A restrictive covenant (often referred to as a non-compete clause or a covenant not to compete) is a clause contained in an employment contract through which the employee agrees not to pursue a similar profession or trade, placing them in competition with the employer, after the employment relationship is terminated. This clause or covenant is often put in place to prevent a former employee from using information he or she obtained through the course of their employment to gain a competitive advantage over their former employer.
If you are currently employed as a physician and your employment agreement contains a provision similar to the type of covenant described above, you probably want to understand how a Court will determine the validity of such a clause in order to understand how such a clause will impact your future as a physician after the termination of your current employment contract, joinder and/or partnership agreement.
Below is a summary on the way Courts are handling the non-compete clauses included in the employment contracts of physicians employed in Connecticut and New York. This review and analysis consists of two separate, but related parts. First, a Court must determine whether the non-compete clause is valid, and therefore enforceable. Second, if a clause is valid, as a way to prevent you from pursuing your newly found employment opportunity, your employer may ask the Court to grant a temporary and/or permanent injunction. The second section of this analysis focuses on whether a Court will grant your employer’s request for a temporary or permanent injunction. If granted, this injunction would prevent you from obtaining employment in any manner which violates the restrictive covenant.
The Validity and Enforceability of Physician Non-Compete Clauses in New York and Connecticut
The laws governing the validity and enforceability of non-compete clauses in New York and Connecticut are fairly similar. In both states Courts seek to determine if the restraints provided for under the non-compete clause are reasonable. In making that determination, Courts consider the following factors: (1) the employer’s need to protect legitimate business interests (such as trade secrets and customer lists), (2) the employee’s need to earn a living and support his or her family, (3) the public’s need to secure the employee’s presence in the labor pool, and (4) the amount of time, and the area restricted under the covenant.
Employer’s Need to Protect Legitimate Business Interests:
In general, Courts have found an employer to have a legitimate business interest in situations where the employer needs to protect against the former employee’s use of a trade secret or a highly valuable patient list. If the employer is not able to protect the employee from using such things in the course of their future employment, the employer’s business will noticeably suffer. This is what the Courts will try and protect against through the enforcement of the restrictive covenant. In Connecticut, however, it is important to note that it is not the employer who needs to prove a legitimate business interest, but instead, the employee who needs to disprove the employer’s need to protect legitimate business interests through enforcement of the non-compete clause.
Employee’s Need to Earn a Living: When considering the impact of the enforcement of a non-compete clause on the earning potential of a former employee, Courts will try to determine if enforcement of a restrictive covenant will unreasonably prevent the employee from earning a living, and therefore being able to support themselves. Significantly, Courts noted, however, that this does not mean the operation of a covenant not to compete must maintain a former employee’s income at present levels in order to be found reasonable. It is the burden of the former employee to prove that if the covenant is enforced it will substantially damage his or her ability to earn a living.
The Public’s Need to Secure Employee’s Services: The principal objection to restrictive covenants in physician employment contracts is that they can potentially interfere with continuity of care for a patient. Therefore, a Court is more reluctant to enforce a covenant if the covenant would impact the care of the former employee’s current patients. There are however, many covenants that are drafted to allow a physician to continue providing post-operative, or other limited care, for current patients. If a restrictive covenant will allow for such continuity of care, the Court is more likely to find its restrictions reasonable, and enforceable.
Time and Area Restrictions: The amount of time, and the area restricted under non-compete clauses varies greatly between different employment agreements, depending on the type of services involved and the location of the parties. In making a finding, Courts will look to whether or not the time and area restrictions are reasonable. Recent decisions held clauses limiting the former employee for up to a period of five years within a thirty mile radius reasonable. Reasonableness depends, however, on the specific circumstances of the case.
