March 28th, 2023
THE FUTURE OF NONCOMPETE PROVISIONS IN PHYSICIAN EMPLOYMENT CONTRACTS by Jim W. Vogele
Introduction: Noncompetes: Good or Bad?
Would it be quixotic to say that physicians treat patients, rather than compete for patients?
To some extent, yes, that might be naïve to say. For example, a high-ranking public-affairs attorney and professional-licensing guru made an observation at a Continuing Legal Education seminar to the effect of: “I frequently correct folks who refer to ‘the healthcare profession’ by reminding them: ‘It’s ‘the healthcare business.’”
Of course money is involved in healthcare. Lots of money. That is where we are at this moment in America; and things won’t likely be changing drastically any time soon. But shouldn’t income-generating patients in this healthcare business setting thus be allowed to see a physician the patient wishes to see? I almost said “whatever physician,” but there are legitimate restraints on that . . . . So a better formulation would be: Shouldn’t the patient at least not be derivatively constrained by a noncompete agreement from seeing a physician whom the patient has a good reason to see? That issue — of patient access to healthcare — is the source of my primary complaint about the use of noncompete provisions in physician contracts. Having said that, a secondary concern, nearly as significant in my mind as the primary concern, is the freedom of heathcare providers to practice their profession wherever they see fit. In short, mobility is a critical component of one’s professional freedom to earn a living and practice a trade. Noncompetition agreements interfere with that freedom. Period.
As an early aside here, I will note that noncompetes are not legal or enforceable when it comes to lawyers. Interesting, right? See ABA Model Rule of Professional Conduct 5.6 (which provides that a lawyer may not enter into an agreement that restricts the ability of the lawyer to practice after termination of the relationship). The rationale behind Model Rule 5.6 is multi-faceted but one underlying consideration is that entities who commit misdeeds should not be able to ‘buy-off’ an attorney from further pursuing meritorious cases against that same bad actor; that is a rationale targeted at parties who might seek to manipulate justice to their own ends. But patients are seeking to buy-off physicians. Rather, a strict noncompete provision can mean that patients are, in effect, not allowed to see the physician of their choice if that physician must move out-of-state or many miles away in order to practice medicine after an employment relationship terminates.
That aside does illustrate the point that restrictive covenants can be limited as to entire professions, when there is a will to do so. Back to physicians here, for present purposes I’m addressing Washington physician contracts, Oregon physician contracts, and Montana physician contracts. While I’m also talking about California physician contracts, we know that California does not permit noncompete agreements in employment, whether in California physician employment contracts or any other employment contract. Having said this, am I able to count on one hand the number of California healthcare provider employment contracts in which I’ve seen noncompetition clauses? No, actually, I can’t – one hand is not enough. For several reasons, California physician contracts occasionally include noncompete provisions despite the ban. I briefly discuss some of the reasons for this below.
Where are Physician Noncompetes Restricted or Prohibited in the U.S.?
Physician noncompetition agreements come in a variety of formats, and bear a variety of labels, but they are all a form of restrictive covenant (physician noncompetes are a form of restrictive covenant, as are non-solicitation agreements, confidentiality or non-disclosure agreements – “NDAs” — and invention assignments ).
In the jurisdictions where I practice, noncompete agreements continue to be a potential headache when seen in:
- Washington physician contracts
- Oregon physician contracts; and
- Montana physician contracts.
As mentioned, physician noncompetes are not (supposed to be) an issue when it comes to:
- California physician contracts.
In this latter category, I could add further bullet points here for Massachusetts, Connecticut, Rhode Island, and Delaware, but I don’t practice in those jurisdictions. I am admitted to practice law in only our three beautiful west coast states and Montana and I limit my work with physician employment contractsto those jurisdictions. As mentioned, in the states listed directly above, noncompetes are no longer enforceable against MDs. And this is trending. On the national level, the tide is shifting. Slowly. Incrementally.
Meanwhile, we deal with noncompetes.
The 2023 Indiana Bill
Recently in Indiana, where I do not practice (but which is a great state and home to countless fantastic men’s and women’s basketball players, a thought on my mind as we are in the throes of another March Madness tournament seas0n –Final 4 weekend coming up!), doctors who are signing physician employment contracts may no longer have to grapple with this particular headache.
I say “may,” because on January 7, 2023, the Indiana Senate engrossed a bill – Senate Bill 7 — to outlaw noncompete agreements in physician contracts. https://iga.in.gov/legislative/2023/bills/senate/7
What we are hoping to eventually see in Indiana in spring of 2023, by the way, is an “enrolled” bill, because that is a bill that has been passed in both houses of the Legislative Assembly, has been printed with all amendments included, and is ready for signature by the President of the Senate and Speaker of the House. An enrolled bill, after signature by the leader of both the House and Senate, is then ready for presentation to the Governor for signature. However, what we have as of this writing in late March 2023, is an “engrossed” bill that has been passed with amendments by the Indiana Senate and is now in the Indiana House. Indiana representatives have been added as co-sponsors to the bill, one Republican and one Democrat, so things are, it appears, moving forward. When both chambers approve the bill, we will have an enrolled bill.
If this bill is ultimately passed in both houses of the Indian legislature (without major changes), and is signed by the Governor, if it is gubernatorially executed, it could become effective in the summer of 2023.
This bill, if ultimately implemented, would bring Indiana in line, when it comes to physician noncompetition agreements, with California (which bans noncompetes across industries and not just in California physician contracts), but also in line with Massachusetts, Rhode Island, Connecticut, and Delaware, which statutorily prohibit physician noncompetes. Besides these jurisdictions, a handful of additional states, including Colorado, Texas, and Tennessee, have begun to address the problem, by enacting statutes that place certain specific limitations on noncompetes in physician agreements.
