[Editor's Note: If you ever feel overwhelmed about the best way to manage your money, investments, and insurance, WCI is here to help. We’ve introduced a FREE email series called WCI 101 that reviews the basics of everything you need to know to get started on your journey to financial prosperity. The emails come to you in bite-sized, easy-to-digest chunks that will help you overcome the mental barriers you might be experiencing. Subscribe to WCI 101 and learn how to build the life you’ve always wanted!]
By Dr. Jim Dahle, WCI Founder
Non-compete agreements are an important part of many employment and partnership contracts in many types of business, including medicine. Naive, young doctors tend to have a reflexive hatred of them. They see these clauses as offensive, limiting, and punitive. They wonder whether they are enforceable at all, and if they are leaving or even thinking about leaving a job, they want to know how to get out of them. I'm going to answer those questions in this post, but first I want to spend some time helping these docs gain a more nuanced, comprehensive perspective on the simple non-compete agreement.
What Is a Non-Compete Agreement?
A non-compete agreement, sometimes called a non-compete covenant or a restrictive covenant, essentially states that you will not compete with your employer, both while you're working there and especially after you leave. The idea is simple, but the devil is in the details. These agreements have to define what competing is, where the agreement applies, and for how long the agreement applies.
Why Do Employment Contracts Have Non-Competes?
All of the employees at The White Coat Investor sign a very specific and limited non-compete agreement or they are not hired. The primary reason WCI requires non-competes is to protect our business secrets. We don't have a lot of secrets, but we do have a few. These include things like how we sell ads, how we negotiate partnerships, where our revenue comes from, what our expenses look like, what we pay our staff members, our search engine optimization techniques, our conversion rates, and similar business statistics and details. We spend a lot of time and money training people to do their jobs, and we don't want them to simply quit, go to a competitor, share all of our secrets, and use all of that knowledge and those skills we taught them to build our competitor's business.
Other businesses simply want to protect their intellectual property. They may have secret ingredients in their soda pop or a specialized manufacturing technique for their hip replacement hardware or a special process for the efficient production of their goods or services. While one can theoretically protect that stuff with a non-disclosure agreement, this is the real world we're talking about here.
In the medical field, a business is also trying to protect its investment. The classic example is a practice that pays to move a doctor to a new town, pays their salary for several months before they really start producing much revenue, introduces them to the medical staff and patients, helps them get insurance contracts, and teaches them how to run an efficient practice. There is a cost to all of that, and that cost represents a significant investment for the employer. Now, imagine the doctor gets all of those benefits, then quits, walks across the street, and opens up their own practice the next day. To make matters worse, the doctor takes half the staff with them. Does that seem fair to the employer? Of course not. The non-compete agreement helps protect the employer from that sort of situation.
There is also the possibility to use a non-compete as “golden handcuffs.” Or maybe not so golden. Maybe just handcuffs. It makes it harder for the employee to leave because they can't do the same job in the same place for a while. They'll have to either not work or go somewhere else. Of course, this also provides a benefit to an employer. However, most employers will honestly tell you that this is not the primary reason for a non-compete.
More information here:
The Proposed Ban on Non-Compete Contracts and Whether It’s Fair
When Is the Best Time to Deal with a Non-Compete Agreement?
The best time to deal with a non-compete is before you get hired. If you don't like what a non-compete says, have it changed or go get a different job. While not always true, you should assume that most non-competes ARE enforceable and WILL be enforced. Even if they are not, you will experience at least some stress and probably spend at least some money if you break them.
How do you deal with an onerous non-compete before you sign on the dotted line? There is always the nuclear option. You can tell them, “Either take this out, or I won't sign the contract.” Take it or leave it. However, this usually is not the best way to deal with a non-compete for a number of reasons. First, unless the employer is desperate, they're probably going to leave it. Second, it marks you as a difficult-to-work-with person. If you're hard to negotiate with now during the honeymoon period, it's only going to get worse.
A better approach is, in the words of businessman Stephen R. Covey, to seek first to understand and then to be understood. Ask the employer WHY they want the non-compete.
