Are non-compete clauses a good idea in physician employment contracts?

Mar 17, 2015

Saurbier

Employers in Michigan have a strong edge in enforcing non-compete agreements.  While there is a split of authority in many other states—for example, Virginia and Washington have watered down the impact of such contractual arrangements, Tennessee has said they are not enforceable in the realm of physician employment, and California has virtually dispensed with them entirely—Michigan courts will uphold such restrictive covenants, if they have been well drafted and meet certain criteria.

Philosophically, the purpose of such clauses is to discourage the new employee from looking for “greener pastures” close to his employer’s locality where he might better his position by encouraging patients and referral sources to follow him. A newly-minted specialist may be too overwhelmed at first to open his open clinic, but once he sees the lay of the land, he may no longer wish to be confined to the practice agreement he once signed and prefer to start his own practice in the same field or join his employer’s competitor.

Michigan’s statute, MCL 445.774a, on this subject reads as follows:

An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business. To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.

The Michigan case most cited regarding enforcement of physician agreements is one decided in 2007, St. Clair Medical PC v Borgiel, in which the Court of Appeals upheld the payment of damages by a physician-employee who violated a non-compete agreement.  The physician signed the contract incident to his employment at a medical clinic in which he agreed not to work within seven miles of the clinic for one year after the employment relationship ended. The Court held that “[a] physician who establishes patient contacts and relationships as the result of the goodwill of his employer’s medical practice is in a position to unfairly appropriate that goodwill and thus unfairly compete with a former employer upon departure.”  In the opinion, the Court addressed a statement issued by the American Medical Association regarding the ethics of such agreements.  The AMA concluded that “restrictive covenants are unethical if they are excessive in geographical scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician.” The Court held that this standard merely reflected the common law rule of reasonableness, and that restrictive covenants are only unethical if they are excessive in geographical scope or duration.

The key in all of this is the meaning of “reasonableness.”  Courts will typically balance the employer’s interest, the public interest, and the employee’s interest in being able to earn a living.  Consequently, a reasonable non-compete agreement should be no broader than necessary to protect the employer’s legitimate business interests.  It is impossible to state a simple rule or numerical formula that provides a sure litmus test for reasonableness as to duration. Instead, courts will individually analyze what is reasonable in each factual scenario, including whether competition by the former employee at a specific location would have an adverse impact on the business of the former employer.

Once an employer begins litigation to enforce a non-compete agreement, the results may be varied.  The court may issue an injunction prohibiting the employee from continuing the practice while the court sorts through the remaining issues:  Was the geographical scope of the agreement and the duration reasonable?  Did the employee take lists of patients or patient charts that might also be violations of privacy laws?  Did the employee violate terms of the employment agreement such as soliciting  referral sources or attempting to change referral patterns to the new practice?  If the agreement is found to be unreasonable in some respects and not in others, e.g. duration is excessive, to what extent will the court reform the contract?  Will the court extend the terms beyond the stated expiration date as a remedy for a breach of the agreement?  Is the payment of money an alternative remedy to closing down the new practice?

The purpose of this NewsFlash is to alert you to the importance of well-drafted non-compete agreements in Michigan. We have been involved in both the drafting of such agreements as well as litigating disputes over such agreements. We would be happy to respond to any questions you may have regarding this NewsFlash or any other thoughts or non-competes in general.