August 15th, 2022
NONCOMPETITION AGREEMENTS IN PHYSICIAN EMPLOYMENT CONTRACTS by Jim W. Vogele
Introduction: A Brief Comparison of Noncompetition Legal Standards in Oregon, California, Washington, and Montana
Restrictive covenants in employment are contractual agreements between employers and employees, including not only noncompetition agreements (aka “noncompetes”), but also nonsolicitation and confidentiality and trade secret provisions (e.g. NDA’s), as well as invention assignments. Restrictive covenants are generally governed by state law; recently, the federal government is also exploring limitations on noncompete agreements, and, indeed the Biden administration early on and continuing in 2022 has been providing instructions to the Federal Trade Commission to explore limits or bans on noncompete agreements, which are used by approximately 50% of American businesses, including many employers in the healthcare arena and tech industries (as many as 60 million workers in the tech industry are subject to noncompetes). Thus, we currently see, from one state to another, a wide variety of laws governing these covenants.
This article focuses on noncompetition provisions as they may apply to physicians and other healthcare employees in Washington, Oregon, Montana, and California. Noncompete provisions are common restrictive covenants that have long been found in employment agreements (one of the first attempts to impose such a restraint on trade occurred in England in 1414!), although, as discussed below, noncompetes are generally not found in California physician employment contracts, because they are not enforceable under California law. As touched upon below, however, just because a noncompete provision may not be enforceable under state law, does not guarantee that such a provision will not be found in your physician employment contract.
While California prohibits the use of noncompete agreements in employment, Oregon, Washington and Montana also have statutes governing noncompete provisions, which include, in Oregon and Washington, various limits on the permissible scope of noncompetition covenants. At present, in Oregon, Washington, and Montana, the relevant statutes apply across-the-board in terms of industries, and are not specifically tailored to address the employment of healthcare employees such as physicians. Several states have passed specific legislation limiting or banning the enforcement of noncompete provisions vis-à-vis physicians. Among the states with statutory noncompete limitations specifically applicable/tailored to physicians are Colorado, Massachusetts, and Rhode Island.
With different state laws governing restrictive covenants in different jurisdictions, it is important to keep in mind that there is no uniform language that you will see or that can be used appropriately from state to state.
As a physician contract lawyer, I limit my representation to healthcare practitioners in the states where I am admitted to practice. Thus, I work with:
- Washington Physician Contracts
- Oregon Physician Contracts
- California Physician Contracts
- Montana Physician Contracts
- Other Healthcare Practitioner Contracts in these states.
This article, of course, is only a brief introduction to this complex area of employment law. For questions about restrictive covenant law generally, or specific questions about your physician employment contract, I recommend that you contact a physician contract attorney in the state where you practice or intend to practice. I am admitted to practice law in Oregon, Washington, California, and Montana.
Noncompetition Agreements in Washington Physician Contracts
Historically, Washington courts applied a three-part test to determine whether a restrictive covenant was reasonable and enforceable. “The test for reasonableness asks (1) whether the restraint is necessary to protect the employer’s business or goodwill, (2) whether it imposes on the employee any greater restraint than is reasonably necessary to secure the employer’s business or goodwill, and (3) whether enforcing the covenant would injure the public through loss of the employee’s service and skill to the extent that the court should not enforce the covenant, i.e. whether it violates public policy.” Emerick v. Cardiac Study Center, P.S., 189 Wash.App. 711 (2015) (citation omitted)
In Emerick, which was decided in 2015, the Court of Appeals of Washington held that a noncompete imposed upon an interventional cardiologist was enforceable, as reformed by the Superior Court, Pierce County. The Superior court reduced the temporal restraint from 5 years to 4 years and set additional limits on the scope of the covenant.
Under current Washington law, in 2022, the Emerick decision would have looked much different. This is because, in 2019, the Washington legislature passed a new law governing noncompete provisions. The controlling statute in Washington is found in RCW 49.62.005 et seq. RCW 49.62.005 et seq
Effective January 1, 2020, Washington law now provides by statute that:
1) An employee must receive advance notice of a noncompetition requirement no later than when the employee accepts a job offer (this cannot be upon the first day of employment). RCW 49.62.02(1)(a)(i).
