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Restrictive Covenants

Patrick C. Alguire, MD, FACP
Director, Education and Career Development

Restrictive covenants, or non-compete clauses, are commonly found in contracts and are legal in most states. Restrictive covenants are meant to protect the practice that hires you from financial loss. The covenant seeks to prevent loss of patients from the practice if you should leave the practice but remain in the area. Nevertheless, restrictive covenants should be avoided, if possible, since they can produce considerable hardship, including financial loss. You should read this section carefully if a restrictive covenant is part of your contract.

Despite being common, states vary in their interpretation and enforcement of non-compete clauses. Because of this, it is strongly recommended that the lawyer you retain to review your contract be located in the state in which you will practice. This will increase the likelihood that the advice you receive is sound and based upon local information. You should avoid going to court to prevent the enforcement of a restrictive covenant. Such action is costly in terms of time and money, and the outcome is not easily predicted. Some courts may uphold the covenant and forbid you from practicing in the area, while others may allow you to practice but only after compensating the practice for loss of patients. Occasionally, a judge may rule against enforcing the covenant, particularly if the welfare of the community is affected. This is most likely to occur in situations where there is a physician shortage and restricting your ability to practice would harm the community. However, never count on a favorable ruling. Its best to deal with the covenant up front and attempt to limit its impact in the event of leaving the practice.

It is not unusual for a potential employer to state, "We have a restrictive covenant in the contract, but we never enforce it." The best advice is don't believe it. If it's not important, it wouldn't be in the contract.

Several aspects of the covenant should be studied. First is the duration and restricted area of the covenant. One or two years is common, and in fact, some states forbid covenants longer than two years. If the agreement is longer than two years, you may wish to negotiate a restriction that is less than that. Some covenants restrict your ability to practice in an unrealistically large geographic area resulting in significant hardship if enforced. Determine what is reasonable and fair for both parties and attempt to reach agreement using these principles.

Determine what the relationship is between the covenant and the reason for leaving the practice. A covenant may be unfair, for example, if you are terminated from the practice as compared to voluntarily leaving the practice. You may wish to include language in the contract that links the covenant with the reason for leaving the practice.

Finally, if you cannot avoid the restrictive covenant, you may wish to reduce its effect by negotiating a "grace period." Under this agreement, the restrictive covenant does not go into effect until you have been in the practice for six months. This allows you to leave the practice and remain in the area without penalty during the "grace period." At the same time, the "grace period" provides reasonable protection to the practice because it is unlikely that you will have accumulated enough patients during this period to make you a threat to the practice.

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