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Are Non-Competition Agreements Enforceable or Not?

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Non-competition agreements usually bar healthcare professionals both from encouraging patients to follow them to a new practice and from practicing for a certain period of time within a certain distance of the former employer’s location. There is much debate in the healthcare and legal communities, however, over the extent to which these non-compete clauses are enforceable—if at all. The truth is that non-competition agreements are sometimes enforceable and sometimes not, depending on their specific restrictions and circumstances.

Advantages

Employers often consider non-compete clauses a legitimate condition of employment since an employee develops skills, knowledge, and reputation because of his or her association with the employer. These agreements also serve to protect the employer’s investment in employees by discouraging them from leaving the practice in the first place. It seems disingenuous for an employee to receive the long-term benefits of working in an established practice only to subsequently leave the practice and compete for the same patients. Employers may be legitimately concerned about healthcare professionals working with a group solely to develop a patient base and referral sources before opening their own practice. Non-competition agreements, may alleviate these concerns.

Disadvantages

One important consideration in using non-competition agreements is the hardship that they can cause the employee. A geographic restriction may force an employee leaving the practice to relocate outside the restricted area, which could entail a major, life-altering move. Some in the medical community are wary of this seemingly “inherent unfairness” in requiring a healthcare professionals to give up their future right to work as a condition of current employment.
There are also less obvious hardships caused by non-competes. For example, an employer who knows employees will be reluctant to leave the practice, may be less concerned about employee retention. The employer may be less sensitive to employees’ needs and concerns or may be less likely to offer pay increases. Employees who are worried about the adverse effects of non-competition agreements should negotiate with their employers for the narrowest possible restrictions, and consider negotiating for additional compensation or severance in exchange to agreeing to the non-compete.
Non-competition agreements may also have an adverse effect on some patients, who are forced to stop seeing their preferred healthcare provider because of a non-competition agreement. It may result in increased costs for the patient, decreased quality of care, and lowered satisfaction.

Enforceability

Employers should make sure they attempt to enforce non-competition agreements in a consistent, timely manner. If an employer only enforces the agreements some of the time, a court may refuse to enforce any isolated one. Enforcing these non-compete agreements can be problematic, though, since courts construe the agreements narrowly and determine their enforceability on a case-by-case basis, considering all of the attendant circumstances.
Arizona courts generally disfavor non-competition agreements. Thus, courts read the restrictions in a non-compete as narrowly as possible, with any ambiguities being construed against the employer. To be enforceable, a non-compete agreement cannot merely be aimed at protecting the employer from competition. Rather, the agreement must be drafted to protect the employer’s legitimate interest in preventing, for a limited time, a leaving employee from using information or relationships that were acquired by the employee during the course of employment because of the employer.
In determining whether a non-compete is reasonable, courts look at all of the surrounding circumstances. Generally, a non-compete clause is unreasonable (1) if the restraint is greater than necessary to protect the employer’s legitimate interest, or (2) if that interest is outweighed by the hardship to the employee and the likely injury to the public.
The first factor, whether the restraint is greater than necessary to protect the employer’s interest, depends on the duration of the agreement and the scope of its geographic limitations. Courts consider the restraint too great if the limitations last too long or cover too great a geographic area.
With respect to the second factor, whether the employer’s interest is outweighed by the hardship to the employee and the public, Arizona courts are generally wary of non-competition agreements between healthcare professionals. Courts have held that patients are entitled to choose their own provider, regardless of the contractual obligations between their provider and his or her former employer. Courts reason that the harm to patients who are restricted from choosing their healthcare provider is greater than an employer’s economic interest in enforcing a non-competition clause.
Accordingly, non-competition agreements between medical professionals and their employers are read very narrowly. Each agreement is considered on a case-by-case basis to determine if the public policy considerations at play outweigh the employer’s interest in protecting its investment through enforcing the non-compete clause.
In contrast, non-competes are less scrutinized when it comes to the sale of a practice. When a dentist sells a practice, the value of the practice’s goodwill and its existing patient base usually figures prominently in into the purchase price, so the buyer of the practice is allowed some protection from competition from the former owner.

The Blue Pencil Doctrine

“Blue penciling” occurs when a court decides not to enforce certain sections of a non-competition agreement that it considers too broad, but still enforces the rest of the agreement. Instead of declining to enforce the entire agreement altogether or rewriting unenforceable provisions, the court will literally cross out unreasonable provisions but keep the rest of the agreement intact. A key component of the blue-pencil doctrine in Arizona is that courts can strike out unenforceable parts of the contract, but it cannot otherwise add to or change the terms. Some courts disfavor the practice of blue penciling, however, because it tends to encourage employers to draft non-competition agreements with broad or additional terms that can have the effect of scaring employees into never leaving the practice.

Step-Down Provisions

Step-down provisions, combined with severability clauses, are the best way to make sure a non-competition agreement is enforceable. These terms provide alternative time and area restrictions that allow a court using the blue-pencil rule to strike restrictions it considers too broad while enforcing a less restrictive provision. A sample step-down provision might be similar to the following:
  1. NONCOMPETITION. For the TIME PERIOD set forth in paragraph 2, Employee shall not, directly or indirectly, own, manage, operate, participate in or finance any business venture that competes with the Company within the AREA. . .
  2. TIME PERIOD. TIME PERIOD for purposes of paragraph 1 shall mean the period beginning as of the date of Employee’s employment with the Company and ending on the date of death of the employee; provided, however, that if a court determines that such period is unenforceable, TIME PERIOD shall end five (5) years after the date of termination; provided, however, that if a court determines that such period is unenforceable, TIME PERIOD shall end six (6) months after the date of termination.
Because different courts rule differently on what provisions are overly broad, it is important to have an attorney draft these provisions if the practice wants to ensure that they are not stricken altogether.

Remedies for Breach

Injunctive relief is usually the most desirable option for the employer, as it allows the employer to immediately stop the competitive behavior before very much damage is done. Injunctions can be a difficult to acquire, however, as courts consider them an especially extreme form of relief. This does not mean that injunctive relief provisions are always unenforceable. Although consent to injunctive relief does not guarantee that the relief will be entered by a court, it goes a long way to increase a court’s comfort level with the remedy.
Alternatively, money damages may be available if the former employee’s breach was the actual cause of the monetary harm to the employer. This form of relief, however, may take years of litigation to acquire.

Conclusion

Non-competition agreements can be a useful tool for healthcare practices, but making sure those agreements will be enforced can be extremely difficult and requires a high level of precision. On the other hand, an employee struggling to work around a non-compete agreement can rarely know for sure if it is truly enforceable or not, since courts consider each one on a case-by-case basis, considering all of the attendant circumstances. The best way to deal with non-competition agreements is to find an attorney with a thorough understanding of the law regarding these restrictive covenants.
*Edward O. Comitz, Esq. heads the healthcare and disability insurance practice at the Scottsdale-based law firm, Comitz | Beethe. He can be reached at ecomitz@cobelaw.com, (480) 998-7800. For more information about disability insurance issues, please visit the disability insurance attorney website at www.disabilitycounsel.net.

DISCLAIMER

The information in this article has been prepared for informational purposes only and does not constitute legal advice. Anyone reading this article should not act on any information contained therein without seeking professional counsel from an attorney. The authors and publisher shall not be responsible for any damages resulting from any error, inaccuracy, or omission contained in this publication.

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