A new Connecticut law significantly restricts the use of physician non-compete agreements. Public Act No. 16-95 (the “Act”), signed into law by Governor Dannel Malloy on June 2, 2016, limits the allowable duration and geographical scope of any new, amended, or renewed physician non-compete agreement. The law also states that physician non-compete agreements are unenforceable if the employer terminates the physician’s employment or the contractual relationship without cause. The new restrictions are set to take effect on July 1, 2016, so employers with physician non-competes are left with little time to assess the Act’s impact on their operations and to plan for compliance.
Restrictions on Physician Temporal and Geographical Limitations
Consistent with well-established Connecticut law, the Act states a non-competition agreement is valid and enforceable only if it is “(A) Necessary to protect a legitimate business interest; (B) reasonably limited in time, geographic scope, and practice restrictions as necessary to protect such business interest; and (C) otherwise consistent with the law and public policy.”
The Act diverges from established law in setting explicit restrictions on the breadth of temporal and geographic scope restrictions. Generally, under Connecticut law, temporal and geographic non-compete restrictions are assessed on a case-by-case basis. However, the Act establishes a bright-line test for temporal and geographic restrictions, prohibiting non-competes that restrict physicians from competing for a period longer than one year and a geographic scope of up to 15 miles from the “primary site where such physician practices.”
The “primary site where such physician practices” is defined as “the office, facility, or location where a majority of the revenue derived from such physician’s services is generated” or “any other office, facility or location where such physician practices and mutually agreed to by the parties and identified in the covenant not to compete.” Consequently, the default “primary site” will be the facility where the physician conducts the majority of his or her practice. The parties to a physician non-compete may, however, explicitly agree upon a different facility as the basis for the 15-mile restriction if the physician actually practices at such facility.
Burden of Proof Concerning Enforceability
The Act states “the party seeking to enforce a covenant not to compete shall have the burden of proof in any proceeding.” The Act places the burden of proof on the employer whether it is the employer seeking to enforce the non-compete agreement, or the physician challenging enforceability. The Act does not explicitly state whether the new burden of proof allocation is retroactive.
Further Restrictions on Enforceability
The Act also identifies specific circumstances when physician non-competes will not be enforceable. Specifically, the Act says a physician non-compete will not be enforceable against a physician if:
- such employment contract or agreement was not made in anticipation of, or as part of, a partnership or ownership agreement and such contract or agreement expires and is not renewed, unless, prior to such expiration, the employer makes a bona fide offer to renew the contract on the same or similar terms and conditions, or
- the employment or contractual relationship is terminated by the employer, unless such employment or contractual relationship is terminated for cause.
After parsing subparagraph (i), it seems a non-compete in an expired physician employment contract is unenforceable unless prior to expiration of the employment contract, the employer offers to renew the contract on the same or similar conditions. What constitutes “similar conditions” is unclear and may spawn litigation to interpret the term.
The language in subparagraph (ii) leaves employers with uncertainty. This provision limits enforceability of physician non-compete agreements to situations where a physician either voluntarily terminates the employment relationship or the employer terminates the relationship “for cause.” The Act does not define what constitutes “for cause” termination, however. Thus, defining the term in any given case may cause courts to consider the meaning of “for cause” in other contexts such as case authority that has interpreted its usage in employment contracts. Employers can be sure that what constitutes “for cause” termination in connection with a physician non-compete will be a hotly disputed issue.
The Act clarifies that where a non-compete is rendered void and unenforceable due to the Act’s limitations, the remaining provisions of the employment contract remain in full force and effect, including provisions that require the payment of damages resulting from any injury suffered by reason of termination of the employment contract.
The Act is based on established non-compete requirements. However, when drafting and attempting to enforce physician non-competes, employers must account for several new restrictions that supersede existing law. In anticipation of these new restrictions, employers should ensure that any physician non-competes entered, amended, or renewed on or after July 1, 2016, comply with the one-year temporal restriction and 15-mile geographic restriction. Employers should also consider whether to explicitly identify a “primary site where such physician practices” to ensure it is protecting the optimal 15-mile geographic scope.
As noted, the Act is silent on whether certain provisions are retroactive, which counsels caution such that employers may consider amending existing physician non-compete agreements to bring them in line with the new restrictions. The “for cause” termination requirement suggests taking the opportunity to revise any agreements that do not specifically define the term.