Limiting Restrictive Covenants
Don't let a restrictive covenant keep you from signing an employment contract, but don't ignore it either.
Fam Pract Manag. 2001 Apr;8(4):50.
If you're presented with an employment agreement that includes a restrictive covenant and you sign it assuming that the covenant won't be enforced, you're in for a rude awakening. Restrictive covenants determined to be “reasonably drafted” are likely to be upheld in court. (For more information on what's “reasonably drafted,” see “Evaluating Restrictive Covenants: Four Key Areas,” FPM, November/December 2000, page 52.)
Before you sign on the dotted line, consider how the restrictive covenant would affect you if you were to break it. Then negotiate to narrow its scope.
Enforcing restrictive covenants
Employers will usually try to enforce a restrictive covenant in one of three ways. Most commonly, employers will seek an injunction (where permitted by state law) to prohibit you from practicing within the area defined by the restrictive covenant.
Alternatively, if your restrictive covenant includes a damage clause, the employer could require that you pay a fixed amount (usually determined according to a formula) for practicing in the restricted area. If you don't pay, the employer may then seek an injunction to prohibit you from practicing (again, if your state law permits it). In general, courts will uphold damage provisions if the formula used is deemed reasonable and not punitive in nature.
Finally, if you're a partner, co-owner or shareholder in a practice and you establish a new practice in a restricted area, you are essentially taking the goodwill you would have been paid for in a buy-out. To prevent this, many agreements will be drafted so that you will lose some or all of your buy-out if you break the restrictive covenant.
It's unlikely that you can delete a restrictive covenant from your contract altogether, but depending on the situation and your leverage, you may be able to narrow its scope. Of course the employer might not agree to the changes, but it would be worth your effort to try to get the employer to narrow the restrictive covenant in one or more of the following three areas:
Duration. Rather than jumping into a new position with the standard two-year restrictive covenant, ask a potential employer for a one-year restrictive covenant to apply if the agreement is terminated during the first year of your employment, increasing to two years beginning with your second year of employment.
Geographic scope. You can also try to narrow the geographic scope of the restrictive covenant. Typically, the mileage radius of the covenant covers 80 percent of the practice's patient base. Ask to have that reduced, or, if your potential employer has several offices, try getting the practice to limit the application of the covenant to only those offices where you'll be practicing the majority of time.
Application. Your greatest chance of success in limiting a restrictive covenant is limiting its application. For example, you may be able to persuade the employer to void the restrictive covenant in the event you're terminated without cause (even if the contract permits “without cause” termination). Employers may resist, though, thinking that they need to be protected from potential competition regardless of the reason for terminating the employee. Or, if you also provide “specialized” services such as acupuncture or alternative medicine therapies, you may seek to limit the restrictive covenant to only “family practice” services. That way, if you leave or are fired, you will be free to provide the specialized services in the restricted area.
Square peg, round hole
Unfortunately, trying to analyze one restrictive covenant in the context of another is like trying to place a square peg in a round hole. Each restrictive covenant must be analyzed on its own merits. Obviously, the law of the state where a family physician practices has a tremendous impact on how a restrictive covenant is enforced. Physicians should review the facts and circumstances of their situation and use them to negotiate a covenant that is fair to everyone involved.
Michael R. Burke is a shareholder with the health care law firm of Kalogredis, Sansweet, Dearden and Burke, Ltd., in Wayne, Pa.
Copyright © 2001 by the American Academy of Family Physicians.
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