2) Noncompetition agreements cannot be enforced against employees earning less than $100,000 per year (most physicians will be above this threshold but some healthcare workers may not be, and the threshold for independent contractors is much higher, i.e. $250,000 annually received “from the party seeking enforcement”). RCW 49.62.020(1)(b) and 49.62.030(1).
3) If an employee is “terminated as the result of a layoff,” an employer who wishes to enforce a noncompetition agreement against the employee must pay the employee, during the period of the enforcement, an amount equal to the employee’s base salary at the time of termination minus compensation earned from other sources by the employee during the period of enforcement. RCW 49.62.020(1)(c).
Furthermore, the revised Washington state law also provides that:
4) Noncompetition agreements are limited to 18 months in duration, unless the employer can show by clear and convincing evidence that a longer period is necessary. RCW 49.62.020(2).
5) The new statute provides that if the court “reforms, rewrites, modifies, or only partially enforces any noncompetition covenant” then the employer must pay the employee’s damages, or $5,000, whichever is greater, along with attorney’s fees, costs and expenses incurred in the proceeding. RCW 49.62.080.
6) Finally, as with Oregon law, the Washington statute exempts nonsolicitation, confidentiality, trade secret, and invention assignment agreements from its reach. RCW 49.62.010(4).
We’ve been discussing noncompetition agreements, but nonsolicitation provisions are another common restrictive covenant that you should discuss with a Washington physician contract lawyer. Depending upon the nature of your practice, a nonsolicitation provision may not be a significant obstacle to your mobility as an employee, while such a provision could be more problematic in other practice areas. For example, ER doctors are unlikely to be soliciting future business from their ER patients, whereas a dentist or veterinarian is perhaps likely to encourage and see a substantial number of repeat patients and business.
For example, in a recent unpublished opinion from the Court of Appeals, Washington, Div. 1, the court affirmed a trial court ruling that a mental health therapist had violated a nonsolicitation agreement. Wellspring Family Services v. Owen, 19 Wash.App.2d 1030 (Oct. 11, 2021).
After resigning from her employment, the therapist started providing, at her new private practice, therapy services to some of her former employer’s clients. The employer inquired whether “there were sound clinical reasons” for her to see these clients in violation of her nonsolicitation agreement. As discussed in Wellspring, when the therapist provided no such clinical rationale, the employer filed an action to enforce the agreement and for damages, to which the therapist responded with a counterclaim, arguing that the nonsolicitation agreement violated RCW 49.62’s provisions concerning noncompetition covenants. The trial court dismissed the counterclaim and the therapist appealed. Finding that the statute expressly excludes nonsolicitation agreements from its reach, at RCW 49.62.010(5), and that the therapist proffered no arguments that the nonsolicitation agreement was actually a noncompete, the court of appeals affirmed the trial court ruling. The appellate court also noted that, even if the agreement at issue were a noncompetition agreement, the therapist had provided “no argument explaining why the Agreement is not still enforceable under RCW 49.62.020(1).”
Yet another potential bone of restrictive-covenant contention between employers and employees, including employees with Washington healthcare employment contracts, is, of course, the protection of, and/or misappropriation of, trade secrets. By way of example, in A Place for Mom v. Perkins, 475 F.Supp.3d 1217, 1227 (W.D.Wash. 2020), the court held that the defendant employee had misappropriated the protectable trade secrets of the plaintiff employer, a senior living referral service, when the employer had taken reasonable steps to protect the information; the employee had emailed various documents and reports to herself during the 6 weeks before she resigned from employment; and the employee had also consulted the company’s Salesforce data numerous times even after she had left the company. While the defendant employee argued that much of the data in her employer’s reports was public information, the court noted: “Defendant’s argument [that this material cannot qualify as trade secrets,] is seriously undermined by the fact that she allegedly accessed Plaintiff’s Salesforce database 11 times after ending her employment – four of those taking place after she began working for Plaintiff’s direct competitor – and [even] forwarding one of Plaintiff’s lead sourcing reports to her new employer on the day she was served with the summons and complaint in this matter.”
