Physician Non-Compete: Calculating Your Economic Risk Model of Breach

I have assisted employers and employees in construction, medicine, and other fields on restrictive covenants regarding trade in employment agreements. While many restrictive trade covenants primarily consider covenants not to compete (“Non-Compete”), the same Wisconsin statute also applies to restrictions on solicitation of the employer’s customers or former customers (“Non-Solicit”), non-disclosure and confidentiality agreements between employers and employees (“NDA/Confidentiality”), and no-hire provisions between two employers (“No-Hire”). 

For these provisions to be enforceable in Wisconsin, it must be reasonably necessary for the protection of the employer. That general language is clear as mud. I sometimes hear of physicians who ignore negotiating non-competes because they believe “it is not enforceable anyways!” and they need not worry. If you are a physician and said this to yourself, call me right now. This analysis is wrong. Physicians should also properly calculate risk associated with breaching the non-compete. 

I often counsel employers to identify their largest risks and focus the non-compete on alleviating those risks, as it often provides the best chance of success. The same analysis applies to physicians. It is often possible to craft the non-compete in a way that gives the physician a fair opportunity to leave. Fox Valley Thoracic Surgical Associates (Appleton Heart Surgeons) v. Ferrante (1) is an Outagamie County case considering a physician non-compete for a heart surgeon. The physician non-compete was found overbroad and was struck down in its entirety. The failure of the physician non-compete in this case provides us guidance on how a court may evaluate reasonableness of an employer’s restrictions. 

Maybe most importantly, this case provides an excellent example of how a physician considering breaching a non-compete could develop an economic model to evaluate their risk and make an informed decision, and how employers may impact the physician’s decision.

The Physician Non-Compete Dispute in Ferrante

Appleton Heart Surgeons (“AHS”) operated a surgical practice in Appleton, Wisconsin, specializing in heart and thoracic surgery. Most of its business came from referrals by other doctors, primarily cardiologists. Ninety percent of its referrals came from one source, Cardiology Associates. Dr. Ferrante’s employment contract with AHS included a covenant not to compete, stating:

“At no time during the term of Employee’s employment with Employer, or for one (1) year immediately following the termination of such employment, …, will Employee … engage in the practice of heart surgery or thoracic medicine, within the city limits of Appleton, Neenah or Menasha, Wisconsin, nor within a radius of thirty miles of the city limits of the Cities of Appleton, Neenah or Menasha, Wisconsin.” (2)

AHS offered Dr. Ferrante partnership. Instead, he left and opened his own surgical practice in the same building as AHS. He leased office space, support staff, and equipment from Thedacare, which also provided him with an operating line of credit. Importantly, Cardiology Associates continued to provide referrals to Dr. Ferrante in his new practice, and referrals from Cardiology Associates to AHS slowed significantly. AHS closed its practice, presumably because of the drop in referrals, and commenced action against everyone involved, including Dr. Ferrante, Thedacare, Cardiology Associates, some individual cardiologists, and another cardiothoracic group (3). 

Wisconsin Physician Non-Compete Law

The operative statute in Wisconsin, 103.465 Restrictive Covenants in Employment Contracts, contains the following:

“A covenant by an assistant, servant or agent not to compete with his or her employer or principal during the term of the employment or agency, or after the termination of that employment or agency, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any covenant, described in this section, imposing an unreasonable restraint is illegal, void and unenforceable even as to any part of the covenant or performance that would be a reasonable restraint.” (Emphasis added.)

Courts typically examine the totality of the circumstances when determining the reasonableness of a non-compete. In particular, the restraint must satisfy the following five “prerequisites”:

(1) be necessary for the protection of the employer, that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the employee;

(2) provide a reasonable time limit;

(3) provide a reasonable territorial limit;

(4) not be harsh or oppressive as to the employee; and

(5) not be contrary to public policy.

Physician non-competes are construed in favor of the physician, are automatically considered suspect, and must withstand close judicial scrutiny. Reasonable often turns on the particular facts of each situation. The employer bears the burden of proving the restriction is “reasonable” considering the protections needed by the employer.  The court will not re-write the provision to make it reasonable. The last sentence of the statute instructs the court to render the entire provision unenforceable. 

Many employers elect to write a very broad provision under the false assumption that a court will simply modify the offending provision and narrow it during litigation, but that analysis is wrong. 

