How to navigate restrictive covenants

Restrictive covenants can prevent physicians from directly competing with their current practices

Batya Swift Yasgur MA, LMSW | April 22, 2015

You’ve received a copy of your new contract, and you’re eager to sign. You plan to stay with the practice a few years until you’re established in the community, then strike out on your own.

Unfortunately, you may not be able to hang out a shingle, at least in that community. Your contract contains a “restrictive covenant” that prohibits departing physicians from setting up a practice for a set period of time (typically two years) and within a set geographic radius. That can range from as little as five miles to as many as 20 or 30 from your current hospital or practice location. The purpose is to prevent you from directly competing with your current practice.

“Restricting physicians from working in large portions of the state increases [physician] shortage.” Dennis Hursh, JD, Hursh and Hursh PC, Middletown, Pa.

Restrictive covenants are extremely complex. “At first glance, the wording may seem simple, but there are many variables that make things complicated and can really limit a physician’s future employment,” warns Dennis Hursh, JD, managing partner of Hursh and Hursh PC, a law firm specializing in health care law based in Middletown, Pa.

Here’s the first question to consider: How is your current employment situation defined?

“It would be logical to assume that you’re restricted from practicing within a 20-mile radius of your current geographical location, but that doesn’t necessarily follow,” says Mr. Hursh, the author of The Final Hurdle: A Physician’s Guide to Negotiating a Fair Employment Agreement. If you are employed by a large hospital system or medical group with multiple satellite facilities, you may be barred from practicing within 20 miles of any facility owned by that hospital or group.

“This is increasingly regarded as unreasonable,” Mr. Hursh reports. In certain states, such as New Jersey, Massachusetts and Delaware, restrictive covenants for physicians are illegal. In Pennsylvania, a bill currently being considered would bar covenants in that state as well.

The issue of “reasonability” hinges on several factors, including whether the restriction imposes an undue hardship on the physician, protects the legitimate interests of the employer or is injurious to the public.

“It’s reasonable to prevent a physician from luring patients away from a former practice,” Mr. Hursh comments. “But if it happens that the hospital has a satellite facility 200 miles away, the physician shouldn’t be restricted from working there. This is undue hardship to the physician.”

It’s also injurious to the public. “One of the reasons behind the proposed Pennsylvania bill is that there is a physician shortage,” he says. “Restricting physicians from working in large portions of the state increases that shortage.”

Chris Brown, JD, an attorney with the Health Law Firm in Altamonte Springs, Fla., notes that there are several things he tries to negotiate into a restrictive covenant. “One is that the prohibition should refer only to the geographical area where you have practiced, and only to the primary practice location.” The address of this location, he adds, should be stated in the contract. “This covers the possibility that you might have spent an occasional day in a satellite office at another location.”

It is also important to nail down exactly what “practice medicine” means, notes Mr. Hursh. “If the original practice was located across the street from a hospital and you set up your new office outside the radius of restriction, you should still be allowed to practice at the hospital.” Language should spell out that the radius is related to the office location, not the overall practice of medicine. “It is unreasonable to ask physicians to resign from hospitals where they have privileges.”

For physicians with multiple specialties, it might be possible to practice one particular specialty without a geographical restriction—if that doesn’t compete with specialties in the original practice, Mr. Hursh adds.

And the reason behind a physician’s departure may affect the restrictive covenant. “I negotiate into the covenant that if the employer terminates the contract without cause or if the physician terminates the contract with cause, the restrictive covenant should be rendered null and void,” Mr. Brown says.

As Mr. Hursh points out, “Everything is negotiable. An attorney can help you avoid the hidden traps in restrictive covenants by demanding precise language and parameters, and by negotiating more reasonable terms.”

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