Let me share an example from my own life. When I joined my current partnership, there was a fairly onerous non-compete. As it was written, it essentially would require me to leave town if I quit my job with the group. In my view, this was simply punitive. It was silly. I'm an emergency doc. Nobody is going to come to another emergency department because I changed jobs. They don't even know if I'm on shift before they make the decision to come in. I didn't really understand why they had a non-compete agreement at all. So, I asked. It turned out that what the group cared about was the contract with the hospital. The group wanted to make sure I didn't steal the contract from the hospital and start my own EM group. No big deal since I had no plans to do that anyway. We simply rewrote the agreement to state that I could not do that and specifically included language that if I quit or was fired I could go across town and work in another ED. Everybody was happy. That's a great way to get rid of dumb, punitive non-compete agreements. This approach works well for most hospital-based specialties. Even better, the approach demonstrated to my future partners that I was the type of person they would want to work with for decades to come.
Are Non-Competes Enforceable?
However, many specialties are different. Their patients are likely to follow them to their new practice if it isn't too far away and if the patients don't have to wait too long to see the doc there. The restrictive covenant really does protect the employer from you stealing all the patients. In those cases, it really comes down to two things: time and distance. How far away do you have to go and for how long? It is in the employer's best interest for that distance to be as large as possible and for that time period to be as long as possible. It is in the employee's best interest for the distance and the time period to be as short as possible. A classic negotiation.
However, both sides really need a critical piece of information to negotiate this properly. That information is whether a given non-compete is enforceable. Time and time again, case law has demonstrated that a non-compete must be reasonable. That means a reasonable distance and a reasonable time period. In a decent-sized city like Salt Lake City, there might be dozens of primary doctors within just a few miles. A non-compete that prevented you from opening a practice within 10 miles would require patients to drive past many other doctors to get to you. Yet it would not be a particularly onerous commute for you. You would not need a new house. Chances are a 10-mile radius is going to be upheld by a judge if it goes to court. Likewise, a one-year agreement not to practice within that 10-mile radius would be very reasonable. After a year, most of the patients who would have followed you have already found another doctor and are less likely to go to you. So, one year and 10 miles is probably fine. If you're in rural Wyoming and you're joining the only GI practice in the county, a much larger radius (50 miles?) might still be reasonable, even if it wouldn't be in a larger city. Time and distance, time and distance.
You can get an opinion from a healthcare contract attorney in your state (or a contract review service) about the enforceability of a given non-compete, but nobody really knows until it actually goes to court. If you are presented with a non-compete that does not seem reasonable and your attorney agrees, arguing that it won't be enforceable is a good way to reduce the distance and the time requirement to something more reasonable. Your employer will likely check with their attorney, find out the same thing, and agree to make it less onerous. For a medical practice, five years and 500 miles isn't going to be enforceable anywhere. But one year and two miles is probably enforceable everywhere. For anything in between, well, it depends.
More information here:
Things to Ask for in a Physician Contract
What Physicians Need to Know About Contract Negotiation
How to Get Out of a Non-Compete
OK, you've got a non-compete agreement. Now, you want to quit (or you're being fired), and you want out of it. What are your options? You have more than you might think.
#1 The Nuclear Option
There's always the option to just ignore the non-compete. Go open your new practice and go about your merry way. It costs money, time, and aggravation to enforce a non-compete. It may not be worth it to the old employer. You're rolling the dice here, though, because it also costs money, time, and aggravation to defend yourself against a breach of contract lawsuit. However, this can be a good option. In essence, you're saying “So sue me!” The worst case scenario is you end up spending time in court over the next couple of years, and you have to write the old employer a big check. But perhaps they don't sue at all. And if you think you've got a good case, perhaps they sue you but you win because the agreement really wasn't reasonable.
#2 Pay the Consequences
Many non-compete agreements have very specific consequences listed. Perhaps the agreement says that if you open a practice within two years inside the same metropolitan area, you have to pay the employer $100,000 in liquidated damages. You can just pay them $100,000 and go ahead and open the new practice. This could be a win-win for both of you. The employer loses less than $100,000 in business and turnover costs and comes out ahead, and you make more than $100,000 in additional income at the new practice.
#3 Negotiate
Just as you negotiate when you join a company, you often negotiate when you leave. Perhaps you are being fired and being paid a couple of months of severance pay. What if they only pay you one month of severance and take away the non-compete? What if you promise not to turn them in for discrimination or sexual harassment in exchange for a generous severance package including the elimination of the non-compete agreement? What if you promise to quit (instead of being fired) if they will reduce the non-compete to just six months? How about they reduce the non-compete period by one month for every month you remain while they're trying to hire a replacement? Lots of potential negotiating options here.
