A New Prescription for - PowerPoint Presentation

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A New Prescription for Physician Restrictive Covenants in Illinois

William J. Cadigan, J.D.

Law Office of William J. Cadigan, P.C.

Ross I. Molho, J.D.

Clingen Callow & McLean, LLCSlide2

Topics for Discussion

Update on case law affecting physician restrictive covenants in Illinois

Significance of physician restrictive covenants and their effect on a physician’s ability to continue caring for patients

Issues to consider for new and existing physician employment and shareholder agreementsSettlement vs. LitigationFinal thoughts

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American Medical Association Position on Restrictive Covenants

AMA Opinion 9.02 – Restrictive Covenants and the Practice of Medicine: “Covenants not-to-compete restrict competition, disrupt the continuity of care and potentially deprive the public of medical services.”

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Illinois State Medical Society Position on Restrictive Covenants

ISMS supports abolishing employment, partnership, or corporate agreements that restrict the right of physicians to practice medicine, and advocates the use of liquidated damages or other contractual means in lieu of these provisions. (House of Delegates 1996; Amended 2010)

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AMA & ISMS Positions on Restrictive Covenants

These policy positions are not binding on physicians, courts or state policymakers.

The law affecting the enforceability of restrictive covenants in physician agreements varies from state to state.

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Overview of Illinois Law

Unlike some other states, Illinois does not have a statute that governs the use and enforceability of restrictive covenants

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Law has evolved over years based on court decisions.Illinois courts generally uphold the validity of restrictive covenants in physician employment and shareholder agreements. But recently, courts have issued decisions that will provide physicians and their attorneys with a greater ability to challenge the enforceability of restrictive covenants.

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Types of Restrictive Covenants

Confidentiality/Non-Disclosure/Illinois Trade Secret Act

Non-Solicitation of Patients and

EmployeesNon-Compete Agreements7Slide8

The Rule of Reason Test

As a threshold matter, for a restrictive covenant to be enforceable, it must be reasonable in duration and geographic scope and supported by

consideration. Courts

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.

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The Rule of Reason Test

Duration

Geography

Type of Activity Restricted 9Slide10

The Rule of Reason Test

Illinois courts also give weight to others factors such as

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whether competition from the former employee would threaten “permanent or near permanent” customer relationships;whether there is a risk that the employer’s confidential business information might be used by the departing employee for his or her own benefit.10Slide11

What is a legitimate business interest for a physician practice?

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

reaffirmed that restrictive covenants are permissible in physician employment arrangements, so long as they are reasonable and serve a legitimate business interest.11Slide12

What is a legitimate business interest for a physician practice?

In 2011, in an effort to clarify the appropriate standard for what constitutes a “legitimate business interest,” the Illinois Supreme Court issued the

Reliable Fire

decision. 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.12Slide13

The Facts and Circumstances Test Applied to Physician Agreements

In 2013, an intermediate level appeals court in Chicago used the standards set forth in

Reliable Fire

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 left his group to join NorthShore University HealthSystems Medical Group. The former group sued to enforce a restrictive covenant against the departing physician.13Slide14

The Facts and Circumstances Test Applied to Physician Agreements

The court reviewed several factors, including the group’s business operations and inbound referral streams, and determined that the relationship between the group and the patients was not a near permanent one. The evidentiary record showed that although the physician was a member of the group, his patient referral stream, marketing and billing systems, and compensation were all independent of the members of the group. The physician even maintained a separate office location and phone number from the group.

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.14Slide15

Restrictions on Hospital Privileges

In addition to restrictions on who a departing physician may practice with, some non-compete provisions require a physician to resign privileges at hospitals and outpatient treatment center where members of the group are on staff

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In 2013, an appeals court ruled that a privileges restriction sought to be imposed by a podiatry group was greater than necessary to protect the legitimate business interest of the group and imposed an undue hardship on the departing doctor by requiring him to permanently resign all clinical privileges at the restricted facilities.This ruling suggests that privileges restrictions will be hard to enforce in the future.

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Non-Solicitation of Patients and Employees

It is also common to see language in post employment restrictive covenants that

prohibits

departing physicians from soliciting the group’s patients and employees to follow them to the new practice.A ban on soliciting patients will be subject to heightened scrutiny because of the unique relationship between patients and their physicians.Restrictions on hiring away staff are likely to be enforced by courts because there is a recognized right to stability in a group’s workforce.

