Ensure Your Practice Covenant is Enforceable Before It's Too Late

July 17, 2013

Physician practices must constantly review existing restrictive covenant provisions to ensure they are compliant with state law.

When I counsel physicians and medical practices regarding their employment agreements, one of the issues of greatest concern is always the restrictive covenant or “non-compete.” Although every state has developed its own case law with regard to non-competes, most states generally follow a reasonableness approach, where the court looks at whether the restrictions are reasonable in terms of protecting the interests of the employer.

Another important issue when it comes to restrictive covenants is when the covenant becomes enforceable. That is, how long a physician must work with an employer before the employer can successfully enforce a covenant. Although most practices seemingly assume the covenant is immediately enforceable, according to a recent decision in the Appellate Court of Illinois, in the case of Fifield v. Premier Dealer Services, Inc. 2013 IL App (1st) 120327, two years of continued employment is required in Illinois to uphold a non-competition or non-solicitation provision.

In the Fifield case, an employee worked in an automotive finance insurance business which was acquired by another company. The new owner offered the employee a job but required the employee, as a condition of employment, to sign an agreement that contained a non-compete and non-solicitation provision that lasted two years. The employee’s employment under the agreement was “at will,” meaning it could be terminated by either party without cause. Additionally, the employee, prior to accepting the job offer, negotiated the covenant so that it would not apply if the employee was terminated without cause during the first year of employment.

A few months later the employee quit and went to work for a competitor. Litigation ensued between the new and old employers over enforceability of the non-solicitation and non-compete provisions, and a lower court found the provisions unenforceable as a matter of law for lack of consideration (i.e. nothing of value specifically given to the employee for agreeing to the provisions). On appeal, the Illinois Appellate Court affirmed and found the two-year non-compete and non-solicitation provisions unenforceable for lack of consideration.

In its ruling, the court held, in part, that employment itself was not sufficient consideration to support the non-compete and non-solicitation provisions and that at-will employment can constitute an “illusory benefit” since it can be easily terminated and that “continued employment for two years or more constitutes adequate consideration.” The court also held that the two years of continued employment consideration requirement applies even if an employee resigns.

Based on the Illinois court’s decision, medical practices in Illinois need to look at whether the covenants they have in place are enforceable and how new covenant arrangements should be handled. Will employers need to offer some type of signing bonus? It seems that, at minimum, based on the court’s discussion, Illinois employers might consider providing that restrictive covenants won’t bind an employee if fired without cause within two years of the start date.

Of course this blog is not just for Illinois medical practices. This case may simply push Illinois closer to states such as California, which prohibits most non-compete agreements, and Connecticut and Massachusetts, which recently have leaned in favor of employees in determining whether non-compete agreements can be enforced. Other states may look to the Illinois case for guidance in deciding cases on covenant issues. Although many physicians (particularly those looking for employment) would likely be pleased if more states took a no-covenant approach, the idea a physician can come work for a medical practice, learn about the practice’s business and referral sources, and then, regardless of the reason for termination, take that knowledge and use it against the medical practice, is a scary one for an employer.

Physician practices must constantly review existing restrictive covenant provisions to ensure they are compliant with state law. Should your practice offer consideration to ensure enforceability of a covenant? How do you introduce a covenant when somebody is already an employee or contractor of your practice? When does your covenant become enforceable and, under state law, does the reason for termination make a difference? These are all issues that a medical practice should explore regularly with legal counsel or it may find out, after a physician-employee becomes a competitor, that the practice’s contract language has not protected the practice at all.