Illinois courts have a long tradition of upholding covenants not to compete in employment contracts, provided the limitations as to time and territory are not unreasonable. This tradition recently came under attack in Mohanty v. St. John Heart Clinic, 2006 WL 3741970 (Ill. 2006), where doctor-employees argued that all non-compete provisions in physician employment contracts are against Illinois public policy and therefore, unenforceable. The Illinois Supreme Court disagreed. The doctor-employees also argued that their non-compete covenants were unenforceable because the activity and time restrictions were unreasonable and further, that their employer breached their employment agreements by improperly billing patients for a certain diagnostic exam. The Illinois Supreme Court again disagreed. In its contentious decision (with two judges concurring and one judge concurring in part and dissenting in part), the Illinois Supreme Court not only strengthened the long tradition of upholding reasonable restrictive covenants in Illinois but also provided helpful guidance for all employers on what is a reasonable restrictive covenant and how an employer's conduct could potentially undermine enforceability.
St. John Heart Clinic is an Illinois professional medical corporation founded in 1978 and specializing in cardiology. The clinic has two offices in Chicago, and operates at various Chicago and nearby hospitals. Dr. Mohanty joined the clinic in 2000. His employment contract provided that he would receive an annual salary of 50 percent of his gross receipts, with a guaranteed minimum of $160,000. The contract's non-compete clause provided that upon termination of the agreement, Dr. Mohanty would not "practice medicine" within a five-mile radius of any clinic office or at any of the four hospitals where the clinic operated. Dr. Ramadurai began working at the clinic in 1989 as an independent contractor; he became an employee of the clinic in 1993. His employment contract provided that he would receive an annual salary of 50 percent of his gross receipts. The contract's non-compete clause, similar to Dr. Mohanty's, provided that, upon termination, Dr. Ramadurai would not "practice medicine" within a two-mile radius of any clinic office or at any of the four restricted hospitals.
In March 2003, Dr. Mohanty and Dr. Ramadurai notified the clinic of their intention to terminate their employment in accordance with their employment contracts. Dr. Mohanty and Dr. Ramadurai stated that they were terminating their employment because the clinic owner breached the physicians' employment contracts by, among other things, maintaining improper billing practices which supposedly shortchanged the physicians' compensation. After the physician-employees left the clinic, they filed suit to challenge the enforceability of the non-compete covenants in their employment contracts.
In upholding these restrictive covenants, the Supreme Court declined to accept Dr. Mohanty's and Dr. Ramadurai's sweeping contention that all restrictive covenants in physician employment contracts are void as against Illinois public policy promoting accessibility of health care. In the absence of any Illinois constitutional provision, statute or judicial decision that clearly conflicts with restrictive covenants in the medical profession, the court found that physician restrictive covenants are not contrary to Illinois public policy despite Drs. Mohanty's and Ramadurai's "laundry list" of potential adverse effects (e.g., interfering with doctor-patient relationships, denying patients the freedom to choose their own doctor, and creating barriers to quality medical care). Although Drs. Mohanty and Ramadurai referred the court to multiple states that have totally prohibited restrictive covenants in medical employment contracts based on public policy concerns, the court pointed out that these states—the clear minority—all acted pursuant to some legislative enactment. The Illinois legislature has made no such enactment and until it does, the court instructed, Illinois courts will follow the same rule: enforce the physician restrictive covenant so long as it meets the usual "reasonableness" standard and the accompanying contractual requirements (e.g., the existence of adequate consideration).
The court also found the particular activity, geographic and time restrictions within Drs. Mohanty's and Ramadurai's non-compete provisions reasonable. The physicians argued that prohibiting "the practice of medicine" was an unreasonably broad activity restriction because the clinic specialized in only one area of medicine, cardiology. The court disagreed, finding that all specialties are "inextricably intertwined" with the practice of medicine. Further, these physicians could easily find employment elsewhere because the restricted territories (a five-mile and two-mile radius of the clinic and restricted hospitals) covered only a "narrowly circumscribed area of a large metropolitan area," Chicago. As for the three and five year time restrictions, the court found them reasonable based on other Illinois decisions upholding similar time restrictions and evidence that it took the clinic over ten years to successfully establish itself in the competitive area of cardiology. The court also reasoned that Drs. Mohanty and Ramadurai received nearly all their referrals through the clinic during their time there.
Finally, the court also upheld the factual finding that the clinic's billing practices did not constitute a material breach of Drs. Mohanty's and Ramadurai's employment contracts. The doctors argued that the clinic failed to compensate them the full amounts due them under their contracts—50 percent of gross receipts—because the clinic billed certain aspects of its myoview exams under the clinic owner's name rather than the doctors' names. The court acknowledged the general rule that an employer's breach of contract may bar enforcement of a covenant not to compete if the breach is material. However, the court found this rule inapplicable to Drs. Mohanty and Ramadurai. The court relied on the clinic's essentially unrefuted evidence that the amounts billed under the clinic owner's name were for the technical component of the myoview exams and not physician work. Thus, not crediting Drs. Mohanty and Ramadurai with these billed amounts did not deny them any compensation due under their employment contracts. The court declined to entertain the physicians' more sweeping argument, made only to the trial court, that an employer's illegal or unethical conduct—whether or not it amounts to a breach of the employment contract—voids a non-compete covenant if the employee quits due to such conduct.
In upholding physician restrictive covenants as consistent with Illinois public policy, the Mohanty decision strengthens established Illinois precedent of enforcing restrictive covenants that contain reasonable restrictions. The decision also instructs that restrictions of two to five miles and three to five years in physicians' employment contracts are reasonable—at least where the employer has taken several years to develop its patient base and the employee relied on that patient base throughout his or her employment. Whether physician employment contracts with non-compete covenants of longer duration or more expansive geographical restraints would be enforceable is now uncertain. Similarly uncertain is the extent to which the restrictions upheld in Mohanty may now disincline lower courts to enforce broader covenants in non-medical employment contracts.
Finally, the Mohanty decision serves as a reminder that all employers can effectively undermine enforceability of a reasonable restrictive covenant by failing to comply with material provisions of an employment agreement (e.g., compensation terms). Thus, employers contemplating enforcement of their restrictive covenants should carefully analyze whether a former employee can assert a credible defense based on the employer's alleged material breach of the employment contract.