Non-Compete Agreements: What Employers and Healthcare Providers Should Know

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Non-compete clauses are a common component in employment agreements for many businesses and healthcare providers. Employers and healthcare providers, ranging from large public hospitals and Fortune 500 companies to small private practices and businesses, utilize non-compete clauses in their employment agreements to protect their businesses and medical practices by restricting their employees’ ability to work for a competing entity. This blog offers important considerations for employers and healthcare providers implementing non-compete agreements and clauses to protect their interests, ensure enforceability, and avoid costly litigation.

1. Why Are Non-Compete Agreements Used?
Non-compete agreements are often signed at the outset of an employee’s or a practitioner’s employment or when a person or practitioner joins a practice group or business as an owner. It makes sense for businesses and healthcare providers to impose restrictions on former employees’ subsequent employment prospects to prevent them from joining or establishing businesses or practices since they may capitalize on certain information, training, and/or patient/client lists provided or learned through their employment. However, crafting non-compete clauses as part of larger employment agreements can be a tricky process. Employers and healthcare providers should be aware of certain pitfalls to avoid when crafting such agreements, which may ultimately render a non-compete provision unenforceable.

2. Enforceability of Non-Compete Agreements
Employers should understand there is no national legal standard or body of law that governs the enforcement of non-compete agreements. Rather, the enforceability of non-compete agreements and clauses are governed by state law, which can often differ from state-to-state and be determined on a case-by-case basis. For instance, some states (California) passed legislation prohibiting businesses from restricting their former employees from subsequently being employed or engaged by a competitor or other third party. Other states (Virginia and Maryland) enacted statutes prohibiting employers from using non-compete clauses with low-wage workers. And some states (the District of Columbia) made carve outs to specifically permit non-compete agreements for physicians, subject to specified conditions, when such agreements would otherwise be void. However, most states limit the enforcement of non-compete agreements based on certain public policy interests. Therefore, it is important for employers and healthcare providers to check the laws in the states where they operate or practice. Many states will invalidate non-competes where certain conditions are not met or the restrictions on the former employee’s employment prospects are not determined to be reasonable.

In general, courts require that certain conditions be met for the non-compete to be enforceable. These conditions are that the non-compete (a) be supported by adequate consideration; (b) protect a legitimate business interest; (c) be no wider in scope or duration than necessary to protect the business’ interest; and (d) conform with public policy interests.

These conditions are addressed in detail below.

  1. Adequate Consideration
    Consideration is a benefit that is bargained for between the parties to a contract. In many states, adequate consideration includes signing a non-compete at initial employment and as part of continued employment. However, many states take the position that requiring a departing employee to sign a non-compete upon termination lacks consideration. Thus, it is important to ensure that any non-compete provision or agreement is supported by a benefit received by the employee or practitioner subject to the future employment restriction.
  2. Protect a Legitimate Business Interest
    For businesses and healthcare providers, protected business interests include proprietary information (with the exception of patient health records), preservation of specialized training provided to the employee or practitioner, and the employer’s “goodwill” (i.e., the cultivated relationships between the employee and the employer’s clientele). Many courts take the position that non-compete agreements are overbroad where the restrictions seem designed just to prevent competition by the former employee.
  3. Narrow Scope
    Often, disputes arise when the language of the non-compete is overbroad and not narrowly tailored. For example, many courts determined that language prohibiting an employee from “engaging, directly or indirectly, in the same or similar business” as their employer is overbroad and unenforceable.
  4. Limited Duration
    This is often a frequently litigated point of contention. Employers would be wise to consider the average duration of engagement with its customer base. Likewise, healthcare providers would be wise to consider the turnover of its patient population and how much time passes, on average, before a patient chooses to seek treatment from another provider or the amount of time needed to hire and train a replacement. Generally, non-competes that extend in duration for one to two years are considered reasonable. Because the reasonableness of non-compete agreements are evaluated on a case-by-case basis, the reasonableness of the duration is often dependent upon the role of the employee or practitioner unless a particular state’s statute provides otherwise.
  5. Reasonable Geographic Limits or Customer-Based/Facility-Based Restrictions
    Courts will consider the market in which the business or provider delivers services and the area in which the employee performed their services. There is no general “rule of thumb” for what geographical or customer/facility-based limitations are reasonable. Courts determine the reasonableness of the restrictions imposed on a case-by-case basis. It is a good “rule of thumb” for employers and healthcare providers to ensure that any post-employment restrictions imposed on employees or physicians match the business’ legitimate, protectable interests. For example, many courts have determined non-compete provisions that cover areas where a business or provider does not compete to be unenforceable.

3. Important Conclusions
Although the use of non-compete agreements is common, disputes over the enforcement of such agreements can be a time consuming and costly to resolve. In addition, the political climate concerning business’ and healthcare providers’ use of non-competes is ever evolving and shifting. Many states disfavor the use of non-competes as they restrain an employee’s ability to obtain employment. On July 9, 2021, President Biden signed an Executive Order urging federal agencies to utilize their rule-making abilities to ban or significantly limit the use of non-compete agreements, including in the healthcare sector. Thus, when considering whether to request an employee or practitioner execute a non-compete that will limit their subsequent employment prospects, employers and healthcare providers should be aware of the law governing such agreements in the states where they operate and ensure that the non-compete, as drafted, is likely to be enforceable in keeping with the conditions discussed above.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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