A restrictive covenant (often referred to as a noncompete clause or a covenant not to compete) is a contract provision in which the employee agrees not to compete with the employer after the employment relationship ends. This clause or covenant is often put in place to prevent a former employee from using confidential information obtained from a former employer to help a competitor or start a competing business.
If you are currently employed as a physician and you are subject to a noncompete provision, you probably want to understand whether the agreement is enforceable. This article explains how courts are handling non-compete clauses included in the employment contracts of physicians in Connecticut and New York. This discussion has two separate, but related parts. First, is a court likely to find that the agreement is valid, and therefore enforceable? Second, if a clause is valid, will a court grant the employer's request for an injunction preventing you from taking a job or starting a business that would violate the noncompete agreement?
The laws governing the validity and enforceability of noncompete clauses in New York and Connecticut are fairly similar. In both states, courts evaluate whether the restraints provided in the noncompete clause are reasonable. In making that determination, courts consider the following factors: (1) the employer’s need to protect legitimate business interests (such as trade secrets and customer lists), (2) the employee’s need to earn a living, (3) the public’s need to secure the employee’s presence in the labor pool, and (4) the amount of time and the area restricted by the covenant.
In general, courts have found that an employer has a legitimate business interest if the employer needs to protect against the former employee’s use of a trade secret or a highly valuable patient list. If the employer is not able to prevent the employee from using such things in future employment, the employer’s business will noticeably suffer. This is what courts will try to protect against through the enforcement of the restrictive covenant. (In Connecticut, however, it is not the employer who needs to prove a legitimate business interest. Instead, the employee who wants to get out of a noncompete agreement has to prove the employer doesn't have a legitimate interest.)
When considering the impact of a noncompete clause on the earning potential of a former employee, courts will try to determine whether enforcement will unreasonably prevent the employee from earning a living. Courts have found that an agreement can be found reasonable even if it would not allow the employee to maintain his or her current standard of living, however. The former employee must prove that enforcement of the contract would substantially damage his or her ability to earn a living.
The principal objection to restrictive covenants in the medical field is that they can potentially interfere with continuity of care for a patient. Therefore, courts are more reluctant to enforce a covenant if it would impact the care of the former employee’s patients. However, a covenant can be drafted to allow a physician to continue providing post-operative or other limited care for current patients. If a restrictive covenant allows for such continuity of care, the court is more likely to find its restrictions reasonable and enforceable.
The amount of time and the area restricted under noncompete clauses varies greatly. In evaluating this factor, courts look at whether or not the time and area restrictions are reasonable. Recent decisions have found that clauses limiting the former employee for up to five years within a thirty-mile radius are reasonable. Reasonableness depends, however, on the specific circumstances of the case.
Courts also consider the difference in bargaining power between the parties to determine whether a restriction is reasonable. Some courts may be more likely to find a restrictive covenant enforceable if it is created between partners in a practice, rather than between an employer and an employee. A partner will most likely have a greater ability to negotiate the terms of the contract than an employee.
An injunction is as court order requiring a party to do, or to refrain from doing, certain acts. In a noncompete case, an injunction would prohibit the employee from taking work that would violate the restrictive covenant. When considering an employer’s request for a temporary or permanent injunction, courts in New York and Connecticut consider whether the employer has demonstrated that he or she would suffer irreparable injury in the absence of an injunction, that he or she is likely to prevail on the merits of the case, and that the balance of equities favors the issuance of an injunction.
In considering the irreparable harm an employer may suffer, a court looks at factors such as the employer’s revenues, patient flow, and the employer’s ability to maintain its business on a long-term basis. Such calculations will consider only the employer’s losses, not the former employee’s gains.
When balancing the equities, courts consider the following: the effect the injunctive relief will have on the employer’s business, the effect that the injunctive relief will have on the employee’s earning potential, and the effect that an injunction will have on the public. In determining the effect on the employer, the court analyzes how the employer will benefit from the injunctive relief. As for the effect on the employee, the court considers the options available to the employee if the relief is granted. If the employee can reasonably continue to earn a living, courts are more willing to grant the employer’s injunctive relief request. In considering the public interest, courts look at factors such as the hardship the injunctive relief would have on a doctor’s existing patients and whether the doctor’s contributions to the surrounding community would be limited by granting injunctive relief.
In addition to the above factors, Connecticut courts consider whether or not the employer has an adequate remedy at law (that is, whether the employer's needs could be satisfied by the employee paying money damages rather than by restricting the employee's job opportunities). Although some Connecticut courts have held that the lack of an adequate remedy at law is presumed if the employer seeks to enforce a covenant not to compete, not all courts have so found. Even courts that apply a presumption state that it is only a rebuttable presumption; meaning that it may be possible for the employee to convince the court that this presumption does not apply in a certain situation. The Connecticut courts that have not followed that presumption have held that the presumption applies only if calculating damages may be difficult or impossible. These courts have found that employers have an adequate remedy at law if they are in a position to bring a breach of contract claim, meaning that the employer can calculate the damages suffered as a result of the former employee’s actions.
