where enforcement of a non-compete agreement might lead to a shortage of doctors in a particular area or within a particular specialty. Or, it might prevent a patient from being able to continue a course of treatment without disruption. These types of negative impacts are even acknowledged and addressed in the American Medical Association’s Code of Medical Ethics.
The AMA Council on Ethical and Judicial Affairs
Covenants-not-to-compete restrict competition, can disrupt continuity of care, and may limit access to care.
Physicians should not enter into covenants that:
(a) Unreasonably restrict the right of a physician to practice medicine for a specified period of time or in a specified geographic area on termination of a contractual relationship; and
(b) Do not make reasonable accommodation for patients’ choice of physician.
To date, however, courts in New York have not been convinced that this precludes enforcement of covenants-not-to-compete against physicians.
The court in Awwad addressed such an argument as follows:
[T]he Court is not persuaded by plaintiff’s reliance on the American Medical Association … Code of Ethics as a basis for arguing that enforcement of the covenant would be harmful to the public. The Code of Ethics “discourages”, but does not prohibit, the use of post-employment covenants that restrict the right of a physician to practice medicine. … The fact that the AMA may “discourage” physicians from entering into such covenants does not render them unlawful, unethical or harmful to the public.
Similarly, in Peconic, the court found that enforcement of a restrictive covenant was not harmful to the public where the geographic scope was fairly limited because there were other hospitals just outside of the restricted area that were still close (presumably close enough for patients of the doctor to be served at such alternative locations).
Although the courts in Awwad and Peconic were not persuaded of any potential negative impact on patients, in a later case, Goodman v. New York Oncology Hematology, P.C, the court at least recognized that such impacts could exist and that some states have invalidated physician non-compete agreements on that basis. The Goodman court still affirmed, however, that New York “allows such agreements.” 101 A.D.3d 1524, 957 N.Y.S.2d 449, 453 (2012).
4. Is the restriction unduly burdensome?
Courts may refuse to enforce a covenant not to compete when it is considered unduly burdensome on the employee. When a restriction is so broad that it would prevent an individual from being able to make a living, it may be deemed unduly burdensome.
In the case of Delphi Hospitalist Services v. Patrick, a medical staffing agency sought to enforce its noncompetition agreement with a physician assistant (note: not a physician) who had continued to work at the same hospital where the agency had placed him after the hospital had terminated its agreement with the plaintiff staffing agency. 163 A.D.3d 1441, 80 N.Y.S.3d 616 (2018). The court weighed the equities of the staffing company against that of the physician assistant and found that the balance tipped in favor of the physician assistant. The assistant resided in Pennsylvania and had let his Pennsylvania license lapse. Although the staffing company had offered to place the assistant at several other hospitals, one of them was several hours away. As for the other possible placement, the assistant had already worked there and had requested a transfer away from it.
When a physician is not restrained from practicing general medicine (i.e., not restricted beyond practice of a specialty or subspecialty) or is only restricted from practicing that specialty or subspecialty in “all but a small portion” of New York and may continue to practice that subspecialty anywhere else in the state or the country, courts have not found the noncompetition agreement to be unduly burdensome. See, e.g., Awwad, 7.
A buy-out clause is a provision in a non-compete agreement that allows the physician to pay a certain amount of money to be released from the obligation not to compete. It is essentially form of liquidated damages. Liquidated damages clauses that are punitive in nature, rather than merely compensatory, are generally unenforceable. Thus, in order to be enforceable, a buy-out provision must reflect a reasonable resemblance to the anticipated loss to the employer from the physician’s breach. A buy-out clause in an amount that is grossly disproportionate to the employer’s expected loss will likely be deemed punitive by New York courts and will not be enforced.
In Goodman, a noncompetition agreement that required liquidated damages for breach in an amount equal to all payments to [the physician] in the previous two years (amounting to more than $1,200,000 in that case), was found to be unreasonable as a matter of law. (But note that this was based not only on the buy-out clause but was “[u]nder all the facts and circumstances of [the] case.”)
Also in Goodman, however, the court acknowledged that where a physician was new and was recruited to the area by the employer, a covenant–not–to–compete was reasonable where it included a $100,000 buy-out payment, specified a one year term, covered an area of five counties and was inapplicable if the physician was terminated by the employer without cause.
In Ford v. Cardiovascular Specialists, P.C., the court held that a buy-out clause that was based on a formula of “150% of the physician’s annual W-2 gross income and bonus” at the time of termination—an amount equal to $555,000—was grossly disproportionate to the employer’s expected loss from a breach of the noncompetition agreement. 103 A.D.3d 1222, 959 N.Y.S.2d 352 (2013). Nevertheless, the employer was still entitled to actual damages arising from the breach. Id.
Possible Changes from Legislative Action
Some important changes to non-compete laws in New York may be coming soon. New York introduced legislation in its 2019 to 2020 session, Assembly Bill A7193 and Senate Bill S5790. If passed, this legislation would completely prohibit non-compete agreements for anyone whose annual earnings are less than $75,000. Obviously, this income threshold would be unlikely to impact physician non-competition agreements. But the law would also prohibit enforcement of a non-compete covenant against anyone who was terminated by an employer without cause. And this part of the proposed law, if it passed, would apply to physician non-competition agreements.