Covenants not to compete are common in physician employment agreements but are they enforceable? competition_tug_sl_1

The American Medical Association (AMA) has taken the position that physician non-compete agreements impact negatively on health care and are not in the public interest. Stopping short of completely prohibiting covenants not to compete, the AMA strongly discourages them.  In line with the AMA, Colorado, Massachusetts, and Delaware have passed laws invalidating contractual provisions restricting a physician’s right to practice medicine after termination. 

Nebraska courts have held that some covenants not to compete, if narrowly defined and reasonable in scope, are enforceable.  The current test in Nebraska in determining whether a non-compete or non-solicitation covenant is valid involves three considerations:

(1)   Whether a restriction is greater than is reasonably necessary to protect the employer  in some legitimate business interest;  (2)  Whether a restriction is unduly harsh and oppressive on the employee; and (3)  Whether a restriction is reasonable in the sense that it is not injurious to the public.  I’ll address a few of the issues raised with covenants not to compete below.

(1) Legitimate Business Interest:

Nebraska courts first assess whether an employer has some legitimate interest that is worthy of protection and draw a distinction between “unfair” and “ordinary” competition.  An employer is not entitled to protection against a former employee’s “ordinary” competition but is entitled to protection from unfair and harmful competition. 

Non_Compete_AgreementTypically, employers do not have trouble establishing a legitimate interest.  This element can be established by referencing the amount of contact the former employee had with customers.  By referencing the amount of contact with customers, the Court implies the opportunity to use the employer’s “goodwill.”   Goodwill is a somewhat nebulous value tied to an employer – the likelihood that customers will return to the same business or seek old friends.

(2) Greater Than is Reasonably Necessary:

A covenant not to compete cannot be greater than is reasonably necessary to be valid.  In Nebraska, it must only restrict the former employee “from working for or soliciting the former employer’s clients or accounts with whom the former employee actually did business and has personal contact.”

The Nebraska Supreme Court has previously invalidated a non-compete covenant that prevented a dentist from practicing “in any form … under any entity…”   Because the clause was not tailored to the employer’s customers with whom the dentist had personal contact with, the clause was too broad to protect the employer’s interest.  On the other hand, the Nebraska Supreme Court has held a licensed physician to a restrictive covenant that prohibited the physician from practicing medicine within a certain radius after the physician defaulted on the purchase of a medical practice.  It is important to point out that Nebraska courts are generally more willing to uphold promises to refrain from competition made in the context of the sale of the goodwill of a business than those made in connection with employment contracts.

The “personal contact” language above raises an important question: what if a former patient, unsolicited, walks into a physician’s office (operating under a covenant not to compete) for treatment?  Can the physician treat his or her former patient?  As is typical in the legal world, the answer to this question will depend upon the language of the restrictive covenant and the facts of the case.  The Nebraska Supreme Court has previously refused to uphold a restrictive agreement that restrained a salesman for a period of 2 years from merely accepting unsolicited orders for products or services similar to those dealt in by his employer.   This case should not be held out as determinative since it dealt with the sales industry and not the healthcare world. 

(3) Injurious to the Public:

CompetitionAheadIn assessing this prong, Nebraska courts will likely look to the breadth of the provision including whether patients covered by the restrictive covenant will still have access to healthcare services.   Notably, the Nebraska Court of Appeals  invalidated a covenant not to compete that prevented an interventional cardiologist from practicing cardiology anywhere in the state of Nebraska – regardless of how the doctor secured his patients.  On this issue the court stated: “Depriving the entire state of Nebraska of the services of a highly specialized physician … is certainly arguably injurious to the public—particularly to someone who needs his specialized skills.” Other courts have also raised concerns about a patient’s right to choose his or her doctor.

So, what’s the takeaway?

Nebraska courts do enforce covenants not to compete.  The enforceability of a covenant not to compete within a Physician Employment Agreement will depend upon its scope, breadth, and whether it negatively impacts the public at large.  If you come across a restrictive covenant within your employment agreement, it will warrant a careful review and scrutiny by a qualified individual.