A New Prescription for Physician Restrictive Covenants in Illinois

For years, Illinois courts generally upheld the validity of restrictive covenants in physician employment and shareholder agreements.   But recently, courts have issued decisions that will provide physicians and the attorneys that represent them with a greater ability to challenge the enforceability of restrictive covenants.

For years, Illinois courts generally upheld the validity of restrictive covenants in physician employment and shareholder agreements. But recently, courts have issued decisions that will provide physicians and the attorneys that represent them with a greater ability to challenge the enforceability of restrictive covenants.

For years, Illinois courts generally upheld the validity of restrictive covenants in physician employment and shareholder agreements.   But recently, courts have issued decisions that will provide physicians and the attorneys that represent them with a greater ability to challenge the enforceability of restrictive covenants.

I.          Background

These developments come as the healthcare landscape is undergoing rapid and systemic change.  The Affordable Care Act (ACA) mandates the use costly information technology systems to comply with quality of care metrics in order to obtain more favorable reimbursement rates from Medicare and other government healthcare reimbursement programs.  These ACA mandates compound the existing problems and pressures of malpractice insurance and diminishing reimbursement rates from private third-party payors.  As a result, many physicians are deciding that they do not want the administrative, financial and legal burdens of owning and operating their own independent medical practice.

In turn, hospitals and health systems view direct employment of experienced and established physicians as a critical element to securing market share in the communities they serve.  This dynamic has created mobility in the profession as physicians move from independent practice to employment by large multi-specialty groups, hospitals and health systems.

As the seismic shift is occurring, physician practices and hospitals that are seeing physicians leave are confronted with the challenge how to enforce restrictive covenants.   Historically, restrictive covenants, or non-competition provisions, have been widely used in the medical profession.  The justification has been that they allow an established medical practice or hospital practice to recruit, hire, and train young physicians with some comfort that if the physician ever leaves the practice, they will not go into direct competition with the practice for a reasonable period of time.

This area of the law was once guided by well-settled rules and tests, but now the enforceability of those restrictive covenants will turn on a variety of fact specific issues that will likely add to the time and expense of litigating such cases.

II.        The Basic Rules: A Legitimate Protectable Business Interest

As a threshold matter, for a restrictive covenant to be enforceable, it must be reasonable in duration and geographic scope and supported by consideration exchanged by the parties.  Once this threshold test has been met, the court will inquire into the reasonableness of the restrictions using the following factors:

  • The restrictions are no greater than is required to protect a legitimate business interest of the employer
  • It does not impose undue hardship on the employee; and
  • It is not injurious to the public.

This three prong analysis has come to be known as the “rule of reason” test that is used by lawyers and judges determining the enforceability of restrictive covenants.

Over time, Illinois courts also came to give great weight to others factors such as:

  • whether competition from former employee would threaten “permanent or near permanent” customer relationships
  • whether there was a risk that the employer’s confidential business information might be used by the departing employee for their own benefit.

Dating back almost 60 years, Illinois case law has held that physician practices have a legitimate business interest in limiting competition from a former member of the group and that a restrictive covenant to that effect does not pose a risk of harm to the public.  As recently as 2006, the Illinois Supreme Court specifically reaffirmed that restrictive covenants are permissible in physician employment arrangements, so long as they are reasonable and serve a legitimate business interest.

III.       The Reliable Fire Case:  A Facts & Circumstances Test

In 2011, the Illinois Supreme Court issued a decision which was both praised and criticized at the time, as an effort to clarify the appropriate standard for what constitutes a “legitimate business interest”.

The Reliable Fire case (so named for the company that brought the appeal of a lower court’s refusal to enforce a restrictive covenant) holds that the process of determining what constitutes an employer’s legitimate business interest is not a strict, rules based analysis using only the “rule of reason” test.   The court stated that permanency of the relationship with a client/patient or the misappropriation of confidential business information by a competing former employee would no longer be regarded as the exclusive tests to enforce a restrictive covenant.

Rather, the Court said the “rule of reason” test and these other factors are merely “inconclusive aids” and that a balancing test, with a careful analysis of the totality of the circumstances of the particular set of facts surrounding each individual case, is required to determine if a legitimate business interest exists to enforce a restrictive covenant.

Moreover, the court said that when determining whether a legitimate protectable business interest exists, no one factor carries any more weight than any other factor.  The importance of any factor used in the analysis is dependent on the specific facts and circumstances of each individual case.   The court was careful to note that it was not expressly overturning previous cases that it had decided using the strict, rules based formula for reviewing the validity of restrictive covenants.  But those cases are now of limited precedential value and will have to be carefully analyzed to determine if they provide support to an employer’s efforts to enforce a non-compete provision of a contract.

The court also ruled that the parties must be given a full opportunity to develop the necessary evidentiary record before the trial court can rule on whether a restrictive covenant should be enforced.