Here are some examples of restrictive covenant cases decided by Connecticut courts in recent years.
Opticare, P.C. v. Zimmerman, 2008 Conn. Super. LEXIS 759 (2008).
In this case, a doctor signed an employment contract with a physician practice group which provided, among other things, that if the doctor voluntarily left the practice but intended to continue practicing medicine, he would be prohibited from practicing the type of medicine he practiced with the group, within a specific area, for a period of 18 months. The restricted area was in the shape of a hexagon and ranged from between fifteen to thirty miles from the locations in which the doctor had been employed with the practice group.
After 22 years of employment, the doctor left the physician practice group and opened his own office, practicing the same kind of medicine, within four miles of his former employer's office and before the 18 month time period had passed. Upon learning of the physician’s new practice, the practice group asked the court to grant injunctive relief and prohibit the physician from continuing his practice in violation of the restrictive covenant.
In denying the group’s request, the court determined that although the restrictive covenant was valid, the group did not establish that it would suffer irreparable harm. The practice group was still in business, and it had failed to demonstrate that the practice was permanently harmed in any way. The court also determined that the employer had an adequate remedy at law because the employer had the ability to calculate the damages incurred as a result of the physician’s actions. Finally, the Court found that the equities balanced in favor of the former employee, due in part to the fact that the doctor frequently donated his time to assisting uninsured premature infants at local hospitals and that an injunction would place an undue hardship on his current patients.
Fairfield County Bariatrics v. Ehrlich, 2010 Conn. Super. LEXIS 568 (2010).
In the case of Fairfield County Bariatrics v. Ehrlich, the restrictive covenant was deemed valid and injunctive relief was granted to the employer. It involved a situation where a physician developed a very prominent practice performing bariatric surgeries for the physician practice group in which he was a one-third shareholder.
As part of his employment with the physician practice group, the physician signed an employment agreement which, among other things, provided that for a period of two years following the termination of his employment, the physician could not practice medicine or general surgery within 15 miles of the practice’s office, and that he could not practice bariatric surgery in five local hospitals.
Following his termination from the group, the physician retrieved a list of the patients he had treated during his employment with the physician practice group. The physician contacted each patient and informed them that he was no longer associated with the group and directed them to contact him at his new office.
The physician’s new office was located within the restricted area provided for in the employment agreement. Additionally, the physician continued to perform bariatric surgeries at the hospitals restricted under the restrictive covenant in the employment agreement.
The court found that the restrictive covenant was valid, finding the length of time and area of coverage to be reasonable. Furthermore, the court determined that the physician practice group had legitimate business interests requiring the protection of the restrictive covenant. The court relied on the practice’s fear that allowing the physician to continue performing bariatric surgeries at hospitals within the county would drastically reduce the number of surgeries performed by the practice. Additionally, the court determined that the physician’s ability to earn an income was not so restricted by the covenant as to make it unreasonable. Under the covenant, the physician was able to perform surgeries throughout the majority of the county in which he resided, and was able to continue providing post-operative care for his current patients. Finally, the court determined that the public’s need to secure the physician’s services would only be slightly impacted because the physician was still able to provide post-operative care.
Merryfield Animal Hosp. v. Mackay, 2002 Conn. Super. LEXIS 2628 (2002).
In this Connecticut case, the court determined that the restrictive covenant included in the employment agreement was invalid. Consequently, the court denied the employer’s request for injunctive relief. The doctor in this case had been employed under an employment agreement that contained a noncompete provision. This provision restricted the employee from owning, managing, operating, controlling, participating in, being employed, or having any connection with an organization providing the services provided by the employer for a period of two years after his termination, within a seven-mile radius from the employer’s locations.
Shortly after his termination, the physician obtained employment with a different practice group performing the same services. His new employment was located within the seven-mile radius restricted under the restrictive covenant.
Although the court found the time and area restrictions provided for in the restrictive covenant reasonable, it ultimately determined that the covenant was unenforceable and therefore denied the employer’s request. The court found that the restriction under the covenant was overly broad and not reasonably necessary to protect the group’s business. If enforced, the language of the covenant would have prevented the doctor, not only from taking his new position, but even from taking employment that could in no way bring him in competition with his former employer. Finding the expansive limitations provided for by the language of the restrictive covenant unreasonable, the court determined the covenant unenforceable, and consequently denied the employer’s request for injunctive relief.
Here are some cases decided by New York courts.
Millet v. Slocum, 4 A.D.2d 528 (1957).
Following the termination of his employment as a partner in a physician partnership, the physician in this case brought an action asking the court to render the restrictive covenant contained in his employment agreement unenforceable. Under the terms of his employment agreement, the physician was barred from practicing medicine or surgery within a 25-mile radius from the city in which the partnership was located for a two-year period. The partnership, in response, asked the court for injunctive relief which would prevent the physician from practicing in violation of the agreement.
