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Is Your Physician NonCompete Agreement Enforceable?

A Health Care Client Alert

By: E. William S. Shipman

07/18/13

Michigan hospitals and physician practice groups sometimes include in their physician employment agreements clauses that prevent a former employee from accepting employment with a competitor. The employers assume that if an attorney wrote the clause, and if the physician signed it, then it must be enforceable. They are mistaken.

Michigan law is clear – in an employment agreement, noncompetition clauses cannot be used to prevent competition. (Note that the legal analysis changes when the noncompetition clause appears in a shareholder contract). Noncompete agreements can be used only to prevent unfair competition. “In a medical setting, a restrictive covenant can protect against unfair competition by preventing the loss of patients to departing physicians, protecting an employer's investment in specialized training of a physician, or protecting an employer's confidential business information or patient lists” (St. Clair Medical, P.C. v. Borgiel, 270 Mich App. 260 (2006)).

Recently, Bodman represented a hospital that had hired a neurosurgeon who had signed a noncompete agreement with a previous employer. The former employer sued to prevent the new employment, but was unable to show the court that the neurosurgeon had taken any of its patients, records, confidential business information, or property. The former employer admitted that the geographic area it had selected was so broad that it would prevent the neurosurgeon from working in most of the central region of the lower peninsula of Michigan. Thus, the noncompete was designed to prevent competition itself, and was unenforceable.

In other circumstances, we have enforced noncompetition clauses because we were able to demonstrate that our health care client had a protectable business interest, the geographic restraint was reasonable, the line of business that was restricted was reasonable, and there was no harm to the public interest.

The public interest is of particular concern in physician noncompetes, and some courts will not limit the ability of a patient to receive care from the physician of their choice or the ability of a physician to refer a patient to a specialist of his or her choice. Some courts will not limit the ability of a physician to work in an underserved area. Still other states have refused to enforce physician noncompetition agreements on ethical grounds, while still enforcing obligations relating to confidentiality, employee solicitation, rights in inventions, and ownership of records and files.

The bottom line is that health care clients need a surgical approach to the drafting and enforcement of physician noncompetition clauses. They are not enforceable merely because they are signed or because they were enforceable in another case or in another state. Noncompetition clauses are enforceable because, after consideration of a dozen factors, a court finds that they protect a legitimate business interest, are reasonable, do not harm the public, do not merely prevent competition, and do not unduly harm the departing physician.

Bodman's Health Care and Workplace Law attorneys have great experience in this field and are happy to review your physician employment agreements with you. If you would like to discuss these or any other legal issues affecting your organization, please contact the chair of our Health Care Law Group, Bill Shipman, at (313) 393-7562 or wshipman@bodmanlaw.com.