IV.       The Facts & Circumstances Test Applied To Physician Practice Agreements

In 2013, the First District Appellate Court, an intermediate level appeals court in Chicago, used the standards set forth in the Reliable Fire case to analyze the totality of the facts and circumstances of a restrictive covenant contained in a physician employment agreement and determined it was unenforceable.

A gastroenterologist in the northern suburbs who had been with a practice for 10 years left his group to join NorthShore University HealthSystems Medical Group.  The former group sued to enforce a restrictive covenant against the departing physician.  After considering all of the evidence using the standards dictated by the Illinois Supreme Court in the Reliable Fire case, the trial court ruled in favor of the physician and found the group had no legitimate business interest in need of protection that would mandate enforcement of the restrictive covenant.

In upholding the trial court, the Appeals Court reviewed several factors, including the group’s business operations and inbound referral streams, and determined that the relationship between the physician and his patients was not a near permanent one.  The evidentiary record developed in the case showed that although the physician was a member of the group, his patient referral stream, marketing and billing systems and compensation were all independent from the members of the group.  The physician even maintained a separate office location and phone number from the group.  In light of these factors, the court ruled that the relationship existed between the departing physician and his patients.  Therefore, the group had no legitimate business interest in need of protection from competition by the departing physician.

The Appellate Court followed up this decision with one a short time later that held that no legitimate business interest existed in enforcing a restrictive covenant that did not contain a specific limitation on the time a physician was restricted from competing with his practice.

V.        Conclusion

So what does all this new case law mean to physicians and their employers?

For starters, employer’s who may believe they have an open and shut case to enforce a restrictive covenant will likely be frustrated and surprised to find out that Illinois courts will now give much greater latitude to a former employee to put forth evidence to establish:  1) their current employment does not actually compete with the employer; and 2) there is no a legitimate business interest on the part of the employer for the court to protect.  Courts will be much less inclined to grant the employer a temporary restraining order or other initial injunctive that in the past could leave departing physician professionally paralyzed while the merits of the case are litigated.

The discovery phase of litigation to enforce restrictive covenants will likely become more time consuming and expensive as the parties attempt to merge the law and facts together in such a way that the court will find in their favor on the issue of whether a legitimate protectable business interest exists.

The restrictive covenants of certain types of single specialty physician groups that have near permanent relationships with patients may have greater success enforcing restrictive covenants than those groups where the patient relationship is more transient.

The business structure and cost sharing arrangements of physician groups will be reviewed closely to determine if a departing physician’s future endeavors actually compete with the group they are leaving, or if the departure is a simple reshuffling of chairs that the court should not restrain.

Surely, the regulatory and market forces that are roiling the healthcare industry and driving the move towards greater integration and consolidation among physicians and hospitals will be given weight by courts as they attempt to determine if a legitimate business interest is served by enforcing a restrictive covenant.

The recent case law has had the effect of leveling of the playing field between employers and departing physicians.  This changed dynamic should also have the effect of inducing employers to negotiate a settlement, rather than litigate, a dispute over the interpretation of the terms or enforceability of a restrictive covenant.  Even when a disputed employment or shareholder agreements does not provide a departing physician the option to “buy-out” of the restrictive covenant, the parties may find it in their best interest to negotiate a financial settlement that spares everyone the uncertainty of litigation and allows a quicker resolution of the case.

One thing is certain.  The recent case developments require healthcare providers to pull out and dust off their physician employment and shareholder agreements and revisit the terms to determine if they still reflect the realities of the group’s practice structure and comply with the law.  If they don’t, those documents should be revised and redrafted to better suit the business interests of the practice.

Physicians who have been reluctant to explore employment opportunities out of a fear they would be sued by their group for violating a restrictive covenant may now find reason to be emboldened by the recent developments in Illinois law.

In the meantime, the fast moving trend in healthcare business arrangements towards greater integration of hospitals, health systems and physicians will continue.  And the case law in Illinois on the enforcement of restrictive covenants will rapidly catch up to those trends.

Posted in Restrictive Covenant/Covenant Not to Compete | Leave a comment

If You Build It, They Will Come. Or Will They?

Last month the Wall Street Journal had an article on the shortage of residencies for medical students currently enrolled at U.S. medical schools.  Turns out the feds, who have primary authority for funding residency programs through Medicare, have frozen funding since 1997.  Meanwhile, an aging population and mandates of the Affordable Care Act will continue to create demand for trained physicians.   Lets hope this gets worked out soon.moonlight-graham_crop_exact

Posted in Residency Programs | Leave a comment

Scope of Practice for PAs a Hot Issue

The Wall Street Journal has an extensive article on the growing debate over the scope of practice for physician assistants and other mid-level practitioners.  My experience is that a good PA or Nurse Practitioner can add great value to a physician’s professional productivity and personal quality of life.   The Kentucky Medical Association is being cautious on the expanded use of PAs, saying they want to work with the PA community on  developing a model for “”physician-led, patient-centered medical teams”.  Amen to that.  Get it down quick though.  We are going to need a lot of bright minds and caring hearts at all levels to meet the growing demand created by the Affordable Care Act.  Then the next big trick will be to ensure that M.D.s, P.A.s and N.P.s are all compensated fairly.Little Kid in Lab Coat
Little Kid in Lab Coat

Posted in Mid-Level Practioners | Leave a comment

Technology and The Empathetic Physician

Doctor-with-computer-question1

Press control.alt, delete to take back that diagnosis.