Didn't Non-Competes Just Get Outlawed?
On January 5, 2023, the FTC released a “Notice of Proposed Rulemaking” to prohibit employers from imposing non-compete clauses on workers. It argues that non-competes lower workers' wages, stifle new businesses and new ideas, exploit workers, and hinder economic liberty. Plus, it says that employers have other ways to protect trade secrets and other valuable investments that are significantly less harmful to workers and consumers.
- The rule would provide that non-compete clauses are an unfair method of competition. As a result, the rule would ban employers from entering non-compete clauses with their workers, including independent contractors.
- The rule would require employers to rescind existing non-compete clauses with workers and actively inform their employees that the contracts are no longer in effect.
In the proposed rule, for which the agency invites comment, the FTC estimates that the rule would:
- Increase workers’ earnings by nearly $300 billion per year.
- Save consumers up to $148 billion annually on healthcare costs.
- Double the number of companies founded by a former worker in the same industry.
The proposed rule seeks public comment on a number of topics, in particular:
- Whether franchisees should be covered by the rule.
- Whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban.
- Whether low- and high-wage workers should be treated differently under the rule.
Five states have now banned non-competes including California, Colorado, Minnesota, North Dakota, and Oklahoma. However, they are NOT banned nationally. Most physician professional organizations have issued statements supportive of such a ban.
The AMA took a balanced view similar to this article:
“The AMA appreciates the Federal Trade Commission’s examination of non-compete agreements in the workplace. While the AMA’s membership has diverse perspectives on non-competes—with some members in an employer/practice ownership role and some in an employee role—AMA ethics policy opposes unreasonable non-competes. Many states have enacted negotiated healthcare-specific non-compete statutes that take into account their unique healthcare markets and that balance the competing stakeholder interests. The balanced approach of these states must be considered against a proposed universal federal ban on all non-compete agreements.”
So did the American Society of Anesthesiologists:
“In comments to the Federal Trade Commission (FTC), the American Society of Anesthesiologists (ASA) called for states to develop and apply regulations that would outlaw unreasonable and egregious non-compete agreements. Citing shortcomings within the proposed rule, including whether the rule could apply to nonprofit hospitals and facilities, ASA stated its support for state legislatures and regulatory bodies to issue smart, targeted regulations to address non-compete agreements.
In March, more than 300 anesthesiologists responded to an informal ASA survey on how non-competes affected their careers. A majority of respondents described how non-competes limited their career progression, affected their wages, and led many anesthesiologists to seek employment in locations far from their previous job. Other anesthesiologists suggested that non-compete agreements protected their groups from purchase or having to annually renegotiate their contact with hospitals and other facilities. ASA used these comments to describe the variety of non-compete clauses to the FTC, including how a one-size-fits-all approach to banning non-competes would fail to address the nuances of a complex healthcare system.”
The American College of Emergency Physicians did not:
“ACEP strongly agrees with the FTC that non-compete clauses are unfair, exploitative, and coercive because they can restrict emergency physician autonomy and limit otherwise viable employment options. Finalizing this regulation as proposed would help address the current anti-competitive conditions faced by many emergency physicians amidst growing health care consolidation.
ACEP asked its members for anonymous feedback about their experiences with non-compete agreements and included many of the responses in its letter to the FTC. Among 75 emergency physician respondents, 90% said non-compete clauses make it harder for emergency physicians to switch employers, and more than half (59%) said they would seek a different job locally if they were not subject to the clause.”
In my interactions with docs, most are very much against non-competes, but I also found that most had not fully considered their opinion from the view of an employer. The older and more experienced the doc, the more nuanced their views tended to be.
In conclusion, employers have legitimate reasons to have non-compete agreements. Reasonable non-compete agreements are currently enforceable in most states. What is reasonable varies significantly by state, specialty, and metropolitan area. An ounce of prevention is worth a pound of cure. Getting solid legal advice before and after signing an agreement is worthwhile. Creativity and goodwill can get you out of the most onerous aspects of many non-compete agreements. And pay attention to see if the proposed FTC rule actually goes into effect.
If you need to get a contract reviewed, either before or after signing it . . .
Hire a WCI recommended contract review company today!
What do you think about non-compete agreements and why? Have you gotten out of one? How did you do it? Have you been forced to abide by one? What happened? What are your thoughts on the proposed FTC rule? Comment below!
