A rheumatologist was recently offered a lucrative position in his community and was concerned that his previous employment agreement would prohibit him from accepting the new job opportunity. His previous employment contract contained a noncompetition clause that made him and his prospective employer rightfully concerned. Upon a comprehensive review of his former employment contract, the noncompetition provision was not as restrictive as he—and his prospective employer—had previously thought. As it turned out, in his case—as in many others—the noncompetition clause was penetrable, and the physician accepted the new employment offer with a clear conscience that he was not in violation of his previous contract.
What Is a Noncompetition Clause?
A noncompetition clause, also known as a covenant not to compete or a restrictive covenant, is a provision in a contract that precludes one party from engaging in competition with another party by working 1) in a particular field; 2) within a specific geographic area; and 3) for a stated period of time. A well-written noncompetition provision will prevent a physician from practicing within a certain geographic area surrounding the practice location for a prescribed period of time after the termination of the physician’s employment.
Often, the physician will be permitted to practice within the parameters of the restricted geographic area or time period if the physician—or the physician’s subsequent employer—“buys out” of the clause. This is an especially good option when the reasonableness of the noncompetition is not black and white and both parties want to avoid the expense of litigating the enforceability of the noncompetition clause.
Otherwise, in the event the physician breaches the noncompetition clause, the former employer will usually first seek injunctive relief that prohibits the physician’s new employment, followed by a request for monetary damages arising out of the physician’s breach.
In states where noncompetition clauses for physicians are enforceable, the provision must: 1) protect the employer’s legitimate business interest; 2) be specific in geographical scope; and 3) have a narrowly tailored durational scope. If the language in the clause is vague or does not clearly describe the exact terms of the restrictions on practice, the clause may be unenforceable or open to greater interpretation than either party anticipated.
Do Employers Have a Legitimate Business Interest to Protect?
In order for a noncompetition clause to be enforceable, it must protect the employer’s legitimate business interest. Some examples of a legitimate business interest include the employer’s goodwill—namely, the retention of patients and the protection of referral sources. Moreover, since noncompetition clauses are not looked upon with favor by courts because they operate as a restraint of trade, the language needs to be narrowly tailored in order to protect the employer’s legitimate interests.
Is the Geographical Scope Reasonable?
Noncompetition clauses must also specify the restricted geographical area where the physician is prohibited from practicing. However, whether a geographical scope is overly broad will not only depend on the state’s laws, but also on the location of the medical practice and the surrounding community. Typically, contracts will provide a five-mile radius surrounding the employer’s location or locations as the restricted territory. However, whether a geographic limitation is “reasonable” is a relative term. A five-mile radius in an urban area like New York City might be home to millions of people, whereas a five-mile radius in a suburb of New York might only be home to a few thousand people.