Venture capitalist Vinod Khosla writes that technology will largely replace the diagnosis currently performed by physicians.  Khosla asserts that these rapidly progressing developments will actually free up physicians to spend more time with their patients and perform their work better.

Khosla also  says that while computers and technology do the analytics that can lead to more accurate diagnosis and treatment, those physicians that can oversee this process with empathy and a good bedside manner will be the ones that flourish in this brave new world.

Posted in Medical Technology, Venture Capital & Private Equity | Leave a comment

Of Medical Errors and Airplane Accidents

Dr. Marty Makary has a good piece in the Wall Street Journal comparing the harm caused to society by medical errors and airplane accidents.  He says medicine needs to follow the practices put in place by aviation to reduce the amount of medical errors.  In short, medicine needs to do a better job of learning from mistakes and encouraging greater transparency and accountability when dealing with medical errors.

Image

Posted in Uncategorized | Leave a comment

HIPAA Hopping

Think your practice is too small to escape scrutiny and sanctions for HIPAA violations?  Better think again.

In April, the HHS Office for Civil Rights (OCR) levied a fine in the amount of $100,000 against a five physician cardiac surgery group located in Phoenix for potential violations of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Privacy and Security Rules.  Evidently, the surgical practice used a web based appointment system and the names of patients were being posted online for all the world to see.

In addition to the fine, the group was required to implement policies and procedures to ensure that patients’ protected health information is adequately safeguarded.

In announcing the fine, HHS OCR struck an aggressive posture.  “This case is significant because it highlights a multi-year, continuing failure on the part of this provider to comply with the requirements of the Privacy and Security Rules,” said Leon Rodriguez, director of OCR.  “We hope that health care providers pay careful attention to this resolution agreement and understand that the HIPAA Privacy and Security Rules have been in place for many years, and OCR expects full compliance no matter the size of a (medical practice).”

So, if you don’t have HIPAA policies in place, do it soon.  The feds won’t be very sympathetic to an argument that your practice is too small to comply with HIPAA.

Posted in HIPAA, Uncategorized | Tagged | Leave a comment

Wall Street Journal Asks If Your Doctor’s Office Should be Occupied

http://blogs.wsj.com/wealth/2012/01/31/occupy-your-doctors-office/?mod=e2fb#

Posted in Uncategorized | Leave a comment

A Bad Sign For Healthcare Venture Capital

Dan Primack of Fortune magazine has a post today on his blog, Term Sheet, about how one prominent venture capital firm is shutting down its investments in healthcare. This is not good sign.

The firm,  Scale Venture Partners, cites the challenges of getting new drug submissions through the FDA as the basis for its actions.

A vibrant interest in healthcare by venture capital and private equity is critical to advancements in new therapies and devices.  Government policies that chill investments in these areas are a problem and should be changed.

Posted in Venture Capital & Private Equity | Leave a comment

The Great Pains of Pain Management

The Wall Street Journal has an interesting article today on how physicians deal with the complicated issue of pain management for patients.

One doctor quoted in the article says that between 15% and 20% of patients fake their pain or aren’t in as much pain as they say. Other patients are dependent on opoid painkillers or exagerate their pain in order to avoid work.

Faced with patients that overstate their pain, physicians must make some difficult decisions, including just saying no to a request for another painkiller prescription.
It a good article, even for physicians treating the milions of patients out there with very real and debilitating pain. Go give it a read.

Posted in General | Leave a comment

Is There a Doctor on The Plane?

During the summer travel season, I will usually get a few calls from doctor clients who have responded to a medical emergency while on an airplane.  If the patient doesn’t make it or later develops severe complications, the doctors are concerned that they may have incurred liability for providing care.   They need not worry.  Good Samaritan laws provide a shield from liability when a doctor happens upon an accident or ill person and volunteers to provide care without compensation.

Yesterday, the New York Times had a piece on just how much the airline industry actually relies on the medical community to come to the aid of fellow passengers in emergency situations.  Some doctors interviewed even pack drugs and other items and equipment so they are prepared in case they are called upon for professional assistance.

Its an interesting read so go check it out.  And pack accordingly for that trip to the beach this summer.

Posted in General | Leave a comment