I was recently asked how non-compete clauses work in physician employment contracts and whether they can be used to force a doctor to pay damages when leaving a practice or prevent them from taking another job. This is a relatively common issue that is often misunderstood.
Generally, non-compete clauses are not valid in Colorado. There are exceptions to the rule, most notably, contracts for the purchase and sale of a business may contain non-compete covenants and employment contracts may allow recovery of education and training if the employee has worked for less than two years. Physicians, however, have their own rule. Physician groups and medical partnerships can build into employment, partnership and corporate agreements damage provisions requiring a departing physician to pay damages when they leave a practice, but they cannot prevent a departing doctor from taking another position or opening a competing practice.
Colorado’s statute, C.R.S. § 8-2-113(3), provides that
“Any covenant not to compete provision of an employment, partnership, or corporate agreement between physicians which restricts the right of a physician to practice medicine, as defined in section 12-36-106, C.R.S., upon termination of such agreement, shall be void; except that all other provisions of such an agreement enforceable at law, including provisions which require the payment of damages in an amount that is reasonably related to the injury suffered by reason of termination of the agreement, shall be enforceable. Provisions which require the payment of damages upon termination of the agreement may include, but not be limited to, damages related to competition.”
There a couple of interesting points about the statute. First, the rule only applies to medical doctors. Although, I could make a decent argument that it applies to psychologist, chiropractors, and others who provide healthcare, it appears clear that only physicians licensed by the Colorado Board of Medical Examiners are covered. Second, it applies to not only employer-employee agreements, but also to partnership and shareholders agreements as well. The rule is built to discourage doctors from setting up rival practices, so the form of the contract is not really an issue.
Colorado is somewhat unique in that it provides some measure of protection for both the departing physician and the practice group that is losing a member. But there are pitfalls of which both sides should be aware.
Foremost, any damages called for under the contract must be “reasonably related to the injury suffered by reason of termination of the agreement” and cannot constitute a penalty. One Colorado court has found that the damages must reasonably approximate the true lost net profits the practice would actually suffer from the doctor’s departure. The rationale is that damages should be related to the harm that the practice would suffer, and not the benefits that the departing physician will get. For example, a damage provision that requires a departing doctor to pay his or her former practice a percentage of his or her future income does not pass muster. However, a provision that requires the departing physician to pay the practice a fee for each patient that follows the new physician to his or her new practice or simply leaves the old practice might. In my opinion, any contract that calls for payment of a set amount is a problem.
Another related issue is when a physician leaves the fee-for-service world and moves to a managed care system, like a staff-model HMO. Under these circumstances, when the departing physician moves to a closed system, it is difficult to say that they are in competition with their former practice because patients can’t necessarily follow the doctor to their new location without completely changing health insurance plans. Thus, the former practice may have difficulty proving damages related to the physician leaving.
Other issues may arise involving the geographic scope and time restrictions of the “competition” that triggers the damage provision. For example, a provision that requires payment of damages if the departing physician moves to any practice in the western United States during the next ten years would likely be unenforceable. But a 10 miles and two-years are generally considered acceptable.
The take-away for both practice groups and individual doctors is that non-compete clauses should not be taken at face value. A careful analysis of the agreement, the practice, and the facts surrounding a physician’s departure from a practice is necessary before anyone can tell if the contracts have teeth.