A Cautionary Tale: Physician Non-Compete Held Unenforceable by Roanoke Circuit Court

01.05.2016

A recent letter opinion from the Roanoke City Circuit Court may bolster arguments against the inclusion of non-competition provisions in physician employment agreements.  In Fame v. Allergy & Immunology, PLC, CL15-1099 (December 14, 2015), Judge Charles Dorsey struck a physician’s non-compete provision as unenforceable and issued a permanent injunction prohibiting its enforcement by his former practice.

The Enforceability of Non-Compete Provisions in Virginia: A Three-Part Test

To be enforceable in Virginia, covenants not to compete must:

1. be narrowly drawn to protect an employer’s legitimate business interests;
2. not be unduly harsh or oppressive with respect to the employee’s ability to earn a livelihood; and
3. not violate public policy.

Much of the academic debate concerning the propriety of physician non-compete provisions has centered on public policy—i.e., whether a patient’s right to seek treatment from his/her preferred provider trumps the public’s interest in enforcing private contracts. Interestingly, in Fame v. Allergy & Immunology, the Roanoke Circuit Court did not reach the public policy question in its analysis, finding the non-compete provision unenforceable under the first two parts of the test.

First, with respect to protection of the practice’s legitimate business interests, the court found that the provision was not narrowly tailored, in that it prohibited the physician from providing services beyond those which he actually provided to the practice (such as managing or operating a professional competitor). Because this restriction was deemed broader than necessary to protect the practice’s legitimate business interests, the court found the provision unduly burdensome on the physician’s livelihood and therefore unenforceable.

Further, the court found the provision to be ambiguous in that the practice itself provided differing explanations regarding exactly which activities the non-compete prohibited.  The court found at least one of the practice’s interpretations to be overly broad and unreasonable, rendering the entire provision unenforceable.

Effect of Industry Trends on Physician Non-Compete Provisions

Recent trends in the healthcare industry as a whole affect the enforceability of restrictive covenants.  For example, as hospitals increasingly employ physicians and acquire practices, they may be in the position of defending a tortious interference claim.  Hospitals may also be willing to compromise by allowing employed physicians an exit strategy as a means to attract the best talent.  And as accountable care organizations and clinically integrated networks become more common, physicians, practice groups and hospitals may be required to adjust to new restrictions on physician participation and employment.

To Include or Not To Include? That Is the Question

Should employers continue to include non-compete provisions in employment agreements?  Does the decision in Fame v. Allergy & Immunology provide guidance to physicians wondering about the enforceability of an existing covenant not to compete?

The wrong answer to these questions can result in significant expense to the practice group and the departing physician. Determinations of enforceability depend on the specific language of the provision, including the reasonableness of the covenant’s duration and geographic scope; the practice’s location and size; and the physician’s specialty.  The best course of action for a physician or practice group contemplating the enforcement of a non-compete provision in a physician employment agreement is to seek the advice of an attorney with experience in healthcare and employment law.

If you have questions about the enforceability of physician non-competition provisions in Virginia, or would like assistance with a healthcare matter, please contact Emily Scott, John Ivins or Jacquelyn Hedblom.