Employment Law Q&A: Are my organization’s non-compete agreements with our healthcare providers enforceable?

Q. Are my organization’s  non-compete agreements with our healthcare providers  enforceable?

A.  Generally speaking, most states will enforce non-compete clauses if they are deemed to strike a reasonable balance between the employer’s interests and the interests of the employee and the public. But non-competes and other restrictive covenants may not be enforceable in the healthcare context where they are broader than necessary to protect the employer’s legitimate business interest or deprive the public of healthcare. Protectable interests typically include safeguarding of customer relationships and goodwill, confidential patient, referral or business information, trade secrets, and investments employers have made in training their employees, particularly those providing specialized services. 

A recent Ohio decision highlights the fact that courts are less likely to enforce non-compete agreements when their provisions are broader than needed to protect these interests. In MetroHealth Sys. v. Khandelwal, 2022-Ohio-77, (8^th Dist. Jan 13, 2022), MetroHealth, the former employer of a burn surgeon asked the court to issue a preliminary injunction against the surgeon in relation to a non-compete agreement. MetroHealth had employed the surgeon as the director of its burn unit and sought to keep him from working at Akron General for two years consistent with the terms of the non-compete agreement. Rather than enforce the non-compete agreement as written, however, the trial court reformed the agreement allowing  the surgeon to work in his specialty at Akron General, the only other burn unit in the area, but prohibiting him from becoming director for one year. The court also prohibited the surgeon from seeing the same patients, using the same referral sources to benefit Akron General, and using MetroHealth’s confidential information.  

The appeals court affirmed the trial court’s modification of the terms of the parties' non-compete agreement. The appeals court found a two year injunctive period would create a professional and familial undue hardship. The appeals court further found that if the surgeon was completely prevented from practicing his specialty the public would lose the benefit of his expertise. 

This case exemplifies the Ohio rule that allows courts to reform non-competes that it finds to be overly broad. This is not the case in some states. Courts in so-called “red pencil” states (like Virginia) will not enforce a non-compete if any aspect of it is deemed overbroad. In contrast, “blue pencil” states (like Maryland) permit courts to enforce non-competes that are overbroad in part by severing the overbroad portion and giving effect to the remainder. States like Ohio use a modified blue pencil approach, where the court has the power to reform or rewrite an offending provision of a restrictive covenant.

In addition to general overbreadth, health employers should also be cognizant of the laws of the states in which they operate, which are rapidly changing. While most states permit reasonable restrictive covenants, some, like California, North Dakota, and Oklahoma, ban employee non-competes. Several other states prohibit enforcement to certain categories of employees. For example, physician non-competes are limited in New Hampshire, New Mexico, and Texas. States have also enacted various rules requiring the employee to have notice of a non-compete, and some other jurisdictions will not enforce the non-compete if the employee is terminated without cause. Massachusetts implemented a statute permitting the enforcement of non-competes only if employers satisfied certain conditions, for example, the requirement that they provide employees with at least 50% of their salary during the term of the non-compete, or other consideration, which is typically referred to as  “garden leave.”

Given the evolving state of non-compete law, it is critically  important that healthcare employers regularly review their agreements with their physicians and other employees and use appropriate drafted agreements for each state in which the employer does business. 

Below are questions healthcare employers should ask about their restrictive covenant program to ensure that they are doing everything in their power to safeguard their legitimate business interests against unfair competition: 

1. Have you reviewed the restrictive covenants laws of the states in which you operate and do you know if special rules apply to physicians?
2. What business information or trade secrets (e.g., referral lists, , strategic marketing/planning information, etc.) do you want to protect and what steps are you taking to protect them?
3. What measures/agreements do your competitors use to protect themselves from theft of business information, trade secrets, and/or customer relationships to the extent you are aware?  How do your measures compare?
4. Have you established and distributed written confidentiality policies to all employees? (e.g., separate policies, handbooks, etc.)
5. Do you have a policy for advising employees regarding your business information or trade secrets?
6. Have you updated your agreements to comply with the Defend Trade Secrets Act?

If you need assistance working through this complicated area of the law, be sure to reach out to one of the below attorneys in this specialty area.