Other Considerations: Courts also consider the bargaining power between the parties to the employment contract in determining the reasonableness of a restrictive covenant. Some Courts may be more reluctant to find a restrictive covenant unenforceable where the employment agreement is created between partners to a practice, rather then when the agreement is held between an employer and an employee. The Courts have explained this discrepancy on the parties’ ability to negotiate the terms of the employment agreement. A partner will most likely have a greater ability to negotiate the terms of the contract, than will an employee.
An injunction is an equitable remedy in the form of a Court order, whereby a party is required to do, or to refrain from doing, certain acts. In this case, those certain acts would include being employed in a way which would violate the restrictive covenant. When considering an employer’s request for a temporary or permanent injunction, the Courts in New York and Connecticut consider whether the employer has demonstrated that he or she would suffer irreparable injury in the absence of an injunction, that he or she is likely to prevail on the merits of the case, and that the balancing of equities favors the issuance of an injunction.
Irreparable Harm: In considering the irreparable harm an employer may suffer, a Court will rely on factors such as the employer’s revenues, patient flow and the employer’s ability to maintain their business on a long-term basis. Such calculations will consider only the employer’s losses, and not the former employee’s gains.
Balancing of the Equities: When balancing the equities, Courts consider the following: the effect the injunctive relief will have on the employer’s business, the effect that the injunctive relief will have on the employee’s earning potential, and the effect that an injunction will have on the public. In determining the effect on the employer, the Court analyzes how the employer will benefit from the injunctive relief. As for the effect on the employee, the Court considers the options available to the employee if the relief is granted. If the employee can reasonably continue to earn a living, Courts are more willing to grant the employer’s injunctive relief request. In considering the public interest, Courts look at factors such as the hardship the injunctive relief would have on a doctor’s existing patients and the doctor’s contributions to the surrounding community that would be limited by the granting of injunctive relief.
Connecticut – Adequate Remedy at Law: In addition to the above factors, Connecticut Courts consider whether the employer has no other adequate remedy at law available to them. Although some Connecticut Courts have held that the lack of an adequate remedy at law is presumed to be established where a party seeks to enforce a covenant not to compete, not all Courts have relied on that. The Courts that do rely on that theory, however, state that it is only a rebuttable presumption; meaning that it may be possible for the employee to convince the Court that this presumption does not apply in a certain situation. The Connecticut Courts that have not followed that presumption have held the presumption to apply only in the limited instances where the calculation of damages may be difficult or impossible and therefore limits the employer’s potential remedies. These Courts have found that employers have an adequate remedy at law where they are in a position to bring a breach of contract claim, meaning that the employer is able to calculate the damages suffered as a result of the former employee’s actions.
Physician Restrictive Covenant Cases in Connecticut
As a way of bringing together the above information, and to demonstrate the effects of certain factual situations on an outcome, the following illustrations provide examples of restrictive covenant cases heard and decided by the Connecticut Courts in recent years.
Restrictive covenant valid, Injunction denied:
Opticare, P.C. v. Zimmerman, 2008 Conn. Super. LEXIS 759 (2008).
In this Connecticut case, a doctor entered into an employment contract with physician practice group which provided, among other things, that in the event the doctor voluntarily left the practice but intended to continue practicing medicine he would be prohibited from practicing the type of medicine he practiced with the group, within a specific area for a period of 18 months. The restricted area was in the shape of a hexagon and ranged from between fifteen to thirty miles from the locations in which the doctor had been employed with the practice group.
After 22 years of employment, the doctor left the physician practice group and opened his own office, practicing the same kind of medicine as he had been, before the 18 month time period had passed and less than four miles away from his former employer’s office. Upon learning of the physician’s new practice, the practice group asked the Court to grant injunctive relief to prohibit the physician from continuing his practice in violation of the restrictive covenant.
