June 1, 2021, Legal Intelligencer article by Lamb McErlane PC Health Law Attorneys Vasilios J. Kalogredis and Rachel E. (Lusk) Klebanoff.

One of the most prevalent provisions in a physician’s employment contract is a restrictive covenant (otherwise known as a covenant not to compete or non-compete agreement).  They often set forth proscriptions while employed and post-employment.  So, when that physician’s employment ends, either with a private office, hospital, health system, or other health care facility, he or she may be limited as to where he/she may practice. Non-competes are designed to restrict physicians from competing by precluding them from working for a competitor, or setting up a competing medical practice, usually for a specified time period after employment ends within a designated geographic area.

For many lawmakers, the issue of restrictive covenants is about making a choice between employers protecting their turf and physicians’ ability to move freely in a particular area or region. But what about their patients?

Like any employee, physicians’ employment may terminate for a whole host of reasons.  But when they do leave a particular facility and are required to leave the area as a result of a restrictive covenant, patients lose access to a health care provider that they have had an established relationship with, oftentimes for many years. For patients, this change can be both clinically and emotionally disruptive.

Pennsylvania courts have generally found non-compete agreements to be enforceable if the agreement: (1) is incident to an employment relationship between the parties; (2) the restrictions imposed by the covenant are reasonably necessary for the protection of the employer; and (3) the restrictions imposed are reasonably limited in duration (time) and geographic extent. See, e.g., A&T Med. Inc. v. Mercadante, 2011 Pa. Dist. & Cnty. Dec. LEXIS 200 (Pa. Common Pleas Ct. Feb. 28, 2011) (finding a two-year and five-mile radius restriction in a chiropractor non-compete agreement reasonable).  There must be consideration for it also.

Nevertheless, the Pennsylvania Supreme Court has made it clear that non-compete agreements and restrictive covenants are not favored in Pennsylvania and are viewed as a trade restraint that prevents a former employee from earning a living. As a consequence, courts scrutinize restrictive covenants in employment agreements to determine whether the burden placed on the former employee is unreasonable. Even when courts decide to enforce an agreement, when an employer imposes restrictions broader than necessary to protect the employer, courts may limit restrictions to those that are reasonably necessary for the protection of the employer. See, e.g., Wound Care Ctrs., Inc. v. Catalane, 2011 U.S. Dist. LEXIS 88136 (W.D. Pa. Aug. 9, 2011) (denying injunction where plaintiffs sought to enjoin for a period of one year within 20 miles several physicians and a hospital from entering into the business of employing a physician-defendant for the purpose of treating chronic non-healing wounds).

Back in February, House Bill 681, also known as the “Health Care Practitioner Non-Compete Agreement Act”, was introduced in the PA House of Representatives Health Committee. HB 681, which is moving quickly through the legislature, would prevent the use of non-compete agreements in health care practitioners’ employment contracts.

According to State Representative Torren C. Ecker (R), who is the primary sponsor of the bill, HB 681 would “deem any non-compete language in an employment agreement for a health care practitioner to be against public policy,” and “would allow health care practitioners to alert their patients to the new affiliation and allow the patient the option to follow the health care provider to the new location.” HB 681would not apply to any additional services provided by the individual outside their scope of practice or to trade secrets or confidential information learned through the course of the prior employment.

The legislation has earned the support of the Health Committee on the grounds that restrictive covenants are anti-patient, anti-worker and bad for the future of medical innovation and treatment in Pennsylvania.

HB 681 has been subsequently amended to include limited exceptions to the proposed general rule that “[A] covenant not to compete is deemed contrary to public policy and is void and unenforceable to the extent the covenant not to compete restricts the right of a health care practitioner to practice in any geographic area for any period of time after a separating event.” For example, medical employer may enforce a covenant not to compete if all of the following apply:

• The health care practitioner’s primary health care facility or office is located in a County of the sixth, seventh or eighth class;
• The geographic restriction is less than a 45-mile radius from the primary health care facility or office of the health care practitioner;
• The length of the covenant not to compete is no more than two years; and
• The restriction applies only to the primary health care facility or office of the health care practitioner.

In addition, an employer in any County of the Commonwealth may enforce a covenant not to compete if the employer is a provider-owned independent practice not affiliated with any health care system, health care provider or hospital.

HB 681 has received bipartisan support and the support of many medical groups and societies, but, unsurprisingly, significant opposition from hospital groups, such as the Hospital and Healthsystem Association of Pennsylvania (HAP).

According to HAP, “Pennsylvania’s hospitals and health systems make significant investments in recruiting and retaining exceptional health care providers—like physicians—to provide high-quality care to patients in all areas of the commonwealth. These investments include compensation, as well as providing liability coverage, medical school loan forgiveness, credentialing with insurers, onboarding, and training. A non-compete agreement is an essential element of consideration when recruiting highly compensated employees. Eliminating these agreements could invite bidding wars between hospitals—increasing health care costs for everyone—and threaten hospitals’ ability to retain health care professionals.”

Further, it is HAP’s position that the proposed legislation is “[n]ot only harmful to the hospital community’s ability to attract high-quality health care professionals, but is also unnecessary and duplicative. A mechanism currently exists in Pennsylvania for courts to void non-compete clauses if they are deemed unreasonable or contrary to the community’s health care needs.”

The Pennsylvania Medical Society disagrees, arguing that the “restrictive covenants erode physician freedoms and disrupt the physician-patient relationship.”

While HB 681 is potentially poised to pass the House of Representatives, its fate in the Senate is unknown.  The legislation could also be further amended as it makes its way through the process.  Thus, physicians should not assume their non-compete agreements will be automatically voided in the immediate future.

View the online Legal Intelligencer article here.

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other health care professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. bkalogredis@lambmcerlane.com. 610-701-4402.

Rachel E. (Lusk) Klebanoff, Esq. is a senior associate at Lamb McErlane PC who focuses on health law and health care litigation. She represents physicians, dentists, medical group practices, and other health-related entities in transactional, regulatory, and compliance matters. rlusk@lambmcerlane.com. 610-701-4416.