It is also of interest to note that the U.S. District Court for the Western District of Washington held, in Perkins, that, despite the undisputed fact that defendant lived and worked in Texas, the court had jurisdiction and would apply Washington law because the agreement defendant had signed stated that Washington law would govern the agreement and that venue and jurisdiction would lie in Washington state.
Obviously, the legal decisions briefly discussed throughout this article are merely illustrative of a few important points governing physician employment contracts. A Washington physician contract lawyer can help you sort through the full scope of your contractual obligations; and can also help you to decide whether you can live with the restrictive covenants found in your Washington physician agreement or whether there may be room for negotiation.
Noncompetition Agreements in Oregon Physician Contracts
The statute governing noncompetition agreements in Oregon is ORS 653.295
As mentioned above, this statute includes no special provisions for Oregon physician contracts or for other Oregon healthcare provider contracts (note, however, that in 2017 the Oregon legislature passed the law codified at ORS 410.631, which provides that home care or personal support workers may void a noncompete). In 2021, this statute was amended, yet again, with several new provisions taking effect on January 1, 2022. Note that the 2021 amendments to ORS 653.295 are the fourth time the statute has been amended in 6 years. If you have signed an Oregon noncompete agreement and need help interpreting the limitations imposed by an Oregon physician employment agreement, you should consult with an Oregon noncompete lawyer who can determine exactly what version of the statute governs your agreement and assist you in developing a gameplan to address your particular situation.
Among the more recent amendments to ORS 653.295 are the following:
In 2015, the legislature reduced the permissible period for an enforceable noncompete from 24 months to 18 months.
In 2017, the Oregon legislature provided that noncompetes are voidable by homecare workers. ORS 410.631.
In 2019, the Oregon legislature amended the statute to mandate that an employer must provide an employee with a signed written copy of the agreement containing the noncompete provision within 30 days following the final date of employment.
In 2021, the Oregon legislature passed additional, employee-friendly amendments to the statute, including the following provisions:
1) an employee’s income at the time of termination must be equal to or greater than $100,533, an amount which will be adjusted annually for inflation (this is certainly an improvement upon the previous, and potentially confusing, median income of a family of 4 standard, which could be difficult to find in Census data and which was ambiguous as to geography, since there are national, state, and even local median income data available);
2) the maximum duration of the noncompetition agreement is limited to 12 months (compare WA’s statute which is limited to 18 months; and note that, while 12 months is still a long time, one year is an improvement from the employee perspective, as this increases the likelihood that an employee can find a potential workaround where the noncompete provision is, indeed, enforceable); and
3) perhaps most importantly, noncompetition agreements that do not comply with the statute are now, post-January 1, 2022, “void,” not voidable. The use of the term “voidable,” which was the applicable term in Oregon’s statute for 13 years, from January 1, 2008 to December 31, 2021, caused no small amount of mischief and headache for Oregon employees, because use of the term “voidable,” as opposed to “void,” meant that employees who signed noncompetes during this decade-plus time period, must take steps to notify their employer that they are voiding a noncompete that does not comply with the law. Going forward, from January 1, 2022, the noncompete is void ab initio if it does not comply with the statute.
A thorough discussion of Oregon caselaw on noncompetes is beyond the scope of this article, but several reported cases have arisen in the medical and ancillary services fields:
- Pacific Kidney & Hypertension, LLC v. Kassakian, (D.Or. 2016) (holding that restrictive covenants under Oregon law would, to a certain extent, be enforced against a physician, while also discussing the AMA policies which discourage use of noncompetition agreements in physician contracts for public policy reasons).
- Psychiatric Partners, LLP v. Henry, 316 OrApp 726 (2022)(employer bears the burden of proving enforceability of noncompete, once employee takes steps to void, and trial court did not abuse its discretion in finding that certain patients were not customers within the meaning of the statutory exception excluding nonsolicitation agreements from the reach of ORS 653.295(4)(b)).
- Millenium Health, LLC v. David Barba, 21-35314 (9th Cir. 2021)(federal court holding that employees of substance testing service employer did not provide a notice of “voiding” to their employer prior to the employer notifying the employee of its intent to enforce the noncompete; therefore, the fact the noncompete did not comply with ORS 653.295 did not render the noncompete unenforceable under Oregon law).
