Evaluating Restrictive Covenants: Four Key Areas
Understanding a few general principles of contract law can help you assess the enforceability of a restrictive covenant.
Fam Pract Manag. 2000 Nov-Dec;7(10):52.
It's likely that at some point during your career you'll encounter an employment contract containing a restrictive covenant. The current competition for today's health care dollars has caused employers of all sizes to rely on restrictive covenants to protect their practices' patient populations and referral sources (i.e., the key components of the goodwill of a physician practice).
Many physicians think restrictive covenants will not be enforced against them. I would urge those physicians to think again. Yes, restrictive covenants are anti-competitive in nature and essentially act as restraints of trade, but many states will uphold them if they are reasonably drafted. When determining whether a restrictive covenant is reasonably drafted, state courts generally look at four key areas.
A basic principal of contract law is that the parties involved must exchange adequate consideration (i.e., something of value) in order for a contract to be upheld in a court of law. What form would adequate consideration take for a physician? A physician who accepts a job and signs an employment contract containing a restrictive covenant as a condition of employment is generally said to have received adequate consideration. However, courts in many states would not uphold such a covenant if the same physician had been asked to sign the same contract after he or she had already begun to work for the employer. That's because the physician did not receive something of value for agreeing to the covenant. In this case, adequate consideration could have taken the form of an increase in salary or better benefits.
A restrictive covenant must be of reasonable duration in order for a court to enforce it. Many restrictive covenants contained in employment agreements restrict the right of a physician to compete for a period of two years. Courts have generally upheld two-year time limits because they give the employer sufficient time to replace a departing physician and protect the practice from unfair competition during that time. Yet if your employment agreement contains a two-year time limit, don't just assume the courts will enforce it. That will depend on the facts and circumstances of your particular situation.
The courts will also consider whether the geographic scope of a restrictive covenant is reasonable. This depends heavily on the circumstances of each situation, but as a rule of thumb most practices use a mileage radius that covers 80 percent of the practice's patient base as the scope of its geographic restriction. A radius of five or 10 miles from a practice may be upheld as reasonable in a suburban practice setting, but it may also be reasonable for a rural practice to have a restrictive covenant with a 50-mile radius or an inner-city practice to have a radius of several city blocks.
Protection of interest
A court will only enforce a restrictive covenant to the extent that it is necessary to protect the interest of the party seeking to enforce it. Courts generally protect the interests of a medical practice because the practice invests time and money to train its employees, gives them access to confidential information (such as trade secrets and patient lists) and essentially imbues them with the goodwill of the practice.
In certain instances, a court will look to the public interest to decide whether to enforce a restrictive covenant. Sometimes, even when it can be argued that a restrictive covenant is reasonably necessary to the interests of the parties seeking to enforce it, a court may refuse to uphold the covenant in an area where there is a shortage of physicians with similar skills or where the physician in question possesses a specialized skill that would serve the public interest. The public policy of access to quality health care would then outweigh the individual employer's need for protection.
Obviously, the law of the state where you practice has a tremendous impact on the enforceability of a restrictive covenant. Familiarize yourself with your state's laws before signing a restrictive covenant. In an upcoming article, I'll discuss how restrictive covenants are enforced and describe how to negotiate the terms of a restrictive covenant in each of the four key areas I've identified for you here.
Copyright © 2000 by the American Academy of Family Physicians.
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