In denying the group’s request, the Court determined that although the restrictive covenant was valid, the group did not establish a showing of irreparable harm. The practice group was still in business, and it had failed to demonstrate that the practice was permanently harmed in any way. The Court also determined that the employer had available to them an adequate remedy at law because the employer had the ability to calculate the damages incurred as a result of the physician’s actions. Finally, the Court found that the equities balanced in favor of the former employee, due in part to the fact that the doctor frequently donated his time to assisting uninsured premature infants at local hospitals and that an injunction would place an undue hardship on his current patients.
Restrictive covenant valid, Injunction granted:
Fairfield County Bariatrics v. Ehrlich, 2010 Conn. Super. LEXIS 568 (2010).
The case of Fairfield County Bariatrics v. Ehrlich, is a case in which the restrictive covenant was deemed valid and injunctive relief was granted to the employer. It involved a situation where a physician developed a very prominent practice performing bariatric surgeries for the physician practice group with whom he was employed and was a one-third shareholder.
As part of his employment with the physician practice group, the physician signed an employment agreement which, among other things, provided that for a period of two years following the termination of his employment, the physician could not practice medicine or general surgery within 15 miles of the practice’s office, and that he could not practice bariatric surgery in five local hospitals.
Following his termination from the group, the physician retrieved a list of the patients he had treated during his employment with the physician practice group. The physician contacted each patient and informed them that he was no longer associated with the group and directed them to contact him at his new office.
The physician’s new office was located within the restricted area provided for in the employment agreement. Additionally, the physician continued to perform bariatric surgeries at the hospitals restricted under the restrictive covenant in the employment agreement.
The Court held the restrictive covenant valid, finding the length of time and area of coverage to be within reasonable limitations. Furthermore, the Court determined that the physician practice group had legitimate business interests that needed the protection of the restrictive covenant. In that finding the Court relied on the practice’s fear that because of the extremely large amount of bariatric surgeries the physician performed on a yearly basis, if the physician were allowed to continue practicing bariatric surgeries at the hospitals within the county, it would drastically dilute the number of surgeries performed at the hospitals in which the practice performed those surgeries. Additionally, the Court determined that the physician’s ability to earn an income was not so restricted by the covenant as to make it unreasonable. Under the covenant, the physician was able to perform surgeries throughout the majority of the county in which he resided, and was able to continue providing post-operative care for his current patients. Finally, the Court determined that the public’s need to secure the physician’s services would only be slightly impacted and that because the physician was still able to provide post-operative care, the public’s need did not render this covenant invalid.
Continuing in their decision, the Court granted the practice’s request for injunctive relief as the Court believed the practice was likely to prevail at a trial. In its decision the Court found the physician practice group would suffer irreparable harm if injunctive relief were not granted as it was able to demonstrate the physician had the ability to drastically dilute the number of available surgeries. As for the balance of equities, the Court determined the harm the physician practice group could potentially suffer if their request was denied was much greater than the harm the physician would suffer if the relief was granted.
Restrictive covenant invalid, Injunction denied:
Merryfield Animal Hosp. v. Mackay, 2002 Conn. Super. LEXIS 2628 (2002).
In this Connecticut case, the Court determined that the restrictive covenant included in the employment agreement was invalid. Consequently, the Court denied the employer’s request for injunctive relief. The doctor in this case had been employed under an employment agreement that contained a non-compete provision. This provision restricted the employee from owning, managing, operating, controlling, participating in, or being employed or in any way connected with an organization providing the services provided by the employer for a period of two years after his termination, and within a seven mile radius from the employer’s locations.
Shortly after his termination the physician obtained employment with a different practice group performing the same services he had been for his former employer. His new employment was located within the seven mile radius restricted under the restrictive covenant. The employer turned to the Court, seeking a temporary injunction which would order the doctor to comply with the specific provisions of the restrictive covenant.
Although the Court found the time and area restrictions provided for in the restrictive covenant reasonable, it ultimately determined that the covenant was unenforceable and therefore denied the employer’s request. In doing so the Court relied exclusively on its finding that the restriction under the covenant was overly broad and not reasonably necessary for the fair protection of the group’s business. If enforced, the language of the covenant would have prevented the doctor, not only from his new position, but even from employment that could in no way bring him in competition with his former employer. Finding the expansive limitations provided for by the language of the restrictive covenant unreasonable, the Court determined the covenant unenforceable, and consequently denied the employer’s request for injunctive relief.
