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Almost every physician will face signing a non-compete clause in their physician contract at some point. A non-compete clause means that the physician must not compete with an employer after the employment period is over.

Non-competes prevent physicians from leaving a medical practice and opening up next door or joining a competitor. They also prevent physicians from revealing any trade secrets learned during employment.

Enforcement of non-competes is changing rapidly. In some states, like California, non-competes are not being enforced at all. The FTC seeks to ban non-competes since many feel that the freedom to change jobs is the core of economic liberty.

This article will review the latest results of non-compete legislation, including the most recent outstanding legislation in 31 states and 6 in Congress. It will also briefly explain why non-competes exist and where they came from.

Origin and history

In medieval times, apprenticeship meant that an older master craftsman would train apprentices. In some cases, the master craftsman would insist that the newly trained apprentice not set up shop next door and take away the master craftsman’s business.

Modern uses of this concept have been intended to prevent highly skilled workers from transferring trade secrets or a customer list, thus offering the new company a competitive advantage.

Non-compete clauses (non-competes) are also called restrictive covenants or covenants not to compete. They originated as far back as the 1400s in English Common law but were not enforced until the 1711 case of Mitchel v Reynolds which established the law of restraint of trade.

In the US, the Mitchel case took on greater importance after its citation in the famous US Supreme Court case of Addyston Pipe and Steel Co v United States in 1899 which was the origin of the “rule of reason” test which is used to interpret the Sherman Antitrust Act of 1890.

The rule of reason means a business practice is illegal if it unreasonably restricts trade. Physicians became targets of non-competes because they are highly trained, technical workers.

The desire for the elimination of non-competes for physician contracts has been brewing for years, particularly in states where non-competes have been detrimental to healthcare access. Recently in 2021, a US healthcare study showed that non-competes led to higher prices for physicians, smaller medical practices, and greater medical firm concentration.

Are restrictive covenants legal?

Non-competes are legal but enforced differently in different locations. Non-competes can set the tone for a physician’s career.

The most important factors a physician must consider are what the parameters of the restrictive covenant are. That means how far and for how long does the physician have to stay away.

Physicians want to negotiate to limit a non-compete to apply only if:

  • The physician leaves without cause–meaning it only applies if the physician just decides not to work there anymore
  • Or, the physician is fired for cause.

Physicians never want to be employed and their employer fires them without cause and still be able to enforce a restrictive covenant. As an alternative, some employers are allowing physicians to buy out their restrictive covenant to avoid enforcement.

Why are restrictive covenants harmful?

The reasons non-competes may be harmful include:

  • Enforcement of restrictive covenants may limit the ability of physicians to fulfill the community benefit
  • Hospital systems and practices are not the only investors in physicians’ training. The federal and state governments play a role.
  • Restrictive covenants may not be negotiable in some jurisdictions
  • Restrictive covenants restrict physicians from seeking employment in more favorable work environments.
  • Restrictive covenants may limit patient choice and interfere with the doctor-patient relationship such as when a physician leaves a practice and patients are prohibited from finding out where they went.

Changing non-compete landscape

The AMA is against non-competes because they feel the clauses restrict competition, disrupt continuity of care, and potentially deprive the public of access to medical care. The AMA states that non-competes are unethical if they do not make reasonable accommodations for the patient’s choice of physician.

The Biden administration seeks to ban all non-competes. As of Mar 10, 2024 there are 70 noncompete bills in 31 states and 6 in Congress. Unfortunately, most efforts to ban non-competes fail.

Some states have passed legislation specifically addressing restrictive covenants for physicians. These include:

  • Rhode Island passed a ban on physician restrictive covenants in 2016 except regarding the sale and purchase of a physician’s practice
  • Restrictive covenants tied solely to employment are generally prohibited by statute in:
    • North Dakota
    • Oklahoma
    • California
  • Significant limitations by statute for physician non-competes in:
    • Alabama
    • Illinois
    • Massachusetts
    • New Hampshire
    • Rhode Island

Here are the latest updates:

  • Washington’s non-compete bill passed (will be effective on Jun 6, 2024)
  • Maine and New York’s non-compete bills were vetoed by its Governors
  • Georgia and Rhode Island have new bills to ban physician non competes
  • Also, failed non-compete bills include Florida and Oregon

Summary

Non-competes are being used commonly in physician contracts. Employers are making significant investments in bringing physicians into healthcare systems and practices. The issue boils down to whether the physician feels that the non-compete is within reason for their particular situation.

Most physicians are taking the stance that large health systems that now employ a majority of physicians have outgrown the need for non-competes, although their employers may disagree in certain cases. Medical societies may be a good source for physicians to find out more through meetings and educational forums. But don’t wait to find out the latest changes since legislation is pending across the country.

Contact Contract Diagnostics before signing your next physician contract to learn more about your specific state’s laws regarding non-competes and what you can expect.

About the author

Jon Appino is the Founder and CEO of Contract Diagnostics. He has spent over a decade disrupting the contract review space. He has discussed thousands of contracts with physicians and understands the challenges and opportunities of understanding how your story matters in compensation discussions. He passionately advocates for physicians and believes they deserve to be compensated fairly. He also firmly believes in the power of data and technology to improve the healthcare system.

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