Employed physicians frequently have access to highly sensitive information. They know the patient lists, trade secrets, balance sheets, relationships with vendors and many other pieces of highly proprietary information. But in some states, a traditional noncompete agreement will not protect an employer from a physician's ability to cross the street and set up shop with a competitor. This issue is underscored by the fact that patients often attribute good will to their individual doctor, and not to the practice or organization.
While agreements limiting physicians from competing with their former employers are common, the American Medical Association long has opposed them. Its Ethics Opinion 9.02 "discourages" noncompete agreements that restrict a physician's right to practice medicine after leaving an employer or a partnership. The AMA makes noncompete agreements an ethical, not merely a legal, issue by pointing to the ability of noncompetes to disrupt patient care and restrict the availability of medical care to the public.
Despite these obstacles, there are many steps that hospital executives may take to protect their organization when a physician leaves.
Multiple Approaches by the States
Some states have adopted the AMA's policy position of protecting the rights of patients to choose their physicians. Colorado, Delaware and Massachusetts have all passed statutes outlawing noncompete agreements that restrict a physician's right to practice medicine for a period of time or in a certain geographic area.
In Massachusetts, the courts have been especially vigilant in supporting a policy favoring patients' rights over employers' rights to protect themselves against unfair competition. The Massachusetts courts have likened the right of patients to choose their physicians to the right of clients to choose their lawyers. Lawyers generally enjoy the greatest protection against noncompetes, and if more courts begin applying the policy of client choice to physicians, the enforcement of covenants not to compete against physicians could be in jeopardy elsewhere.
The Massachusetts statute is broadly written, and the Massachusetts courts have struck down many restrictive agreements, allowing departing physicians to compete with their former employers. The Delaware and Colorado statutes are slightly narrower. In these states, employers will at least be compensated for the damage a departing physician causes through competition, even though they may not be able to stop the damage from occurring in the first place.
Employer Risk in Other States
Other states have taken a more balanced approach to the competing policies of patient care and protecting employers from unfair competition. Some states place restrictions on the length of time or geography that a physician may be held by a noncompete agreement. For example, in Tennessee, a statute describes the bounds within which physician noncompetes are reasonable. Generally, two-year agreements restricting the right to practice within a county are allowed.
In Texas, noncompete agreements for physicians are also allowed. But they are subject to a series of limitations that the courts have been strictly enforcing. Noncompetes must allow the departing physician access to lists of patients treated within the past year, provide access to medical records for a reasonable fee, allow for a buy-out of the covenant by the physician for a reasonable price, and permit the continuing care and treatment to specific patients during the course of an acute illness even after the employment has ended.
Other states that generally enforce reasonable noncompetition agreements have used policy reasons specific to the practice of medicine when refusing to enforce noncompetes among doctors. For example, North Carolina courts have refused to enforce a noncompete agreement for an endocrinologist on public policy grounds, noting the importance of patient choice and the need to have multiple specialists in the same area to provide second opinions to patients. Similarly, in 2005, a New York court noted the "discouragement" the AMA gives to noncompete agreements while, ultimately, allowing the departing physician to compete with the former employer.
The balance of states make no distinctions for physicians. Each state has its own case law and statutes governing the scope of noncompete agreements, and some states ban them altogether, regardless of the professional status of the departing employee.
CMOs and Medical Directors
The role of chief medical officer or medical director has evolved over the last two decades. Twenty years ago, CMOs generally concerned themselves with organizing the medical staff. Today, CMOs and medical directors typically have increased business responsibilities that limit their opportunities for clinical work. But CMOs are not limited to the health care field. Many pharmaceutical and biotech companies employ CMOs; the National Collegiate Athletic Association recently hired its first CMO. No two CMOs or medical directors have the same responsibilities but, regardless of their exact job description, they almost always have access to a company's most sensitive trade secrets and confidential business information.
No court yet has answered the question of whether CMOs or medical directors are covered by any state's statute governing noncompete agreements. In Colorado and Delaware, the statutes apply only to agreements between physicians. This restriction appears to exclude CMOs who are employed directly by hospitals and other business organizations.
The Massachusetts statute is more broadly written. To fall under its exemption, a physician must only be "registered to practice medicine," and a noncompete agreement must not "restrict the right of a physician to practice medicine." The key to understanding whether this statute will free a CMO or medical director from his or her noncompete agreement is whether the person is "practicing medicine."
While the CMO or medical director role often is considered purely administrative and executive, it is an open question whether such professionals are "practicing medicine." In Colorado and Delaware, for example, merely "holding oneself out" to the public as a doctor or using the title M.D. is practicing medicine. Therefore, a court easily could conclude that a CMO or medical director is practicing medicine, even if the employer thinks he is solely an executive.
Finally, a court may look to the policy supporting the statute, namely supporting patients' rights to choose their physician. On its face, CMOs and medical directors may not be covered by this policy, since they generally do not treat patients in the traditional sense. But, depending on how closely a court chooses to hew to this justification, a court could find that CMOs and medical directors are not bound by their covenants not to compete, leaving employers exposed.
Options for Today's Employers
Depending on the jurisdiction involved, there may not be much an employer can do to prevent departing physicians from taking patients or patient lists. But in the vast majority of states, employers are not helpless. Below are some steps employers should take to help mitigate the risks:
- Make sure employee physicians are covered by airtight nondisclosure agreements. Otherwise, physicians and CMOs could walk out the door and disclose sensitive business information to your competitors.
- Ensure that physicians are bound by well-defined non-solicitation agreements. This will help protect your patients after a physician leaves to join or start a competing practice.
- To the extent allowed by law in your jurisdiction, craft your employment agreements with your physicians to ensure that patient records remain the property of the organization, not the departing physician.
- Make sure your physician noncompete agreements have favorable and exclusive choice of law and venue provisions specifying which state's law will apply to disputes and in which court the disputes will be litigated.
- Look closely at your CMO's or medical director's job description and (assuming it is compatible with your business model) make the position sound less physicianlike. The more the job description emphasizes executive and administrative tasks, the better.
- Consider requiring CMOs and medical directors to acknowledge as part of their employment agreement and noncompete agreements that they are not "practicing medicine." This will help to guard against an argument that they should be exempt from noncompetes under certain state statutes.
- For the crown jewels (the information you most need to keep confidential to ensure a competitive advantage), make sure physicians, CMOs and/or medical directors understand the information is confidential and take appropriate steps to guard its secrecy.
No matter in which states you operate, it is important to know the laws applying to physician noncompetes. Failure to properly tailor these agreements can subject your company to lengthy and expensive litigation. Take the time to understand whether you can legally bind physicians to noncompete agreements.
Timothy P. Van Dyck is a partner and co-chairman of the labor and employment group at Edwards Wildman Palmer LLP in Boston. David S. Szabo is a partner in the business law department and a member of the firm's health care practice group at Edwards Wildman. Nathanael J. C. Nichols is an associate in Edwards Wildman's labor and employment group.