Specific, Narrowly Tailored Non-Competes are Stronger

The court found it important that most of AHS’s referrals came from a single source, Cardiology Associates. Instead of protecting that business relationship, which was the anchor of AHS’s entire practice, AHS went far beyond and wanted a 30-mile radius from three different cities. Even though Cardiology Associates was located within that radius, the referred patients came from both inside and outside the radius. The court found that the patients’ addresses did not demonstrate the geographic area in which AHS competes for referrals. 

Importantly, the court does not have the option to simply reduce the scope of the physician non-compete to the employer’s needs. If it is not reasonable, it is completely unenforceable. The court is silent as to what language would have been considered reasonable. However, I believe a restriction limited solely to Cardiology Associates may have been enforceable. Instead of the 30-mile radius, AHS may have been successful by simply limiting Dr. Ferrante’s ability to solicit referrals from Cardiology Associates.

Model Your Risk-Reward Profile of Breach

I am curious as to the risk-reward analysis considered by Dr. Ferrante at the time he left his employment as AHS. He obviously saw a huge potential upside to owning his own practice, beating the non-compete, and obtaining a high percentage of referrals from Cardiology Associates. However, he also likely considered the risks of losing a litigated case and resulting damages brought by AHS attempting to enforce the non-compete. If Dr. Ferrante consulted me before proceeding, here are some questions I believe we would have considered together:

  1. If you stay with AHS and become partner, what will your current and future salary and job satisfaction look like? 
  2. If you leave AHS, what is the probability that you will get a small, medium, or large number of referrals from Cardiology Associates? How lucrative do you estimate this venture to be under good, average, and bad case scenarios, and how would your job satisfaction be different? 
  3. Will your new venture fail if you do not get referrals from Cardiology Associates, either because of losing the litigation or it decides to continue referring to AHS?
  4. What are your job prospects if you fail? Are you prepared to move and practice in Milwaukee, Madison, or somewhere else?

Litigating a Physician Non-Compete

I would also provide my initial analysis of the probability of success in disputing the enforceability of the non-compete and discuss potential litigation costs. The damages exposure for failure in this matter was tremendous – AHS was presumably a profitable surgical group that went out of business. AHS may have been able to prove they went out of business because of Dr. Ferrante’s breach of contract. Dr. Ferrante presumably has personal exposure for any potential damages assessed against him and AHS would likely have been collectable against Dr. Ferrante in his personal capacity (his house, cars, boats, bank accounts) and from his new venture. Corporate form protections may not have been helpful. Additionally, Dr. Ferrante left AHS in March 2004, but this appellate decision dismissing the case against him was decided in February of 2008. It is prudent to consider how the length of litigation could affect your risk profile.

The Employer’s Analysis of the Physician’s Risk Profile

This risk profile analysis is often how physician non-competes become useful to employers. The physician non-compete does not need to be successful in every instance. Would the economic model have supported Ferrante’s decision to strategically breach the non-compete if his chance of success was 50%? 20%? 80%? When advising employers, I often highlight how a non-compete can affect their economic risk model and discourage physicians from leaving.

Properly Calculate Your Risk Profile

The enforceability of non-compete agreements in Wisconsin employment contracts is very fact dependent. The provision will only be upheld if the employer can demonstrate the restriction is reasonable. Defining “reasonable” can be challenging. Cases like Ferrante suggest the provision will more likely be enforced if its scope is narrow and focused on protecting the employer’s most important business interests. 

Physicians should be prepared for non-compete provisions to be enforced. They should also understand potential legal defenses. They should properly calculate risk associated with breaching the provision and consider modeling their particular risk profile. Physician non-competes can often serve as an effective deterrent, even if they are not guaranteed to be enforced. As an attorney with experience drafting and evaluating numerous non-competes and litigating numerous business disputes, I can help employers and physicians make better business decisions. If you are considering a non-compete or any other restriction on trade in an employment contract, please consider reaching out to me to discuss. 

(1) Fox Valley Thoracic Surgical Associates, S.C. v. Ferrante, No. 2006AP3201 (Wis. App. 2008).

(2) I am only privy to what was discussed in the published decision. There may have been a number of other important facts that affected the decision.

(3) This post focuses on the dispute over the non-compete. AHS brought additional claims, including Breach of Duty of Loyalty to Employer, Tortious Interference with Contract, and conspiracy in restraint of trade.

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