Restrictive covenant invalid, Injunction denied:
Merryfield Animal Hosp. v. Mackay, 2002 Conn. Super. LEXIS 4099 (2002).
A Connecticut Court determined the restrictive covenant at question in this case to be overly protective of the employer’s interest, and therefore determined that the covenant was invalid. Pursuant to the terms of that clause the doctor in this case agreed he would not involve himself with or be employed by a business providing the professional services he provided for the practice within a seven-mile radius of the practice, and for two years after his employment contract terminated.
After providing written notice of his termination, the doctor accepted a position with another practice, located slightly less than seven miles from his former employer’s office. During the course of his new employment the doctor did not solicit any of his former employer’s patients and even rejected any patients he knew to have been patients of his old practice. The Court, therefore found no evidence of a legitimate business interest that the practice needed to protect. Furthermore, the practice was unable to demonstrate it suffered or would suffer any loss as a result of the doctor’s actions. Consequently, the Court determined the restrictive covenant was unenforceable and denied the practice’s request for injunctive relief.
Physician Restrictive Covenant Cases in New York
As a way of bringing together the above information, and to demonstrate the effects of certain factual situations on an outcome, the following illustrations provide examples of restrictive covenant cases heard and decided by New York Courts.
Restrictive covenant valid, Injunction denied:
Millet v. Slocum, 4 A.D.2d 528 (1957).
Following the termination of his employment as a partner in a physician partnership, the physician in this case brought an action before the Court asking the Court to render the restrictive covenant contained in his employment agreement unenforceable. Under the terms of his employment agreement, following his termination, the physician was barred from practicing medicine or surgery within a 25 mile radius from the city in which the partnership was located for a two-year period. The partnership, in response, asked the Court for injunctive relief which would prevent the physician from practicing in contravention of the employment agreement.
Before working with this partnership, the physician never worked as a physician in New York State. During the time the physician served the partnership he developed a professional reputation for competence and earned the trust of the partnership’s patients. As a result, the Court concluded that if the physician were able to directly compete with the partnership, the remaining partners would suffer a loss of patients and good will. Considering next, the physician’s ability to earn a living, the Court decided that the hardship imposed on the physician was not, when balanced with the needs of the partnership, sufficient to invalidate the covenant. The physician had the ability to practice medicine and surgery anywhere outside of the 25 mile radius, and the Court noted that since he had been able to come to New York and build such a strong professional reputation when beginning his work with the practice, it would not be so unreasonable for him to do so again. The Court therefore, concluded that the restrictive covenant was valid and enforceable.
Despite the validity of the restrictive covenant, the Court denied the partnership’s request for injunctive relief based on its finding that the partnership breached the partnership agreement when it expelled the physician from the partnership without justification, as was required pursuant to the agreement. The Court held the partnership’s actions constituted such a breach of the partnership agreement as to not entitle the partnership to the injunctive relief requested.
Restrictive covenant valid, Injunction granted:
Gelder Medical Group v. Webber, 41 N.Y.2d 680 (1977).
After a few years of employment as a partner to a partnership practice, the physician in this case was expelled pursuant to the partnership agreement. Under the terms of the partnership agreement, the physician had agreed not to practice his profession within a radius of 30 miles of the village in which the partnership was located for a period of five years. Disregarding the restrictive covenant, the physician resumed his surgical practice as a single practitioner, practicing in the same village as the partnership and within two months of his expulsion. The partnership, in an effort to protect its practice, asked the Court to enforce the restrictive covenant and grant injunctive relief.
