Locked in

By Ruth Carol, contributing writer

You either signed one when you joined a practice, or you had dermatologists sign one when they joined your practice. If you sell that practice one day, you will likely sign two. Non-compete clauses are a standard part of employment and transaction contracts but navigating the nuances of them can make all the difference in where you practice next.

Non-compete defined

A non-compete clause precludes a physician from engaging in competition with an entity (i.e., a practice, clinic, hospital) for a period of time in a particular geographic location after leaving the entity, explained Rob Portman, JD, who serves as legal counsel for the AAD/A. The purpose of signing a non-compete is to ensure that the physician doesn’t open an office nearby and directly compete with his or her former employer, he added.

Non-complete clauses always have a duration and geographic scope, both of which must be reasonable. A reasonable duration is considered anywhere from one to three years. If it’s longer than that, the employer would have to make a strong case as to why a longer duration is necessary to protect the investment it made in the physician, said Daniel F. Shay, Esq., an attorney with Alice G. Gosfield and Associates in Philadelphia. “At some point, it can become about punishing,” he said. “Courts don’t favor punishment or indentured servitude by locking you into your job.”

Regarding geography, the assumption is that patients cluster in certain areas, said Portman, who is a health law and nonprofit attorney with Powers Pyles Sutter and Verville PC in Washington, D.C. Outside of that five- or 10-mile circle, it’s less likely that patients would want to continue seeing the same physician because it’s inconvenient. A larger geographic scope has less impact if it’s around a rural location because there are fewer practices nearby versus an urban location, which could have a several practices within close proximity.

Regarding practice type, non-competes usually refer to services consistent with a full-service dermatology practice. However, if the dermatologist plans to practice pediatric dermatology or Mohs surgery, services not offered by their current employer, the dermatologist could make the case that there is no competition. “You’re not in competition if the employer doesn’t provide the services you intend to offer,” Shay said.

Typically, non-competes come with a non-disclosure and non-solicitation clause, all under the rubric of restrictive covenants, Portman explained. A non-disclosure clause may include language about confidentiality and trade secrets. A non-solicitation clause prohibits the physician from soliciting patients and employees whether the new employer is across the street or across town. The non-solicitation clause could be binding for a year or more, depending on what is written in the contract. It’s important to define “solicitation,” said Richard Cooper, a health care attorney with McDonald Hopkins in Cleveland. If the physician doesn’t directly solicit former patients, but the new group they join does as part of a normal marketing process such as a mass mailing, is that considered solicitation?

Consequences

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Consequences of signing a non-complete clause can vary. The dermatologist is giving up some of their freedom to choose where to practice next for a certain period of time, Cooper said. Some non-competes are so broad that the dermatologist may have to move to a different state to practice, although non-competes with geographic restrictions that are too broad risk non-enforcement. On the other hand, if the physician is moving across town or to a different city, then the non-compete is likely to be inconsequential, Portman said. In the event of a sale, however, a non-compete may prevent the former owners of the practice from continuing to practice dermatology anywhere in the area, he added.

Physicians who violate a non-compete clause can find themselves hit with an injunction and hefty legal fees for themselves and the enforcing party. Most non-competes indicate that the employer can go to court for a violation and obtain injunctive relief, Portman said. “Going to court is expensive, time-consuming, and soul crushing,” Shay added.

The former employer can seek a preliminary injunction, requiring the dermatologist to stop practicing immediately, said Daniel Bernick, JD, MBA, vice president of the health care law section and president of health care consulting at The Health Care Group in Plymouth Meeting, Pennsylvania. Preliminary injunctions are heard by the court on an urgent basis because of the immediate harm caused to the former employer by the dermatologist’s new employment. Most physicians on the wrong end of an injunction comply with the court order because not doing so could land them in jail, he said. Often, a preliminary injunction ends the case, because the dermatologist does not want to incur further attorney’s fees and be forced to pay damages to the plaintiff too. Defending a lawsuit like this is always expensive and can be prohibitive for physicians who are trying to start a practice and must sign leases, buy equipment, and hire staff — all while facing the risk that their entire operation could be shut down.

State laws vary

The consequences of violating a non-compete clause can be stiff, but they are always subject to judicial review if one of the parties believes the non-compete is unreasonable, Portman said. In a contractual dispute, the courts decide what is reasonable.

In recent years, however, the courts have been less supportive of non-competes, Bernick said. Nearly 30 states have introduced bills to modify their non-compete laws. (See sidebar for details.)

Most states address non-compete clauses through common law, which can change over time, Shay said. A key court consideration is whether the non-compete will have a harmful impact on the public. If the non-compete prohibits the only Mohs surgeon in the region to practice, for example, it will likely not be enforced, Bernick stated, because it could put the health of the patient population at risk. In 2018, Colorado amended its non-compete law to allow a physician to disclose their intent to continue practicing and provide new professional contact information to their patients who have a rare disorder. The statute relies on the National Organization for Rare Disorders’ database to determine which diseases are considered rare.

