LEGAL CORNER

Richard E. Moses, DO, JD

Restrictive Covenants

Employment contracts generally set forth the terms and conditions for the employee’s services to the employer. While most of the terms are easy to understand (e.g., salary, benefits, vacation), contracts for many industries, including those for healthcare providers (HCPs), include “restrictive covenants” which are not self-explanatory. This article will explain restrictive covenants in general and explore their current status in the United States, especially as they apply to HCPs.

A restrictive covenant is a condition that restricts, limits, prohibits, or prevents the actions of someone an individual named in an enforceable agreement (employment contract). The phrase “restrictive covenant” is a general catch-all term. It encompasses non-competition, non-solicitation of patients and employees, and nondisclosure provisions, in addition to other provisions, that are frequently included in standard employment contracts, or ownership agreements., and ancillary agreements to the employment relationship. The most common restrictive covenants causing HCPs concern are noncompete and non-solicitation provisions restricting the HCP’s conduct during and after employment. As a general rule, non-solicitation and noncompete provisions are usually closely associated in healthcare employment contracts.

Non-solicitation Provisions

Non-solicitation clauses restrict the employee’s post-employment activities. The purpose of the a non-solicitation clause is to limit the employee’s ability to solicit patients, employees, and referral sources, which would otherwise result in a loss to the employer. These clauses need to be narrowly worded to be enforceable since patients have the right to choose their own HCP. “Solicitation” can be difficult for the employer to prove because i It requires an affirmative action by the employee. A patient seeking out the ex-employee HCP does not constitute a violation of the non-solicitation clause without the employee’s affirmative action.

Noncompete Provisions

Noncompete clauses restrict the employee from practicing within a defined geographic scope/area and timeframe after leaving the practice. The restricted geographyic area may be a radius of a certain number of miles from the employer’s office or facility, or even a larger area in rural situations. Noncompete clauses are intended to protect the employer/ practice/health system from the employee’s actions once employment terminates. Depending on the wording of the noncompete, the HCP may be restricted from completely practicing medicine or it could be a targeted restriction of a particular area of specialty practice.

protect the employer’s legitimate interest, (2) does not cause undue hardship to the employee, and (3) is not contrary to public interest. For the employer, protectable interests include employees, practice relationships with patients, referral sources, confidential information, and trade secrets learned by the employee during employment.

Laws and Restrictive Covenants

There is a recent trend against restrictive covenants. Some states have started banning or restricting restrictive covenants. California, North Dakota, and Oklahoma have state laws completely prohibiting restrictive covenants. Twenty-one other states have laws prohibiting restrictive covenants to one degree or another.

Reasonable

Noncompete

clauses are enforceable. Courts determine enforceability based on the reasonableness of duration (time limit) and scope (geographic limitations). The more reasonable the restriction, the more likely the Court will enforce it. Commonly used restrictions in Pennsylvania HCP employment contracts are 2 years (timeframe) and a 5 mile radius from the original place of employment (or greater in rural locations), although these parameters vary from contract to contract. A noncompete is enforceable if it: (1) is necessary to

Unfortunately, Pennsylvania is not one of those states. PA House Bill 681 would have prohibited enforcement of noncompete covenants in HCP employment agreements. The bill was unfortunately removed from the table in September 2022. There is nothing pending currently in the Pennsylvania State Senate or House or Representatives. At this time, restrictive covenants have been held to be enforceable in Pennsylvania as to HCPs, provided the covenant is protecting a legitimate business interest and its scope is reasonable in both time and geography.

However, a number of states have laws prohibiting restrictive covenants. California, North Dakota, and Oklahoma have state laws completely prohibiting restrictive covenants. Other states have laws prohibiting restrictive covenants to one degree or another. These include: Alabama, Arkansas, Colorado, Delaware, D.C., Florida, Illinois, Indiana, Iowa, Kentucky, Massachusetts, Nevada,