In a recent federal court decision, the U.S. District Court for Oregon found that the former Head of Product for a canine DNA testing service company had not violated various trade secret statutes or common law principles when he took a position with the employer’s direct competitor. Kinship Partners, Inc. v. Embark Veterinary, Inc., No. 3:21-cv-01631-HZ (D.Or. Jan. 3, 2022)
While the trial court had earlier issued a Temporary Restraining Order (“TRO”), upon a full hearing concerning Kinship’s motion for an injunction under the Defend Trade Secrets Act and the Oregon Uniform Trade Secrets Act, the court found that Kinship’s former employee had not signed a noncompete provision; that he had not engaged in actual misappropriation of trade secrets, and that the “inevitable disclosure doctrine” has not been adopted in Oregon.
The Kinship Court cited a 2019 case indicating that around 17 states appear to have adopted some form of the “inevitable disclosure doctrine.” See Phoseon Technology, Inc. v. Jennifer Heathcote, No. 319-cv-2081-Si (D.Or. 2019) As of 2022, however, “Oregon is not one of those states.” The “inevitable disclosure doctrine” provides, in short, that an employee may be restrained from working for a competitor (or starting her/his own business to an extent), due to the nature of the access the employee had to trade secrets, the employee could not help but disclose them in the employee’s new work or business environment.
Note that Kinship makes the important point that the application of the inevitable disclosure doctrine can be tantamount to a “de facto noncompetition agreement.” Id. (citation omitted). In other words, if applied in certain circumstances, the inevitable disclosure doctrine can be misused, as an end-run around the statutory requirements governing noncompetition agreements.
If you have questions concerning Oregon noncompetition agreements, you should contact an Oregon physician contract lawyer to discuss obtaining a contract review of your employment agreement.
Noncompete Agreements (Should Not Be Found) in California Physician Contracts
The most important provision of California restrictive covenant laws is Business and Professions Code Section 16600, which, as mentioned above, bans the enforcement of non-compete provisions against employees under California law.
This statute provides as follows: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
The three exceptions to the ban on noncompetes in California are:
1) sale of the goodwill of a business;
2) a dissolution of a partnership or disassociation of a partner from a partnership; or
3) a dissolution or termination of an interest in an LLC.
Cal.Bus. & Prof. Code 16601 – 16602.5.
As with noncompetition agreements, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., 28 Cal.App.5th 923 (2018) the California Court of Appeals held that non-solicitation agreements are unenforceable under Bus. and Prof. Code 16600. Please note that if you are looking for the litigation involving AMN Healthcare and Aya Healthcare Services, the citation above is the state court litigation involving enforceability of nonsolicitation agreements under California law. There is separate litigation in federal court between these same two parties involving allegations of Sherman Antitrust Act violations.
Please note that despite the clarifications in the law of restrictive covenants that has occurred in California over the past decades, I continue to see, on occasion, even in 2022, various forms of nonsolicitation restrictive covenants (and occasionally even noncompete provisions) in California physician contracts.
There are, of course, many provisions in your California physician employment contract, and, prior to signing, you should discuss them with a California physician lawyer. I would be happy to help and you can reach out to me using the confidential contact form or by emailing me directly.
Noncompete Agreements in Montana Physician Contracts
Montana’s noncompetition statute is codified at MCA 28-2-703, which provides in its entirety:
“Contracts in restraint of trade generally void. Any contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, otherwise than as is provided by 28-2-704 or 28-2-705, is to that extent void.”
MCA 28-2-704 pertains to the sale of goodwill in a business and sets geographic limitations on such covenants, and MCA 28-2-705 pertains to dissolution of a partnership. While either of these latter two statutes may apply to a Montana healthcare professional at some point in your career, this article addresses only employment law issues affecting employees and their employers.
While MCA 28-2-703 closely mirrors California’s Bus. & Prof. Code 16600, note that noncompetition agreements continue to be enforceable under Montana law, provided that the court determines the provision is reasonable.
