Earlier this month, a physician group sued a healthcare system in North Carolina state court, accusing it of monopolization by including overly restrictive covenants in physicians’ employment agreements, thereby preventing the physicians from leaving and practicing independently. This case serves as an important reminder of the antitrust risks inherent in common restrictive covenants contained in physician employment agreements.

Atrium Health (Atrium), a nonprofit hospital system and the largest system in the Charlotte area, has over 1,100 physicians on staff at its flagship hospital and over 2,500 physicians in its clinically integrated network. Mecklenburg Medical Group (MMG) is a physician group with over 90 doctors. Each MMG physician individually contracts with Atrium, so that physicians’ employment agreements are not all identical. On April 2, 2018, MMG sued Atrium for a declaration that noncompete and nonsolicitation provisions in its physicians’ employment agreements are void, invalid or unenforceable on the grounds that they are overly broad and violate public policy.

According to the complaint, MMG’s employment agreements contain noncompete provisions that broadly prohibit employed physicians from operating a medical office, clinic or outpatient treatment facility, or otherwise engaging in any practice of medicine, within a 15-mile radius of certain Atrium-owned or -controlled offices. MMG claimed that the provisions effectively prevent the physicians from performing specialty work in the Mecklenburg County area for 12 or 18 months, even if that work is distinct from the work they performed as employees of Atrium. For example, the noncompete provision allegedly prevents the physicians from working as nonphysician managers of a practice or from performing charity physician work in the area.

Most of the employment agreements also contain a nonsolicitation provision that bars physicians from contacting, communicating with or targeting persons to provide services. The provision also restricts physicians from soliciting any Atrium patients who reside in the relevant geographical area and have consulted with, been treated by or been cared for by the physicians within the 12-month period immediately preceding termination for a 12-month period. These provisions prevented any physicians departing from Atrium’s employment from notifying their patients of the change or inviting them to continue receiving services at the physicians’ new practices.

MMG alleged that Atrium unilaterally decided to change certain physician employment terms, including by lowering physician compensation, effective January 1, 2018, and then notified the physicians that if they refused to execute the new agreements, they would be terminated “for cause.” Therefore, refusal to sign the new agreements would trigger the noncompete provisions.

The same day that MMG sued Atrium, Atrium announced that it would allow Mecklenburg to break away and operate as a new, independent group. Mecklenburg sent a letter on April 4 seeking to settle the suit, but as of April 9, Mecklenburg reported that it had received only a one-sentence email from Atrium stating that it was reviewing the suit.

Takeaways

As we reported in our April 2017 article, Atrium also was sued by the Department of Justice over anti-steering clauses in its insurer contracts, and the case survived an initial attempt to dismiss. Both anti-steering clauses and restrictive covenants are relatively common and can have procompetitive justifications, as well as serve legitimate business needs. For example, restrictive covenants may serve to prevent rivals from gaining an unfair advantage from a company’s investments in training its employees.

Agreements that unfairly restrict employees’ ability to practice their trade and compete with their former employer, however, may come under antitrust scrutiny. While the court has yet to make a determination on the validity of the noncompete and nonsolicitation provisions and whether they in fact run afoul of the antitrust laws, the case serves as an important reminder of the antitrust risks inherent in these common contractual clauses when they are not narrowly tailored.