Before working with this partnership, the physician never worked as a physician in New York State. During the time the physician served the partnership, he developed a professional reputation for competence and earned the trust of the partnership’s patients. As a result, the court concluded that if the physician were able to directly compete with the partnership, the remaining partners would suffer a loss of patients and good will. Considering next the physician’s ability to earn a living, the court decided that the hardship imposed on the physician was not sufficient to invalidate the covenant. The physician had the ability to practice medicine and surgery anywhere outside of the 25-mile radius, and the court noted that he had been able to come to New York and build a strong professional reputation, so it would not be so unreasonable for him to do so again. The court therefore, concluded that the restrictive covenant was valid and enforceable.
Despite the validity of the restrictive covenant, the court denied the partnership’s request for injunctive relief based on its finding that the partnership breached the partnership agreement when it expelled the physician from the partnership without justification.
Gelder Medical Group v. Webber, 41 N.Y.2d 680 (1977).
After a few years of employment as a partner to a partnership practice, the physician in this case was expelled pursuant to the partnership agreement. Under the terms of the partnership agreement, the physician had agreed not to practice his profession within a radius of 30 miles of the village in which the partnership was located for a period of five years. Disregarding the restrictive covenant, the physician resumed his surgical practice as a single practitioner, practicing in the same village as the partnership and within two months after his expulsion. The partnership, in an effort to protect its practice, asked the court to enforce the restrictive covenant and grant injunctive relief.
The court ultimately determined this restrictive covenant was valid. Its decision was due, in part, to the small size of the village in which the partnership was located and had built its practice. In such a small area, the threat of competition from the physician, if allowed, could result in serious damage to the partnership’s number of patients and its revenues. The court also considered the impact that the covenant could have on the physician’s ability to earn a living. Throughout the course of his career, this physician had repeatedly changed professional associations within a range of thousands of miles. Therefore, the court did not credit the physician’s argument that relocating his practice would unreasonably impair his ability to earn an income. Finally, the court noted that the public would not be affected by the enforcement of this covenant, as they could easily obtain the services provided by the physician elsewhere. Granting the employer’s injunction, the court noted that the damage the partnership would suffer without injunctive relief, when balanced with the losses the physician might face if the covenant were enforced, justified the enforcement of this restrictive covenant.
Michael I. Weintraub, M. D., P. C. v. Schwartz, 131 A.D.2d 663 (1987).
The physician in this case had been employed by a certain professional practice group for two years when his employment contract was terminated. Pursuant to the terms of his employment agreement, the physician was restricted from engaging in the type of services he performed for the physician practice group within a five-mile radius from the professional practice’s office, and within a five-mile radius of any hospital at which he had worked at on behalf of the professional practice for a period of one year after the effective date of his termination. Before that one-year period lapsed, the physician established an office to perform the restricted type of services within five miles of a hospital where the physician worked on the group’s behalf. The professional group initiated an action against the physician to enforce the restrictive covenant and prevent him from breaching his employment agreement.
In reviewing the restrictive covenant, the court determined the provision restricting the physician from practicing within five miles of the group’s offices was reasonable and enforceable. The court, however, found the portion of the covenant prohibiting the physician from practicing within a five-mile radius of any hospital where he worked on the group’s behalf was overly broad and oppressive, and thus unenforceable. If the physician had been required to follow the terms of the covenant it would essentially prohibit him from practicing at or near any of the major hospitals in the two nearest counties. Consequently, the court denied the group’s motion for injunctive relief.
Karpinski v. Ingrasci, 28 N.Y.2d 45 (1971).
In this case, the court found that even though the restrictive covenant contained an unreasonable provision, the remaining restrictions in the agreement would be enforceable against the former physician employee. In essence, the court severed the unreasonable restriction from the restrictive covenant, and held the remainder to be valid. This situation involved a dentist employed by an oral surgeon. As part of his employment with the oral surgeon, he agreed to never practice dentistry or oral surgery in any of the surrounding counties except in association with the oral surgeon.
Upon voluntarily ending his employment with the oral surgeon, the dentist opened his own office in violation of the restrictive covenant. After the competition created by the dentist’s new office forced the oral surgeon to close one of his offices, the oral surgeon asked the court to enforce the restrictive covenant. The court ultimately held the employer was entitled to an injunction barring the dentist from practicing oral surgery in the five specified counties named in the covenant, but that the covenant’s restriction on the practice of dentistry was too broad. Because the oral surgeon’s business consisted only of performing oral surgeries and related operations, a dental practice providing only dentistry services would provide no direct competition. After determining that the restriction on the practice of dentistry was too broad, the court severed that restriction from the covenant, but enforced the remaining provisions of the agreement.
Cases involving restrictive covenants are very fact specific, requiring individual analysis and determinations. Determining the consequences of your employment agreement and your options will require an in-depth review with an experienced employment lawyer.