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Recent Developments in Physician Non-Compete Agreements

April 20, 2009

Restrictive covenants in physician employment agreements are disfavored, both professionally and legally. The American Medical Association has long been hostile to such restrictions for professional reasons, resolving in 1933 that post-employment restrictions on competition that prevent the "free choice of physician" are unethical. The AMA's Judicial Council revisited the issue in 1960, stating in an opinion that it is not unethical to enforce a "reasonable agreement not to practice within a certain area for a certain time, if it is knowingly made and understood." The pendulum again swung back in 1980, when the AMA adopted a Judicial Council opinion declaring that physician non-competition agreements are not "in the public interest."

The AMA's current position, adopted in 1996, coincides with the public policies of most states:

Opinion 9.03, Restrictive Covenants and the Practice of Medicine

Covenants not to compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services. The Council on Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership or corporate agreement. Restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients' choice of physician.

The AMA's grudging acceptance of reasonable non-competition agreements in the practice of medicine coincides with Wisconsin law, which held such agreements do not violate public policy in 1971. See Oudenhoven v. Nishioka, M.D., 52 Wis. 2d 503, 190 N.W.2d 920 (1971). But that does not mean such agreements will always be enforced in this state.

Wisconsin law disfavors restrictive covenants for all employees, including physicians.

A covenant by an assistant, service or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this subsection, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.Wis. Stat. § 103.465.

This statute recognizes the inequity in bargaining power and discourages employers from overreaching in drafting non-competition agreements for their employees by invalidating the entire covenant if any part of it is later determined to be unreasonable.

Two recent decisions illustrate Wisconsin's fact-dependent application of this statute to physician agreements. In Robert Davison, M.D. v. Bay Area Nuclear Medicine, S.C., (BANM), the Court of Appeals held a post-employment restraint unenforceable because it was no longer reasonably necessary to protect BANM.

BANM hired Davison in 2003, when it held a contract as the exclusive provider of nuclear medicine services to St. Vincent's Hospital in Green Bay. BANM terminated Davison's employment in 2006, however, after it lost its exclusive services contract with St. Vincent's to a competitor, then refused to release Davison from his non-competition agreement when he was offered employment with the competitor. Davison sought and received a judicial declaration that the restraint was unenforceable, even if its terms were perfectly reasonable when the agreement was signed in 2003, because BANM no longer had any protectable interest justifying enforcement of the restrictive covenant. The Court of Appeals affirmed, holding that whether a restraint is reasonably necessary to protect an employer's interests must be determined not at the time of contracting but at the time of the alleged violation.

In another case from the Fox Valley, the Court of Appeals held a geographic restriction in a heart surgeon's non-compete agreement unreasonable and unenforceable because his employer primarily obtained patients by referrals. See Fox Valley Thoracic Surgical Associates, S.C. v. Ferrante, et al., 2008 WI App 51 (unpublished):

Heart Surgeons contends the restriction is reasonable in light of information regarding the zip codes of patients it has served. We disagree because Heart Surgeons obtained these patients via referrals. The patients' addresses, by themselves, do not demonstrate the geographic area in which Heart Surgeons competes for referrals. This is the area that Heart Surgeons arguably needed to protect.

Moreover, most of Heart Surgeons' referrals came from a single source, Cardiology Associates. Yet, Heart Surgeons has not proffered evidence demonstrating how its geographic restriction is necessary to keep Ferrante from unfairly competing for those referrals. Given the lack of relevant evidence, the circuit court was correct to conclude that Heart Surgeons did not meet its burden of establishing the reasonableness of the geographic restriction. Id., ¶¶ 14-15.

These cases illustrate that, although physician non-compete agreements are not against public policy in this state, great care must be exercised in drafting and attempting to enforce them under Wisconsin law. A geographic restraint that may be perfectly reasonable for a family practice physician could be held unenforceable against a specialist, for example, based on differences in how the doctors obtain patients. Similarly, a narrow restraint that appears reasonable when a physician is hired may become unenforceable over time based on changes in the employer's business. One size definitely does not fit all in physician non-compete agreements.

If you would like more information on physician non-compete agreements in Wisconsin, please contact Robert J. Dreps (608-284-2606 or or another member of our Godfrey & Kahn Healthcare Team.

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