The Shifting Tide of Physician Non-Competition Agreements

January 2005

Frost Brown Todd Health Law News

Relying only on medical ethical pronouncements or a memory of court opinions from the 1980’s and 1990’s, health care professionals might think that physicians cannot be subjected to non-competition agreements. Today, however, the courtroom and day-to-day medical practice management realities are significantly different. While many courts will now scrutinize physician non-competes a little more closely than agreements in other professions and industries, the trend is definitely toward more likely enforcement. Unfortunately for purposes of predictability, in most states including Ohio, Kentucky, and Indiana, this area of law has few clear rules and even fewer easy answers.

Where we’ve been

The American Medical Association has long been officially opposed to physician non-compete agreements. The AMA clearly staked out that position by enacting Code of Ethics 9.02 which provides:

Covenants not to compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services. The Council of Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership, or corporate agreement. Restrictive covenants are 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.

For decades in Kentucky, physicians were held to non-competition agreements just as were any other employee who signed such an agreement. Then in the mid-1990s, the tide changed. Picking up on the AMA’s disfavor and the Kentucky Medical Association’s similar position, the Kentucky General Assembly briefly turned that ethics position into a statutory prohibition against many physician non-compete agreements. The statute, effective July 1994, declared that non-competition agreements among health care providers were unethical and contrary to public policy. However, it only banned agreements that exceeded a one year non-competition period. While many Kentucky healthcare professionals and healthcare lawyers vividly remember some portion of that statute, it was quite short lived. By July 1996, the statute was repealed. Accordingly, regardless of when an agreement was entered into (during the effective period of the statute or not), Kentucky physicians should now assume that their non-competition agreements are much more likely to be enforced.

While lacking Kentucky’s (temporary) legislative clarity, many Ohio courts also held physician non-competition agreements to additional scrutiny. A frequently cited Ohio case used the AMA’s ethics position to conclude that physician agreements should be “strictly construed in favor of professional mobility and access to medical care.” Even with that additional scrutiny, bright lines and clear rules escaped the Ohio courts. Ohio physician non-competes were often analyzed based upon the degree of specialty they brought to their patients and the relative supply of similarly specialized physicians. Under that line of cases, generalists or doctors in common medical fields were often held to non-compete agreements from which their highly specialized colleagues were excused. To predict whether a particular non-compete would be enforced, the uniqueness of the physician’s services and the existing competition for providing those services were key. In other words, highly specialized physicians with few nearby geographic competitors in less populated areas were more likely to be excused from their non-compete agreements.

Where we are today

As a general matter, physician non-competes can be enforced. The circumstances under which that will occur are still unclear. To the extent that generalizations can be made, they would be to place physician non-competes in much the same position as any other non-compete. Courts start with the same legal standard and review the same factors for the enforcement of any kind of non-compete agreement. The general standard for most states, including Indiana, Kentucky, Ohio, and Tennessee, is that non-compete agreements are enforceable to the extent reasonably necessary (in time, geography, and scope) to protect the employer’s legitimate business interests. Enforceable agreements can only address unfair competition. An agreement that merely seeks to avoid normal competition does not protect a legitimate business interest.

A standard that calls for doctors and lawyers to discuss what is “reasonable” and “necessary” is somewhat like inviting your new neighbors over to discuss religion and politics – everyone knows for himself or herself what is a “reasonable” position, it’s just that many others will not agree with that position. To make matters even worse, this is the only area of the law where the judge is often required to cast aside the written words used by the parties’ agreement and replace them with the judge’s own conception of a “reasonable” restriction.

Many courts will state that non-compete agreements remain in a disfavored class of agreements, but the reality is that courts are enforcing these agreements with greater regularity. Analysis of a unique subspecialty or the relative availability of competing physicians is becoming less of an issue. On the other hand, courts are placing increased focus on the level of confidential information and patient relationships that the hospital or practice group provided the physician.

Due to the unpredictability of how and whether non-competes will be enforced, some healthcare businesses are turning to pre-arranged buy-outs. These agreements establish the amount the physician will pay the practice group upon deciding to recommence his or her practice elsewhere. Certainly, this approach has its own drawbacks, primarily given that the practice or hospital may be conceding that the physician may set up shop across the street. However, to the extent that these buy-outs can be tied to recruiting expenses, training costs, physician-specific revenue, or practice group ownership, they may serve as a much more predictable business tool.

The business of medicine often clashes with the practice of medicine. Physician non-compete agreements are just one example. If structured properly, they will often be enforceable. If not structured properly, you may quickly find yourself with even more competition for your patients and revenues.