Enforceability of Physician Noncompete Agreements in Medical & Healthcare Businesses
Is a noncompete agreement between a medical or healthcare company enforceable against a physician? Please address both
- noncompete agreements with a physician selling a medical practice and
- noncompete agreements with a physician who is an employee.
In general, noncompete agreements between the buyer and seller of a business, including a medical or healthcare operation, are enforceable, while employee noncompete agreements are more susceptible to being held less enforceable (see the “blue pencil doctrine”) or unenforceable.
The relationship between a buyer and seller does not involve the same public policy concerns as an employment relationship. An employment noncompete is carefully scrutinized because of the public policy interest in employees having a right to work in their occupation and the fact employees often have unequal bargaining power and sophistication. For this reason, courts typically scrutinize employment noncompete agreements to balance (1) protecting a legitimate interest of the employer and (2) ensuring the employee can still earn a living somewhere.
Noncompete Agreements in the Sale of Medical or Healthcare Businesses
Noncompete agreements involving the sale of a business are generally enforceable as long as they are reasonably calculated to protect the buyer of the business. Business sellers and buyers are considered sophisticated parties, so they are generally bound to the language of the agreements they enter. Of course, outrageous language that is not reasonably calculated to protect the interests of the buyer may be subject to the blue pencil doctrine, where the court limits to the agreement to the scope permitted under Minnesota law, or held wholly unenforceable for violation of the duty of good faith the all parties owe each other when entering into a contract.
Employment Noncompete Agreements in Medical or Healthcare Businesses
No Minnesota law prohibits a noncompete agreement with an employee physician. However, the American Medical Association (AMA) has an opinion “discouraging” noncompete agreements.
Thus, the medical profession is subject to the same considerations of general Minnesota employment noncompete agreements.
General Employment Noncompete Agreements
Often, medical or healthcare organizations want to prevent a physician from competing with the employer. The employer has to offer something to the physician (“consideration”). Usually, the consideration an employer gives is (1) the job offer to a new employee or (2) a financial payment to an existing employee. Courts have held payments of $500 to be sufficient, but $1 is probably too low.
In general, “ongoing employment” is not sufficient consideration in an employment noncompete agreement. However, the Minnesota Court of Appeals in 2008 held that “continued employment” for a long duration after signing the noncompete will qualify as “consideration.” See Witzke v. Mesabi Rehabilitation Services, Inc., 2008 WL 314535 (Minn. Ct. App., Feb 5, 2008) (unpublished). However, this case is an anomaly because it involved extraordinary facts, suggesting enforcement of the noncompete would be inequitable and unjust. If there is no consideration, the noncompete agreement is not enforceable because lack of consideration prevents the formation of a contract.
If there is consideration, the next question is whether the scope is reasonably calculated to protect a legitimate interest of the employer while balancing an employee’s right to earn a living and society’s interest in having people employed.
Scope includes geographic limitations. Whether the geographic limitation is reasonable depends on the facts, looking at the business operations and market of the employer. In at least one case, a court held a global restriction was reasonable in a narrow marketplace niche where the employee’s move to an international competitor would have severely harmed the employer.
Scope includes industry limitations. Whether the agreement is narrowly tailored to protect the employer’s market for products and services, or broadly written to prevent the employee from working anywhere in the industry, also depends on a case by case analysis.
Scope includes the duration of the noncompete agreement. Generally, 2-3 years is reasonable; courts have often held 5-10 years is unreasonable. Whether the duration is reasonable also depends on a case by case analysis.
In summary, whether an employment noncompete agreement is enforceable depends on weighing multiple factors, the facts and circumstances of each situation. The uniqueness of each case can make predictability difficult unless the noncompete is narrowly and conservatively written to protect the interest of the employer while ensuring the physician can still obtain employment elsewhere.
While overly broad noncompete agreements are often narrowed by the “blue pencil doctrine,” employers should not draft overly broad noncompete agreements for two reasons: First, overly broad noncompete agreements invite litigation, which is expensive. Second, courts may find the employer violated the duty of good faith, to which all contracting parties in Minnesota are bound, and potentially holding the contract is unenforceable.
For guidance on physician noncompete agreements in other states, see this article.