And then there is the federal government. As I write this in March 2023, you may be aware that the Federal Trade Commission (“FTC”) is considering imposition of some form of federal prohibition on noncompetes. This is an encouraging development for employees across the country, but the wheels of justice indeed move slowly (and sometimes roll in reverse or fall off completely).
Meanwhile, we await the Indiana House of Representatives . . . .
Restrain Your Enthusiasm, Perhaps
Before thinking that the prospect of FTC action on noncompetes is great news, even fantastic news for employed physicians . . . pause to consider, for example, that nonprofits are not within the FTC’s jurisdiction. Knowing that non-profits are prevalent in healthcare, including some giant healthcare systems, there is reason for caution, in other words, when it comes to one’s enthusiasm about across-the-board changes. Yet non-profit systems certainly like to be competitive (pun intended) when it comes to recruiting healthcare providers (and who doesn’t in 2023 when there are healthcare provider shortages across the nation?); and part of being competitive is certainly offering similar terms and conditions as offered for-profit employers.
Thus, while I’m not suggesting that anything the FTC does would result in a prompt sea-change in the non-profit physician employment picture, the likely reality is that if the FTC does successfully curb noncompetes, it will have broad implications at least eventually, including even if informally, for non-profits. A rising tide lifts all boats is a cliché for a reason.
Negotiation Strategies for Physician Employment Contracts
As I have written elsewhere, there are a few potentially fruitful points upon which a physician can (attempt to) negotiate noncompete agreements in Washington physician contracts, Oregon physician contracts, and Montana physician contracts. Again, one hopes not to find a noncompete provision in a California employment contract . . . and yet, as mentioned, one does, on occasion, find that an employer has either intentionally or mistakenly included a noncompete provision in a California physician employment contract.
I can’t speak to the presence or absence of intentionality on behalf of any particular employer, but a few reasons one might find a noncompete (or, more likely, a nonsolicitation provision) in a California contract, may range from benign to arguably sneaky. These might include: (a) using contract templates that originated in another jurisdiction, (b) not realizing what a pain in the neck noncompetes are and thus figuring – what the heck – may as well, to (c) actually knowing that noncompetes are not enforceable in California but anticipating that to include even a clearly unenforceable provision, restraining a doctor’s career mobility, may tend to discourage the provider from leaving to pursue employment elsewhere.
The ‘template from another jurisdiction’ example is not entirely surprising, given that California is surrounded by states that do allow noncompetes. Oregon physician contract noncompetes are limited temporally and in other ways, but in most cases are fully enforceable (because most physicians: meet the minimum income requirement of Oregon law; are exempt employees; were notified in writing two weeks before the employment commencement date of the noncompete requirement; and, frankly, nearly every workplace involves protectible trade secrets of some sort (this is not to say that some physicians, including emergency medicine physicians, may be unlikely to take “trade secrets” from their workplace when they leave, albeit they will take experience, but, thankfully, experience is not a protectible trade secret belonging to an employee – rather, it is yours; nor are doctors working in emergency rooms or departments apt to be soliciting patients to follow the practitioner to a new practice or place of employment).
As with Oregon physician contracts, which often contain noncompete provisions, with regard to Washington physician contract noncompetes — ditto.
Montana physician physician contracts including noncompetes? Again, ditto.
When one does encounter a noncompete provision in a California physician contract, the employer issuing the proposed contract is likely to be a smaller practice and perhaps one that is trying to save the expense of attorney’s fees for contract preparation. Nonetheless, it really isn’t that expensive to retain a physician contract attorney to prepare a physician employment contract – I do it, so I know what it takes, and it’s not very expensive. I will not purport to opine on what other attorneys charge. But I will note that I’ve had auto repairs that cost nearly as much than does a competently-prepared physician employment contract.
As touched upon above, most of us have no doubt read about the FTC’s recent and ongoing efforts to prohibit noncompetes nationwide within the FTC’s reach. One of the motivations for this campaign is to eliminate or limit noncompetes in the contracts of relatively lower-income employees. But perhaps the rising tide will help to bring some sense to restrictive covenants across-the-board.
In short, go, Indiana Legislature! Your state’s teams may be out of the NCAA men’s basketball tournament, including both Indiana and a No. 1 seed Purdue, but you are moving in what is very arguably the right direction when it comes to physician employment contracts and physician noncompete agreements specifically.
I should note here, by the by, that while this article may not be published (or at least findable in a search!) online in time, on the women’s side of the 2023 NCAA basketball tournament, there are some fantastic games coming up – every basketball fan I know is looking forward to this Friday’s games, when the Iowa Hawkeyes and superstar Caitlin Clark taken on perennial No. 1 seed South Carolina, not to mention what should be a great game between the LSU Tigers and the Virginia Tech Hokies!
And when it comes to physician noncompete agreements: Washington? Oregon? Montana? Are you paying attention? Not to me, but regardless Indiana is moving forward. Massachusetts, Delaware, Rhode Island, and Connecticut, not to mention California, are showing us the way.
In closing, I should also note here that a smaller but important part of my work with physicians is working on behalf of physicians who are small business employers themselves. If I am drafting a physician contract for a small business, with this small business happening to be a physician’s practice, and said small business asks me to include a noncompete provision in an employment contract, will I do so? Consistent with the law, yes, of course I will (which means definitely not in California of course). But I will also discuss with my client what is really necessary to protect the legitimate business interest of the practice. Overbroad noncompetes are unnecessary and benefit no one, and serve to harm physicians (or can certainly be a pain in the neck). A narrowly-tailored noncompete that includes a number of safeguards and/or outlets for an employed physician make the most sense, if a noncompete is required at all.
Thank your for reading my article, and hats off to Indiana!