Are Restrictive Covenants in the Health Care Setting Still Enforceable?

Are restrictive covenants still enforceable in the health care setting? The answer to this question depends on state law. While, generally speaking, restrictive covenants are disfavored by the courts, these types of provisions can be used to protect assets/business interests under certain circumstances. The law varies significantly from state to state, and, as a general matter, is trending against the enforceability of these covenants.

In Pennsylvania, there is no statute or regulation specifically governing the enforceability of restrictive covenants. Currently, restrictive covenants have been held to be enforceable in Pennsylvania as to health care practitioners, provided that the covenant is protecting a legitimate business interest and its scope is reasonable in both time and geography. At the end of 2017, however, the several State Representatives sponsored Pennsylvania House Bill 1938, entitled the “Freedom to Work Act,” which, if passed, would render non-competition agreements “illegal, unenforceable and void as a matter of law,” with a few exceptions relating to the sale of a business and reasonable non-competition agreements in effect prior to the bill’s effective date.  (See HB 1938 (Pa. 2017). The bill remains in the Pennsylvania House Committee on Labor and Industry since it was referred there on November 27, 2017.

As in Pennsylvania, at the end of 2017, New Jersey’s Senate and Assembly each proposed identical companion bills that would limit the use of non-competition agreements in the state. See 217th Leg. (N.J. 2017) and A1769. Unlike the proposed Pennsylvania bill, the New Jersey bills would not prohibit non-competition agreements, but would establish a 10-factor test that a non-competition agreement would have to meet in order to be enforceable. Among other things, the factors set forth standards related to entering into the agreement and the specific terms of the agreement (e.g., the restricted period, territory, and activities).

Some states have statutory industry-specific limitations on restrictive covenants relating to health care. Colorado, Connecticut, New Hampshire, New Mexico, Rhode Island, Texas, and West Virginia all limit or prohibit the use of restrictive covenants as to physicians and other health care practitioners. Broader, non-industry specific statutes exist in California, North Dakota, and Oklahoma that provide that non-competition agreements are “void,” subject to narrow exceptions for the sale of a business or the dissolution of a partnership.

Certain federal initiatives have also attempted to address restrictive covenants. On October 25, 2016, following reports from the White House and the United States Department of the Treasury on the negative impacts of non-competition agreements, the Obama administration released a “State Call to Action on Non-Compete Agreements” to address the perceived problems of non-competition agreements and to promote competition and worker mobility. The State Call to Action set forth best practices for state legislatures to pursue, including banning non-competition agreements for certain categories of workers, improving the transparency and fairness of non-competition agreements and incentivizing employers to write enforceable non-competition agreements. While it is not clear that the Trump administration will continue this executive effort for widespread non-competition agreement reform, the Secretaries of the federal Departments of Health and Human Services, Treasury and Labor joined together to specifically recommend scrutinizing restrictive covenants binding physicians in an effort to increase competition in the health care industry in a document entitled, “Reforming America’s Health Care System through Choice and Competition (2018).”

To have the best chance of enforcing a restrictive covenant (in those states that do not prohibit these provisions), drafting considerations should include: the forum in which the restrictive covenant is disputed and the state’s law that is applied; limitations on the scope (time and distance) of the restriction to a reasonable standard; an assignment provision in any agreement to protect the business interest of the employer or business from permitting the obligations under the agreement to be assigned; and limitations on any liquidated damages provisions to a reasonable monetary amount.

Restrictive covenant enforceability is not a slam dunk, and is becoming more difficult in the health care industry. As the shortage of physicians and other health care practitioners increases, it is likely that more states will enact legislation that will void or significantly limit the enforceability/applicability of these covenants.