By Jason Guss
Restrictive covenants are contractual clauses that limit an employee’s post-employment activities for a specified length of time and geographic area. Their enforceability varies by state and by profession. For example, restrictive covenants are unenforceable in the legal profession but are enforceable in the medical profession. The American Medical Association, however, discourages restrictive covenants between physicians. Yet it deems them ethical unless they are excessive in geographic scope or duration, or fail to reasonably accommodate patients’ choice of physician.
The determination of whether a restrictive covenant is reasonable is a factual one that is assessed on a case-by-case basis: courts weigh the competing interests of the employee versus the employer, and typically the burden is on the employer to demonstrate that the restrictive covenant protects the employer’s interests without posing an undue hardship on the employee.
In Pennsylvania, restrictive covenants are enforceable if they are incident to an employment relationship between the parties, the restrictions imposed by the covenant are reasonably necessary for the protection of the employer, and the restrictions imposed are reasonably limited in duration and geographic extent. Hess v. Gebhard & Co. Inc., 808 A.2d 912 (Pa. 2002).
New Jersey, on the other hand, employs the Karlin test to determine a restrictive covenant’s enforceability. This test considers whether the restrictive covenant is necessary to protect the employer’s legitimate interests, whether it would cause undue hardship to the employee, and whether it would be injurious to the public.
Interestingly, New Jersey does not allow restrictive covenants on psychologists and psychotherapists. Apart from the existence of regulations restricting covenants for psychologists, the nature of the practice of psychology and the uniquely personal patient-psychologist relationship forbid any restrictions which might interfere with an ongoing course of treatment. Comprehensive Psychology System, P.C. v. Prince, 867 A.2d 1187 (N.J. Super. Ct. 2005).
So what does this mean for doc employees? Employees can – and should – pay close attention to agreements containing restrictive covenants. As they are a material part of the contract, the parties are best served by discussing any restrictive covenants during the negotiations of other major terms of their agreements.
What types of restrictive covenants are commonly seen? The following are examples of restrictive covenants common in employment agreements within the medical profession:
- Non-compete clauses prohibit an employee from engaging in work or being connected with any business or “practice” in competition with the practice of their employer. The duration (i.e., length that the prohibition applies) and geography (i.e., the places where the prohibition applies) must be reasonable.
- Non-solicitation clauses prevent a physician from soliciting her former practice’s patients and/or employees to join her new practice or employer. Typically, these clauses last one to two years post-employment and apply when the physician initiates contact—there is no restriction on treating former patients due to the patient’s right to choose.
- Confidentiality clauses restrict an employee from disclosing proprietary and/or confidential practice information, and may be indefinite in duration. This is not to be confused with the privilege attaching to the health professional’s duty with regard to patient information. Instead, contractual confidentiality clauses usually apply to business information of the practice.
- Due to the innovative nature of the medical profession, more so than other professions, the assignment of property rights is often an issue of contention. A typical medical workplace breeds inventions and ideas. Therefore, an employer may restrict an employee’s right to own, copyright, patent, or trademark items developed during employment, especially when the invention holds value to the employer. There are usually stipulations regarding the release of these rights to an employee, which physicians and medical researchers should be aware of. If there is no such provision, the employee must be cognizant of her jurisdiction’s default rule (e.g., “works for hire”).
Ultimately, restrictive covenants are an essential tool in protecting a practice’s business interests. However, before signing an employment agreement, physicians should evaluate the fairness and scope of all restrictive convents, as they do not tend to follow a one-size-fits-all formula. Their enforceability is dependent on various factors. If a provision appears unreasonable, it may be because it is unreasonable, and should be discussed.
Jason J. Guss is an associate of the firm, and concentrates his practice on a wide range of business transactional matters including entity formation, drafting internal documents, drafting business agreements, real estate transactions (acquisitions / leases), and tax issues.