By Joseph W. Gallagher, Esq., LL.M., and Mark E. Kropiewnicki, Esq., LL.M.

The traditional July start date for employment of new associates is fast approaching, so it's appropriate to consider what's up with restrictive covenants. Restrictive covenants in employment contracts for associate ophthalmologists are commonplace, if not the rule, in these increasingly competitive times. In our work with many ophthalmology associates and group practices all over the country, the overwhelming majority of written employment agreements contain a "no compete" clause or restrictive covenant in one form or another in those states where they are allowed. In fact, restrictive covenants often receive as much attention and are negotiated as strenuously as base pay or incentive bonus arrangements.

In this article, we explain the basic components of a restrictive covenant and what they mean to you as a new associate — and also later as an employer.

What Is a Restrictive Covenant?

A restrictive covenant is a contractual obligation by which employees promise not to take competitive actions against employers in a designated geographic area for an agreed time period.

While some ophthalmologists and their advisors maintain a level of skepticism about the enforceability of restrictive covenants, they have been upheld in most states. Enforceability of these agreements depends on the "reasonableness" of the covenant. Although reasonableness ultimately depends on the circumstances of a particular relationship, a number of guideposts have been established through the years that are useful in developing an enforceable restrictive covenant. 

In the eyes of the courts, reasonableness is a three-factor analysis:

1. The covenant has to be necessary to protect an employer's legitimate rights.

2. The covenant cannot be overbroad so as to interfere with the employee's rights.

3. The negative impact on the public's interest must be minimized.

How Long?

The restrictive covenant should be effective only as long as necessary to protect the practice's interests and to moderate the risk of injury. Typically, a covenant that attempts to exclude an associate from practicing in the restricted area for more than 2 to 3 years could be considered unreasonable.

Realistically, an ophthalmologist returning to the practice's patient-drawing area after 2 to 3 years is not likely to retain the same drawing power. A longer covenant would, in all likelihood, be unreasonable and thus unenforceable.

How Wide?

Establishing a reasonable geographic boundary can be tricky, depending on the surrounding territory — for example, an office in the center of a large city versus a suburban location versus a rural setting. The covenant has to be worded to cover the area actually served by the practice. It is not advisable for a practice to stake out an area that envelops every last patient. The
better approach is to establish a boundary that takes into account about 80% of them.

Covenants that merely create a flat mileage radius may be too expansive since the entire patient population rarely comes from such an evenly drawn boundary. Reasonableness of the geographic restriction is more likely if the boundary is drawn from identified physical markers, and we often suggest a more specific ZIP code listing. Highlighting the designated area on a map and attaching a copy to the employment contract is a good idea.

Public Impact

Courts are more willing to favor the legitimate business interest of preserving an employer's practice over an employee's freedom to earn a livelihood when the impact on public health is not significant. This is the aspect of restrictive covenants over which practices and associates have the least control.

If a particular medical specialty or subspecialty is undersupplied in an area, a court will, in all likelihood, view the exclusion of such a specialist or subspecialist as harmful to the public's need for adequate medical services.

Similarly, if the court finds that excluding a doctor will lead to a monopoly, it probably won't enforce the covenant, particularly if there is evidence that public care would be diminished in emergency situations.

What's the Remedy?

A restrictive covenant is incomplete unless it contains a remedy for violation. An absolute restriction (injunction) against competitive practice following an associate's termination of employment is the usual remedy. In most jurisdictions, the practice must convince a court that payment of money damages is inadequate and that the damage caused to the practice by the associate's competition would be irreparable.

As an alternative, money damages may be satisfactory to a particular practice. As with other aspects of the restrictive covenant, these
liquidated damages must be
"reasonable" and cannot be considered a penalty or a punitive sum. The amount must reflect a fair
estimate of economic harm that would be caused to the practice by the associate's competition.

Thus, an ophthalmologist who practiced with a group for several years would likely do more damage to the practice than someone who leaves to compete after a few months of association. An approach that has proved useful in some situations is to set the liquidated damages amount equal to all or a
portion of the previous wages paid to the competing associate, with a "not to exceed" dollar amount.

Adequate "Consideration"

Without exception, the concept of a restrictive covenant should be introduced at the start of negotiations with any new associate, and it should be written into the initial employment contract. A restrictive covenant entered into after an associate starts working is susceptible to rejection by the courts on the grounds it lacks "adequate consideration." If a restrictive covenant is not introduced until after employment starts, there is likely no "consideration" for the associate to sign other than the potential loss of his or her job.

Be Prepared to Negotiate

From a practice's perspective, restrictive covenants are an important and necessary part of new associates' employment contracts, and they continue to be upheld in various states. As a result, new associates are not likely to have restrictive covenants totally eliminated from the employment contracts they sign. Usually, the best they can expect is to make the restrictions as "reasonable" as possible and perhaps negotiate limited "outs" if they leave within a few months of starting employment or if they are terminated without cause. Don't be surprised, however, if the practice will not allow such limited exceptions.

Whether you're an employer or a new associate, a basic understanding of the "no compete" clause is essential.

The authors are principal consultants with The Health Care Group, Inc. and principal attorneys with Health Care Law Associates, P.C., both based in Plymouth Meeting, Pa. You can reach them at (610) 828-3888 or jgallagher@healthcaregroup.com; mkrop@healthcaregroup.com.