Contract Review Series: Restrictive Covenants

4 minute read

4 minute read

Restrictive covenants refer to contractual agreements that try to restrict post-employment activities to limit competition. They are usually signed together with physician employment contracts and aim to protect the employer’s investment in an employee.

Types of restrictive covenants

Non-competition clauses prevent a physician who leaves a practice from practicing within a set geographical radius from their former practice for some specified period of time.

Non-solicitation covenants prohibit a physician who leaves a practice from asking patients to follow to a new practice, and from soliciting his or her former practice’s referral sources or other employees.

Sample restrictive covenant contract language

Below listed two paragraphs of restrictive clauses as found in a sample anesthesiologist’s contract:

A.During the twelve (12) month period following the effective date of termination of this Agreement enters into arrangements, contracts or agreements, written or oral, with facilities or third party payors which are parties to arrangements, contracts or agreements with Employer, or

B.Engages in the practice of medicine in the specialty of anesthesia, including pain management, or critical care, during the twelve (12) month period following the effective date of termination of this Agreement within fifteen (15) miles of any hospital, outpatient surgery center, office of other facility serviced by any employee of Employer, or any independent contractor retained by Employer, during the twelve (12) month period proceeding the effective date of termination”

The key takeaway of paragraph A is that, for the 12 months after the end of the contract (for any reason), the physician can’t enter into third-party payer agreements with parties to which the employer was already in contract.

If your employer has payer contracts with all the insurance companies within the region, for the next 12 months you could not be reimbursed by those insurance companies for their services. This clause essentially means you couldn’t practice within that area.

The major consequence of paragraph B is that, if this sample physician does practice in her specialty, it must be outside a 15 mile radius of any hospital or office served by the employer. With mega-groups becoming common in the healthcare system, this could cover a large geographical region and potentially require a physician to move in order to not break the restrictive covenants.

Are restrictive covenants enforceable?

Many courts have recognized that reasonable physician restrictive covenants serve an important purpose and are legally enforceable in most states.

While some states like Alabama and Colorado have prohibited restrictive covenants in physicians’ contracts altogether, most states will uphold a reasonable restrictive covenant.

Unfortunately, there are no set guidelines as to what constitutes a reasonable and enforceable restrictive covenant and this must be kept in account when reviewing any restrictive clauses listed in contracts. If you have any doubt regarding the language of a restrictive covenant, it is advisable to consult a contract attorney who specializes in physician contracts.