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Adequate Consideration

Consideration is a legal term for the tangible or intangible thing of value that each party to a contract provides to the other

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Fifield Case: This case holds that there is not sufficient consideration to enforce an otherwise valid restrictive covenant unless the employee has worked for the employer for two years.Reactions to Fifield: Although Fifield presents physicians and their employers with a bright-line rule it has been inconsistently applied in the federal courts where many of these disputes are litigated and it probably is not the last word in Illinois.

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Issues to Consider for New and Existing Physician Employment and Shareholder Agreements

Draft all new agreements to comply with changes in law

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Review current employment and shareholder agreements to determine if they still reflect the realities of the group’s practice structure and comply with the law. If they don’t, revise them to better suit the business interests of the practice.Consider including a buyout provision.Tailor all restrictive covenants to only apply to legitimate business interest of the group. The business interest served by the restriction must apply when the agreement is signed, during the term of the agreement, and at the time enforcement is sought.

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Doctor Departs: The Choice Between Litigation vs. Settlement

Litigation Issues

Initial Litigation Considerations

TimingArbitration v. CourtArbitration has certain advantagesMedical practices want to know if arbitration clauses will be enforced by courts.What about non-parties to these disputes (like a physician’s new medical practice) -- must they defend themselves in an arbitration forum?

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Doctor Departs: The Choice Between Litigation vs. Settlement

Venue/Jurisdiction: Because federal

courts transfer

cases based on convenience, medical practice groups must consider if they will need to use third-party witnesses (who might be inconvenienced) to testify at trial. Such a use of out of state witnesses might sabotage a practice’s desire to fix the venue of a dispute in one location.Choice of Law – Will an employer’s choice of law provision be honored?The chosen state must have a relationship with the disputeThe state’s law must not offend the public policy of the state where the employee lives and works.

Red

flags: California employees and Delaware law.

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Doctor Departs: The Choice Between Litigation vs. Settlement

Evidentiary Issues

Burden of Proof – Who bears the burden of reasonableness? In Illinois, it is the medical practice. In other states, like Connecticut, a doctor may have to prove the covenant is unreasonable. In Ohio, an employer must prove reasonableness by “clear and convincing evidence.”

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Doctor Departs: The Choice Between Litigation vs. Settlement

Social Media/Electronic Discovery

employees

e-mail themselves dataemployees download information to a flash drivewho pays for electronic discovery – generally the responding party but if spoliation is involved, the burden may shift.courts have discretion to appoint neutral “experts” to assist with e-discovery and will do so if the responding party is not cooperative.

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Doctor Departs: The Choice Between Litigation vs. Settlement

Parol Evidence -- Doctors who receive assurances that a restrictive covenant is not as broad as it seems must insist these assurances are put in writing.

Attorney

Client Privilege Issuesindemnification agreements with new employers may be discoverable.such agreements may undercut a departing physician’s ability to defeat equitable relief because that employee may not suffer tremendous hardship if an injunction were to issue.

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Doctor Departs: The Choice Between Litigation vs. Settlement

Scope of Discovery

Equitable

Remedies TRODifficult to obtainCan result in sloppy work (think battlefield surgery)Frame the issue early for the Judge

May

embolden the other side

Often

times may lead to settlement

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Doctor Departs: The Choice Between Litigation vs. Settlement

Preliminary Injunction

Akin

to a trial with evidence and witnessesPreliminary injunctions that are reversed may later subject a medical practice to actual damages and attorney’s fees. Permanent Injunction25Slide26

Doctor Departs: The Choice Between Litigation vs. Settlement

Money Damages

Nominal Damages – may be worth pursuing to trigger a fee shifting provision in the physician’s contract

.Salary Forfeiture – an effective remedy in breach of fiduciary duty cases, i.e., when a high level physician breaches her duty of loyalty to her existing practice. One must determine when the breach of duty occurred which is it at odds with the “preliminary stages doctrine.”Lost Profits are the correct

measure of damages for restrictive covenant cases. They are hard to prove and may not be proven by pointing to a third party’s gains unless that third party has a similar cost-structure or distribution network.

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Doctor Departs: The Choice Between Litigation vs. Settlement

Settlement

Issues

The recent case law in effect levels 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. 27Slide28

Doctor Departs: The Choice Between Litigation vs. Settlement

Even when a disputed employment or shareholder agreement 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.

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Final Thoughts

William J. Cadigan, J.D.

Law Office of William J. Cadigan, P.C.

874 Green Bay RoadWinnetka, Illinois 60093(847) 441-0222Ross I. Molho, J.D.Clingen Callow & McLean, LLC

2300 Cabot Drive, Suite 500

Lisle,

Illinois

60532

(630) 871- 2614

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