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Legal Update
How to Turn Out Loyal Surgeons
Joseph Sowell II
Publish Date: October 10, 2007

Joseph A. Sowell II, Esq. Whether you're opening a surgical facility or bringing on a new physician, be sure you have a no-compete clause in your governing documents. The logic is simple: When a physician-owner comes to work for you, you don't want him padding a competitor's case volume on the side.

Joseph A. Sowell II, Esq.\ Most hospitals have no-competes, a factor that's responsible for much of the tension and many of the legal battles between hospitals and ASCs. But as the two sides war over non-competes and claims of monopolization and cherry-picking, ASCs might also face competition from other freestanding facilities. If you own an ASC, your non-compete options are pretty well spelled out; you can and should consider prohibiting physicians from working both for and against you. The enforceability of your no-compete rests on having the right language in the clause (see "Two Things Your Non-Compete Should Have"). Here's what you need to know to give your non-compete some teeth.

On a short leash
A well-drafted provision will define a competing business broadly to prevent physicians from having an economic interest in any business that provides ambulatory surgical procedures, whether that business is another ASC, hospital or physician's practice. It should let you do the following:

  • stop a physician from investing in a competing business (or let you show him the door if he does)
  • buy back the breaching physician's ownership interest in the partnership, if applicable, for a penalty price; and
  • sell a breaching physician's ownership interest, if applicable, without his approval.

Historically speaking, the courts aren't big on non-competition provisions. A court will only enforce a non-compete if it finds the provision is reasonably necessary to protect a legitimate business interest. Because of this, you must not overreach on the geographic area specified - keep it to the general area you serve. In a well-drafted provision, you and the physician should agree that any court reviewing the document shall redraft the provision to make it enforceable if the court finds it unenforceable as drafted.

The non-competition covenant should apply as long as the physician is an owner in the ASC, and for a period after he disposes of his ownership interest. If the non-compete doesn't extend beyond his date of departure, he can simply sell off his ownership interest and use the proceeds to immediately invest in a competing ASC.

Courts also aren't so keen on non-competes that prevent physicians' practicing their livelihood. But they're receptive to provisions that let physicians practice medicine and choose where they want to perform procedures, while restricting their abilities to invest in a competing surgical service.

Two Things Your Non-Compete Should Have

Here's the language you should use to make your non-compete clause enforceable.

Restriction on ownership
Each member agrees that while he is a member and for two years thereafter neither he nor any of his affiliates shall, directly or indirectly, own, lease, manage or be employed by a competing business (see below) that is located within 25 miles of the center. Nothing in this section is intended to prevent a member from practicing medicine, being a member of the medical staff of, or referring patients to any other hospital or healthcare facility.

Each member agrees these restrictions are reasonable and necessary to protect the legitimate interests of the company and that any violation of this provision would result in damages to the company that cannot be compensated by money alone. Each member agrees the company will be entitled to injunctive relief without proving actual damages or posting any bond.

If a court were to hold that the duration or scope (geographic or otherwise) of the agreement contained here is unreasonable, then, to the extent permitted by law, the court may prescribe a duration or scope that is reasonable and judicially enforceable. The parties agree to accept such a determination, subject to their rights of appeal.

Defining competition
A competing business means any healthcare business that provides a facility in which surgical procedures are performed and shall include, without limitation, a specialty hospital, hospital or ASC; provided, however, the private practice of any member won't be a competing business as long as substantively all the member's professional services are rendered through such practice and such practice only performs surgeries that don't

  •  require a separate license,
  •  require the presence of an anesthesiologist,
  •  involve conscious sedation or
  •  generate a separate facility fee.

- Joseph A. Sowell II, Esq.

Who's Your Surgeon of the Month?

Every workplace is familiar with the idea of employee of the month, but at our surgery center, we've added to that. For the past year or so, we've announced a surgeon of the month. It's a little thank-you for docs who are timely and provide good patient care.

We created a nominating committee, made up of our scheduler and our pre-op and admissions administrators, to select the surgeon who's done the best job this month and who has the best attitude, schedules his cases ahead of time, gets his paperwork done and gets along with our staff. There has to be a real reason why we choose the winner from the 20-some surgeons who operate here, and the choice always seems pretty evident.

We announce the winner at our general staff meeting. We print out surgeon of the month certificates for the doctor and his scheduler. The scheduler gets a gift certificate to a local shop. The surgeon gets to park in the reserved parking space right by the pathway that leads up to the door. It's a nice perk for the winner, and it's already improved relations with our doctors and their schedulers. Also, the surgeons walk around with their heads held high, and the schedulers are angling to get their docs to win.

Jo-Ann Pinel, RN, CPN
Director of Nursing
Palmetto Surgery Center
Columbia, S.C.
writeMail("[email protected]")

The legal system
If you go to trial over a non-compete, courts are usually more willing to order the breaching physician to pay money damages than they are to order him to sell his interest in the competing ASC. So if you're a physician-owner thinking about joining with or opening another ASC, think twice. I've seen the potentially harsh results firsthand.

In Hopkins v. San Jose Surgery Center, my firm represented an ASC company that had acquired a majority ownership interest in an ASC from a group of three physicians. As part of that transaction, the doctors agreed they would not have any "investment or management interest in any entity engaged in the business of developing, owning, operating or managing" an ASC within a specified geographic area. And, should one of them violate the agreement, he'd have to pay liquidated damages based on the amount paid to him in the purchase transaction. One of the physicians had a pre-existing investment in a competing center that was under development. He hadn't disclosed this to the buyer, nor had the buyer agreed to grandfather this fact into the transaction. The physician subsequently wasn't paid his salary.

When the physician sued the surgery center for $250,000 of alleged unpaid compensation for serving as the center's medical director, the surgery center counter-claimed against the doctor for $650,000 for breach of the non-compete covenant.

At trial, the court held that the agreement was enforceable under California law because it was entered into as part of the purchase of the goodwill of a business, that it was reasonable in scope and that the liquidated damages were reasonable and appropriate due to the difficulty of proving compensatory damages. The trial court also ordered the doctor to reimburse the surgery center's litigation costs, including lawyers' fees. The physician appealed, only to have the California Court of Appeals affirm the judgment of the trial court.

The lowdown
While the enforceability of any covenant-not-to-compete is ultimately a matter of state law, a well-drafted provision that limits only a physician's ability to own an interest in a business that competes with an ASC in which he owns an interest should generally be enforceable.