Are Non-Competition Agreements Enforceable or Not?

Comitz | Beethe, PLLC

Non-competition agreements usually bar doctors both from encouraging patients to follow them to a new practice and  from practicing medicine for a certain period of time within a certain distance  of the current employer’s location.1 Most healthcare practices now use  non-competition agreements and other restrictive covenants to shield their  patient bases and referral sources from competition when a doctor leaves the  practice, but these agreements also have drawbacks.  There is much debate in the healthcare and  legal communities over the extent to which these non-compete clauses are  enforceable – if at all. The truth is that non-competition agreements are  sometimes enforceable and sometimes not, depending on their specific  restrictions and circumstances.

Advantages of Non-Compete Agreements

Employers often consider non-compete  clauses as a legitimate condition of employment since a doctor will develop  skills, knowledge, and reputation because of his or her association with the  employer practice.2  These  agreements also serve to protect the employer’s investment in employees by  discouraging them from leaving the practice in the first place.3 It seems disingenuous for a doctor to receive the long-term benefits of working  in an established practice only to subsequently compete against the practice  for the same patients upon leaving.4 Employers may also be concerned about  a doctor working with a group solely to develop a patient base and referral  sources in order to open his or her own practice.5 Non-competition  agreements, along with other restrictive covenants, can alleviate employers’  concerns and prevent this from occurring.

Disadvantages of Non-Compete Agreements

One important consideration in using  non-competition agreements is the hardship that they can cause the leaving  doctor. First, a geographic restriction may force the leaving doctor to  relocate outside the restricted area, which could entail a major, life-altering  move.6  Some in the medical community are wary of  what seems to be an “inherent unfairness” in requiring a doctor to give up his  or her future right to work as a condition of current employment.7

There may also be some less obvious  effects of a non-compete on a doctor’s work environment before he or she leaves  a practice.  Because the employer knows  that the employee will be reluctant to leave the practice, it may not be very  concerned with employee retention.  For  instance, an employer who knows it has a non-competition agreement in place may  be less sensitive to an employee doctor’s needs and concerns or may be less  likely to offer pay increases.8   Doctors who are worried about the adverse effects of non-competition  agreements should negotiate with their employers for the narrowest possible  restrictions, and also consider negotiating for additional compensation or  severance in exchange to agreeing to the non-compete.9

Non-competition agreements may also  have an adverse effect on some patients.   When a patient is forced to stop seeing his or her doctor because of a  non-competition agreement, it may result in increased costs for the patient,  decreased quality of care, and lowered satisfaction with the doctor.10

The American Medical Association does  not encourage non-competition agreements.11  However, employers who wish to balance their  own interests in protecting their investments and resources can still use  non-competition agreements in accordance with AMA’s ethics opinions if they are  reasonable. According to the AMA, restrictive covenants are only unethical “if  they are excessive in geographic scope or duration in the circumstances  presented, or if they fail to make reasonable accommodation of patients’ choice  of physician.12 The AMA’s position does not have much  legal impact, however, as it merely imitates the standard for reasonableness  that most courts already apply.13

Enforceability of Non-Competition Agreements

Employers should make sure they  attempt to enforce non-competition agreements in a consistent, timely manner.  If an employer only enforces the agreements some of the time, a court may  refuse to enforce any isolated one.14  Enforcing these non-compete agreements can be  problematic, though, since courts construe the agreements narrowly and  determine their enforceability on a case-by-case basis, considering all of the  attendant circumstances.

Arizona courts generally disfavor  non-competition agreements, especially those among doctors. Thus, courts read  the restrictions in a non-compete as narrowly as possible, with any ambiguities  being interpreted in favor of the employee rather than the employer.15 To be enforceable, a non-compete agreement must protect “some legitimate  interest beyond the employer’s desire to protect itself from competition.”16 According to the Arizona Supreme Court, the legitimate purpose of non-competes  is to prevent a leaving employee from using information or relationships that  belong to the employer or where acquired because of the employer for a limited  amount time.17

The courts outline two factors that  make a non-compete clause unreasonable: “(1) the restraint is greater than  necessary to protect the employer’s legitimate interest; or (2) if that  interest is outweighed by the hardship to the employee and the likely injury to  the public.”18 In making the determination of  reasonableness, a court will look at all of the circumstances surrounding the  non-competition agreement.

The first factor, whether the  restraint is greater than necessary to protect the employer’s interest, depends  on the scope of the agreement. The scope has two factors of its own: the  duration of the agreement and its geographic limitations.  Courts will find that the restraint is too  great if they think the limitations last too long or cover too great a  geographic area.

The second factor, whether the  employer’s interest is outweighed by the hardship to the employee and the  public, has been the focus of recent Arizona court decisions.  In Valley Medical Specialists v. Farber,  the Arizona Supreme Court expressed its wariness of non-competition agreements  between doctors. The court held that patients are entitled to be seen by the  doctor of their choosing, regardless of the contractual obligations between  their doctor and his or her former employer, because the harm to patients who  could lose the option to see their chosen doctor is greater than the employer’s  economic interest in enforcing a non-competition clause.