The Court ultimately determined this restrictive covenant was valid. Its decision was due, in part, to the small size of the village in which the partnership was located and had built its practice. In such a small area, the threat of competition from the physician, if allowed, could result in serious damage to the partnership’s number of patients and its revenues. The Court also considered the impact that the covenant could have on the physician’s ability to earn a living and found that throughout the course of his career, this physician had repeatedly changed professional associations within a range of thousands of miles. Therefore, the Court did not credit the physician’s argument that relocating his practice would unreasonably impair his ability to earn an income. Finally, the Court considered the interest of the public and noted the public would not be affected by the enforcement of this covenant, as they could easily obtain the services provided by the physician elsewhere. Granting the employer’s injunction, the Court noted that the damage the partnership would suffer without injunctive relief, when balanced with the losses the physician may face if the covenant were enforced, justified the enforcement of this restrictive covenant.
Restrictive covenant invalid, Injunction denied:
Michael I. Weintraub, M. D., P. C. v. Schwartz, 131 A.D.2d 663 (1987).
The physician in this case had been employed by a certain professional practice group for a period of two years at the time his employment contract was terminated. Pursuant to the terms of his employment agreement, the physician was restricted from engaging in the type of services he performed for the physician practice group within a five mile radius from the professional practice’s office, and within a five mile radius of any hospital at which he had worked at on behalf of the professional practice for a period of one year after the effective date of his termination. Before that one-year period lapsed the physician established an office to perform the restricted type of services within five miles from a hospital where the physician worked on the group’s behalf. The professional group initiated an action against the physician to enforce the restrictive covenant and prevent him from breaching his employment agreement.
In reviewing the restrictive covenant, the Court determined the provision restricting the physician from practicing within five miles of the group’s offices was reasonable and enforceable. The Court, however, found the portion of the covenant prohibiting the physician from practicing within a five-mile radius of any hospital where he worked on the group’s behalf was overly broad and oppressive, and thus unenforceable. If the physician had been required to follow the terms of the covenant it would essentially prohibit him from practicing at or near any of the major hospitals in the two nearest counties. The Court furthered noted an absence of evidence indicating the group’s business related concerns were implicated in any manner through the physician’s breach of the restrictive covenant. Consequently, the Court denied the group’s motion for injunctive relief.
Restrictive Covenant Severed:
Karpinski v. Ingrasci, 28 N.Y.2d 45 (1971).
In the following case the Court held even though the restrictive covenant contained an unreasonable provision, the remaining restrictions provided for under the agreement would be enforceable against the former physician employee. In essence, the Court severed the unreasonable restriction from the restrictive covenant, and held the remainder to be valid. This situation involved a dentist employed by an oral surgeon. As part of his employment with the oral surgeon he agreed to never practice dentistry or oral surgery in any of the surrounding counties except in association with the oral surgeon.
Upon voluntarily ending his employment with the oral surgeon, the dentist opened his own office in violation of the restrictive covenant. After the competition created by the dentist’s new office forced the oral surgeon to close one of his offices, the oral surgeon asked the Court to enforce the restrictive covenant. The Court ultimately held the employer was entitled to an injunction barring the dentist from practicing oral surgery in the five specified counties named in the covenant, but that the covenant’s restriction on the practice of dentistry was too broad. Since the oral surgeon’s business consisted only of performing oral surgeries and related operations, a dental practice providing only dentistry services, and no oral surgery services, would provide no direct competition. The Court, therefore determining the restriction on the practice of dentistry to be too broad, severed that restriction from the covenant, but enforced the remaining provisions of the agreement.
Situations involving these restrictive covenants, or non-compete agreements, are very fact specific, requiring case by case analysis and determinations. Determining the consequences of your employment agreement and your options will require an in-depth review. A violation of a restrictive covenant, if such covenant is in fact enforceable, may result in other contractual claims being brought against you by a former employer. If you have any questions relating to your restrictive covenant or would like to discuss any element of your employment agreement, please contact Joseph Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.