Physician non-compete covenants can be one of the most contentious and highly negotiated points in a transaction, and rightfully so. Of all the terms in a physician employment agreement or a purchase agreement tied to the sale of a physician’s business, the non-compete covenant can arguably have the biggest impact on the physician’s practice (and day-to-day life) moving forward.
On the one hand, in an employment arrangement or transaction for the sale of a business, an employer or buyer has an interest in protecting their business from a competing former physician. One the other hand, upon leaving an employment relationship or the sale of a practice, physicians should reasonably be able to pursue their livelihoods. So, it is no surprise that one of the most common questions healthcare lawyers hear (from both sides of the aisle) is: is this non-compete covenant enforceable?
The Georgia Restrictive Covenants Act (O.C.G.A. § 13-8-50 et seq.) (the “Act”) expressly permits certain non-compete covenants signed after May 11, 2011(1), if the non-compete covenant is reasonable with respect to: (i) time, (ii) geographic area, and (iii) the scope of restricted activities. The Act applies to employees that possess selective or specialized skills, learning or abilities (including physicians).
For non-compete covenants that extend past the date of termination of an employee or after the sale of a business, the Act provides a helpful timeline for what will be presumed “reasonable.” For an employment agreement, a two-year period after termination will be presumptively reasonable. In the sale of a practice, a five-year period will be presumptively reasonable.
The Act also requires a non-compete covenant to have a geographic limit, however the reasonable geographic area will be determined on a case-by-case basis. It’s important to note that in the case of an employment relationship, the reasonable geographic limit will be determined by the area in which the employer does business. For example, for an employer with practice locations throughout five counties, it may be reasonable to include all five counties in the non-compete covenant. Still, the employer should be able to show a legitimate business interest to be protected in the area (thus, a geographic limit including the entire state of Georgia is likely to be considered unreasonable).
That’s not to say, however, that a non-compete covering the entire state of Georgia is automatically unenforceable. If for some reason the physician is engaged in a business that broadly covers all of Georgia, it may well be completely reasonable to prohibit the physician from practicing throughout the state of Georgia. It just depends on the facts around the deal or relationship. In any event, the geographic restrictions should be clear enough that the physician has notice of where competition is allowed and where it is prohibited.
Just as with determining a reasonable geographic area, determining a reasonable scope of prohibited activities is more challenging and more dependent on the facts. The parties should look at the physician’s activities during the time of employment (or in the sale of a practice, in the two-year period prior to the sale). The less the scope of restricted activities is tailored to the physician’s activities, the less likely it is to be considered reasonable. Again, the limited scope of activities must be clear enough that the physician understands what activities are prohibited.
One last note:
A non-compete covenant must be tied to consideration. This means that an employer or buyer must give the physician something in exchange for a non-compete covenant. The classic example here is the employer that forgot to include a non-compete covenant when the employment agreement was signed. If an employer and physician negotiate an employment agreement without a noncompete, the employer cannot return to the physician later in the middle of the term of the agreement and have the physician execute a non-compete covenant without paying the physician something in exchange (and continued employment is not sufficient consideration for the non-compete covenant).
The attorneys at Chilivis Grubman have extensive experience with drafting and negotiating physician non-compete covenants, both in the context of employment agreements and the sale of a business. If you need assistance with such a matter, please contact us today.
(1) The Act was signed into law on May 11, 2011 and, in addition to non-compete covenants, governs customer non-solicitation covenants and non-disclosure of information covenants. If a restrictive covenant was entered into prior to this date, it should be reviewed under the case law prior to the Act. Generally, the Act loosened certain standards applied prior to the Act and gave courts the ability to blue pencil.