The Business of Healthcare

When Less is More: Medical Group Covenants Not to Compete

January 9, 2017

Big eyes and hollow legs.

That’s what my mother accused me of having when I was a kid. It was in the context of food. As in the two major food groups: pizza and Mexican food.

As I got older, I came to appreciate my mom’s point of view that too much isn’t too good for you.

But, unfortunately, I’m not talking about food, I’m talking about covenants not to compete.

Many medical group leaders have awakened to the fact that they must consider the use of covenants not to compete and other restrictive covenants to protect their most important assets, their physicians, from being poached by competitors (usually hospitals or their controlled/affiliated groups) or from simply walking out the door to compete on their own account.

However, in fashioning the terms of a CNTC, keep my mom’s saying in mind, because too much of a good thing (greater restrictions) isn’t a good thing at all in the world of enforcement of anti-competitive restrictions.

In general terms (CNTCs being mainly, but not exclusively, a state law issue), if a CNTC is valid at all, it will be enforced only to the extent that (and, in some cases, only if) its terms are found to be reasonable. “Terms” in this context include the scope, the length of the restriction, and the geographic area. The rationale is that there must be a balance between preserving the rights of the employer to protect its business with the rights of the employee to continue to practice his or her profession and earn a living.

Big eyes, such as “Physician will not provide any medical services within the State of X for a period of 50 years,” leads to failing the reasonableness test. (In fact, it fails the laugh test, too.) Failing the reasonableness test may render the CNTC wholly invalid or pruned in scope beyond recognition by the court, meaning that it was just a waste of time and money.

So, in all events, feel free to grab a slice (that is, to consider how CNTCs and other restrictive covenants may be used to protect your business) but don’t attempt to put hot pepper flakes all over the entire pizza to keep your brother from taking a slice (hmm, too autobiographical?) Your mom, I mean the judge, will smack your butt.

You can benefit from my teachable moment: As hard as it was for me to learn, in both pizza and CNTCs, less is more.

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