Some, but not all, states permit the judge to rewrite the non-compete clause instead of throwing it out in its entirety, Cooper said. The judge can reduce the restrictions, whether they relate to geographic location or duration, to restrictions with which the judge is comfortable. For example, he has seen “tiered territory definitions” that go from “within 20 miles of the practice site…but if 20 miles isn’t enforceable, within 10 miles of the practice site,” and so on. These pre-drafted definitions make the judge’s job easier, he added.

Let’s be reasonable

In addition to public harm, courts consider whether the restriction is greater than necessary to protect the employer and how oppressive it is to the physician. While most states will enforce a reasonable non-compete clause, the best indication for what is reasonable is to look at existing court decisions, Shay said.

Practices with more than one office complicate the determination of geographic location. In a densely populated metro area, a non-compete clause that defines the geographic scope as 10 miles around each office can comprise an enormous area and population, if the practice has multiple locations, Bernick noted. From the physician’s perspective, a more favorable non-compete would define the geographic scope as 10 miles around the office in which the physician routinely practiced. The farther apart the offices are, the more likely the dermatologist will be able to exclude some of the offices. “The mileage, and how it’s drawn, is critical,” he said.

Private equity buy-outs can muddy the waters even more because of their significant geographic footprint. A private equity group that owns several practices in a region could argue that it is protecting its investment by preventing the physician from using their knowledge of how to run the practice and its business model. Therefore, the geographic scope could be large enough to prevent competition with the group anywhere it has locations. That could severely limit where the dermatologist can work, Shay said, and may even force the dermatologist to move to another state to practice. A more reasonable option is for the group to consider limiting the geographic scope to the primary location(s) where the dermatologist worked.

It’s not surprising that a group buying out a physician’s practice would want assurances in the form of non-competes for their key assets, which are the physicians themselves, their revenue streams, and business knowledge, noted Frank Wardega, a health care and M&A partner at McDonald Hopkins. They want to protect the investment they made in the doctor as well as their patients and referral sources, all of which figure into the purchase price and terms. In the case of a physician who stands to gain $30 million on the sale of their practice, a judge is more likely to enforce a longer duration, larger geographic location, and more restricted terminology in the non-compete, Wardega said. He tells clients in that circumstance, that they will likely be required to sign two different non-competes with separate clocks running — one in the purchase agreement of longer duration and one in their new employment agreement. For the sales transaction, the non-compete may have a term of three to four years. That clock starts ticking at closing. As a new employee, they will sign an employment-based non-compete with a term of one to two years, and the clock starts ticking after the physician leaves.

Dermatology employment manual

Check out the Academy’s guide to personnel policies and procedures.

Other considerations

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Some courts will rule that if the physician is terminated without cause, then the non-compete is not enforceable, Portman said. An employer can’t just fire a physician without a reason and then prevent the physician from competing with the employer. And while it’s a consideration in many states, Bernick said, it’s not an automatic pass. Shay typically tries to negotiate language in the non-compete that says if the physician is terminated without cause or has cause to terminate due to breach of the agreement by the practice, then the non-compete is unenforceable.

When a non-compete clause is added to an existing contract, it may require a new “consideration” beyond employment, depending on state law. The additional consideration could be extra vacation days, additional benefits, increased compensation, a one-time bonus, or an increased continuing medical education allowance. “In states that require it, they have to give you something if they’re going to bind you to the non-compete during your employment, otherwise it’s unenforceable,” Shay said.

The lower the amount of a “buy out” provision, which would free the physician from the non-compete clause, the better. However, buy out provisions are intentionally costly, usually upwards of a couple hundred thousand dollars, because the number is designed to protect the practice’s investment, Shay said. Alternatively, both parties could agree not to enforce the non-compete clause and instead enter a settlement and release agreement, which enables them to split amicably. A large institution might be amenable because its size would preclude it from being threatened by one dermatologist opening a nearby practice.

Sign on the dotted line

Read tips on how to improve your compensation package at staging.aad.org/dw/monthly/2020/february/sign-on-the-dotted-line.

Tips for negotiating a non-compete

It can’t hurt to push back on a non-compete as long as the physician understands how much negotiating power they have, Portman said. “Many younger doctors don’t have a lot of negotiating power, so they may have to accept it and litigate it later,” he said. Physicians who have a lot of patients they can bring to the practice might have more leverage. Either way, it’s an uncomfortable conversation to have. “Be careful not to overstep and lose the opportunity by being too aggressive,” he warned.

Instead of coming from the vantage point of what “you would like,” Shay recommended using language that speaks to the employer’s perspective. For example, suggest that the proposed language is unlikely to be enforced and should be adjusted accordingly. “Realistically, though, it comes down to how badly they want you,” he said.

Bernick concurs. “The hotter a candidate you are, the better the chances of negotiating,” he said. “Decide up front if you will be able to live with the non-compete if the job doesn’t work out.”

Will your non-compete dictate where you practice next?