Because of the Farber decision,  non-competition agreements between doctors and other medical professionals and  their employers are read very narrowly, and each agreement is considered on  case-by-case basis to determine if the public policy considerations at play  outweigh the employer’s interest in protecting its investment through enforcing  the non-compete clause.19

Non-competes are less scrutinized  when it comes to the sale of a practice. When a doctor sells a practice, the  value of the practice’s goodwill and its existing patient base usually figures  prominently in into the purchase price, so the buyer of the practice is allowed  some protection from competition from the former owner.20

The Blue Pencil Doctrine

“Blue  penciling” occurs when a court decides not to enforce certain sections of a  non-competition agreement that it considers too broad, but still enforces the  rest of the agreement.  Instead of  declining to enforce the entire agreement altogether or rewriting unenforceable  provisions, the court will literally cross out gramatically severable,  unreasonable provisions but keep the rest of the agreement intact.21

A  key component of the blue-pencil doctrine in Arizona is that courts can strike  out unenforceable parts of the contract, but it cannot otherwise add to or  change the terms. In the 2002 case Varsity Gold, Inc. v. Porzio, which  represents the current law on non-competes in Arizona, the court stated that a  judge could not try to reform or soften the contract not to compete in any way  other than using the blue-pencil rule to strike a severable provision.22  The court wrote, “Although we will tolerate ignoring severable portions of a covenant to make it more reasonable, we will not permit  courts to add terms or rewrite provisions.”23

Some  courts disfavor the practice of blue penciling because it tends to encourage  employers to draft non-competition agreements with broad or additional terms  (such as step-down provisions, discussed below) that can have the effect of  scaring an employee doctor into never leaving the practice in the first place.24  This is known as the “in terrorem effect.”25

Step-Down Provisions

Step-down provisions, combined with  severability clauses, are the best way to make sure a non-competition agreement  is enforceable.  These terms provide  alternative time and area restrictions that allow a court using the blue-pencil  rule to strike restrictions it considers too broad while enforcing a less  restrictive provision. These provisions help courts sever unenforceable  provisions and enforce the remainder of the agreement.26 A sample step-down provision might be similar to the following:

1. NONCOMPETITION.  For the TIME PERIOD set forth in paragraph 2, Employee shall not, directly or  indirectly, own, manage, operate, participate in or finance any business  venture that competes with the Company within the AREA. . .

2. TIME PERIOD.  TIME PERIOD for purposes of paragraph 1 shall mean the period beginning as of  the date of Employee’s employment with the Company and ending on the date of  death of the employee; provided, however, that if a court determines that such  period is unenforceable, TIME PERIOD shall end five (5) years after the date of  termination; provided, however, that if a court determines that such period is  unenforceable, TIME PERIOD shall end six (6) months after the date of  termination.27

Because different courts rule  differently on what provisions are overly broad, it is important to have an  attorney draft these provisions to ensure that they are not stricken  altogether.

Remedies for Breach of Non-Competition Agreements

The remedies available to an employer  when a leaving doctor breaches the non-competition agreement include injunctive  relief and money damages. Injunctive relief is usually the most desirable  option for the employer, as it allows the employer to immediately stop the  competitive behavior before very much damage is done.28 Other forms of  relief, such as money damages, may take one to two years or more to realize.29 Injunctions, however, can be the most difficult form of relief to get, as  courts consider them an especially extreme form of relief. This does not mean  that injunctive relief provisions are always unenforceable. “Although consent  to injunctive relief does not guarantee that the relief will be entered by a  court, it goes a long way to increasing a court’s comfort level with the  remedy.”30 Money damages may be available if the leaving doctor’s  breach of the non-compete was the actual cause of the monetary harm to the  employer.

Conclusion

Non-competition agreements can be a useful tool  for healthcare practices, but making sure those agreements will be enforced can  be extremely difficult and requires a high level of precision.  On the other hand, a doctor who is struggling  to work around a non-compete agreement can rarely know for sure if it is truly  enforceable or not, since courts consider each one on a case-by-case basis,  considering all of the attendant circumstances.   The best way to deal with non-competition agreements is to find an  attorney with a thorough understanding of the law regarding these restrictive  covenants.

1 Derek W. Loeser, The Legal, Ethical and Practical Implications of  Noncompetition Clauses: What Physicians Should Know Before They Sign, 31 J.L. Med. & Ethics 283 (2003).

2 Loeser, supra note 1, at 289.

3 AMA Opinion 9.02 – Restrictive Covenants and the Practice of Medicine.

4 Loeser, supra note 1, at 289.

Id. at 290.

Id. at 289.

7 Id. at 287.

Id. at 289.

Id. at 290.

10 Id. at 287.

11 AMA Opinion 9.02 – Restrictive Covenants and the Practice of Medicine.

12 Id.

13 Loeser, supra note 1, at 287.

14 Brent A. Olson and Lisa C. Thompson,  Business Law Deskbook § 12:12 (2009-2010 ed.).

15 Id. at § 12:11.

16 Valley Med. Specialists v. Farber, 194 Ariz. 363, 367 (1999) (citing Amex  Distrib. Co. v. Mascari, 150 Ariz. 510 (App. 1986)).

17 Id. (citing Harlan M. Blake, Employee Agreements not to Compete,  73 Harv. L. Rev. 625, 647 (1960)).

18 Id. at 369 (citing Restatement  (Second) of Contracts § 188 cmt. a).

19 Olson and Thompson, supra note  6, at § 12:11.

20 194 Ariz. at 368 (citing Harlan M. Blake, Employee Agreements not to Compete,  73 Harv. L. Rev. 625, 647 (1960)).

21  Ray K. Harris and Ali J. Farhang, Non-Compete  Agreements with Step-Down Provisions: Will Courts in “Blue-Pencil” States  Enforce Them?, 23 Computer &  Internet Law 3 (July 2006).

22 Harris and Farhang, supra note 21, at 2 (citing Varsity Gold, Inc. v.  Porzio, 202 Ariz. 355, 45 P.3d 352 (App. 2002)).

23 Varsity Gold, Inc., 202 Ariz. At 356, 45 P.3d at 358.

24 Loeser, supra note 1, at 285.

25 Harris and Farhang, supra note 21, at 2.

26 Id. at 1.

27 Id. at 1.

28 Loeser, supra note 1, at 284 .

29 Id.

30 Id.