In a 2020 decision, the Montana Supreme Court again upheld the viability of noncompete agreements in Montana in Junkermeir, Clark, Campanella, Stevens, P.C. v. Alborn, 2020 MT 179 (2020). The Court held in Junkermeir, that noncompetition agreements in Montana may be enforceable provided that three factors are met: (1) the agreement should be limited in time or place; (2) the covenant should be based on good consideration; and (3) it should provide reasonable protection for, and not impose an unreasonable burden on, the employer, the employee or the public. If those three requirements are met, noncompetition agreements may be enforceable in Montana, even though Montana’s statute largely parallels the California statute (and, under the latter, of course, noncompetes have been held not to be enforceable in California physician agreements).
A final note here of relevance to Montana physician contracts, and to contractual employment agreements generally, can be seen on the issue of contractual choice of law provisions. In McCue v. Integra Imaging, No. CV 19-147-M-DLC, (D.Mt. 2020) , the U.S. District Court for the District of Montana held that an employment contract entered into between a Washington Professional Service Corporation and a physician located in Missoula, Montana would be governed by Montana law, not Washington law, despite a contractual “Governing Law” provision that specified, “This Agreement shall be interpreted, construed, and governed according to the laws of the state of Washington.”
In McCue, the employed physician did all of his work from Montana, the physician employment agreement was largely negotiated and was signed in Montana, and about 80% of the patients the physician served were Montana patients, and only 20% were Washington patients. Without getting into the details in this brief article, note that the key substantive issue in the case was whether Montana’s Wrongful Discharge in Employment Act (“WDEA”) would apply to a termination from employment, or whether Washington’s at-will doctrine should apply (the Washington employer had terminated the physician’s employment in reliance upon the at-will doctrine). The court found that Montana law should govern the dispute, pursuant to Montana’s fundamental public policy and because Montana had a “materially greater interest in the particular issue than the state [Washington] chosen by the parties . . . .”
If you have questions concerning Montana physician contracts or other Montana healthcare employment contracts, you should reach out to a Montana physician contract lawyer.
Strategic Considerations for All Healthcare Professionals Concerning Noncompetition Agreements In Healthcare Employment Contracts
The most important recommendation for a medical professional who is presented with a noncompete provision in a healthcare employment contract, is to carefully read the document containing the noncompete provision. This is an obvious point, about which most healthcare physicians will need to be reminded. On the other hand, as a physician contract lawyer, I communicate with employees all the time who simply signed a contract containing a noncompete provision without considering the consequences and limitations that such a covenant would impose upon their mobility and future career choices.
The early days of recruitment and acceptance of a job offer are, as they should be, a period of optimism. Furthermore, physicians who are still completing a residency or fellowship may not know how long they will be employed in their first full-fledged employment position. But suffice it to say that one’s first job is rarely one’s permanent or only job.
If you are a physician and have been presented with a contract containing a restrictive covenant of any kind in Washington, Oregon, Montana, or California, and especially if your employment contract contains a noncompetition provision, you should consult with an attorney who is experienced in noncompete law before you sign the contract.
Some aspects of physician noncompete provisions can be negotiated. For example, some employers are willing to agree that if the employer terminates the employee physician without cause, then the employer will not seek to enforce the noncompete. Other times, the temporal or geographic scope of the noncompete will be negotiable.
The buyout provisions that I typically see – by means of which the physician will be relieved of noncompete restrictions for a price – are generally more than most physicians are willing to pay, e.g. a buyout in the amount of from one to two years of the physician’s salary. There are also some circumstances where a noncompete provision is simply a dealbreaker for a physician, e.g. if you have a family and are contemplating moving across the country to work in any sort of remote setting in Oregon, Washington, or Montana, a noncompete could mean that if you wish to change jobs you will need to completely relocate your family again, or commute an unreasonably distance for a year or more, or perhaps practice telemedicine for a time, assuming that might work in your practice specialty area (and telemedicine can raise thorny legal issues when it comes to restrictive covenants, many or most of which were not drafted with the prospect of remote medical practice in mind).
While this article has briefly summarized some important issues relevant to noncompete provisions in physician employment contracts, the law governing restrictive covenants is notoriously complex, and is subject to somewhat frequent change based on statutory amendments and judicial interpretation of statutes and contracts. I recommend discussing your contract, including any restrictive covenants, with a physician contract lawyer.