• Physician/Health Care Entity Contracts and Non-Compete Covenants: Valid or Void?
  • December 30, 2003 | Author: Wendy Berliant Kahn
  • Law Firm: Much Shelist Freed Denenberg Ament & Rubenstein, P.C. - Chicago Office
  • Every medical professional in Illinois should be aware of two recent cases decided by the Illinois Appellate Court. These cases answer important questions concerning the validity of employment contracts between physicians and health care entities and the enforceability of non-compete provisions included in such contracts. But they answer these questions in conflicting ways, thus leaving the law in this critical area in a state of uncertainty.

    In the earlier case, Prairie Eye Center, Ltd. v. Butler, Dr. Butler's employment agreement with Prairie barred him from practicing medicine within ten miles of any of Prairie's offices for two years after the agreement terminated. When Butler violated the non-compete covenant by setting up a practice just two miles from one of Prairie's branches, Prairie filed suit. The Illinois Appellate Court enforced the covenant and enjoined Butler's competing practice. Prairie was decided in mid-1999.

    Last December, a different district of the Illinois Appellate Court reached the opposite conclusion in a similar case. In Carter-Shields v. Alton Health Institute, the court invalidated more than just the two-year, 20-mile non-compete clause in an employment contract between a physician and a health care institute. It invalidated the entire contract itself. As the Carter-Shields court recognized, under Illinois law a licensed hospital can employ physicians to provide medical services without violating the rule that prohibits corporations from practicing medicine. The health care institute in Carter-Shields, however, was not a licensed hospital.

    Moreover, it did not have tax-exempt status, had a lay president, and was partly owned by a non-physician. Stressing that the prohibition against the corporate practice of medicine was designed to prevent lay interference with professional judgment and that Dr. Carter-Shields had complained repeatedly that lay management was interfering with her patients' treatment, the court voided the entire contract.

    But in the court's view, even if the rest of the contract were valid, the restrictive covenant would still be void. Unlike the court in Prairie, which assumed that every covenant between medical professionals that imposes reasonable time and territorial limitations automatically protects a legitimate business interest of the employer, the court in Carter-Shields held that the medical professional employer must prove a protectible business interest. The employer can do this by establishing either 1) a near-permanent relationship with the doctor's patients, or 2) that the doctor gained confidential information while employed and later tried to use it for his or her own benefit.

    The employer in Carter-Shields failed to make the necessary showing. Because of the nature of the patient-physician relationship, the court noted, it was more likely that patients had a near-permanent relationship with the doctor, not her employer. Nor was there evidence that Dr. Carter-Shields, who was experienced before she joined Alton Health Institute, acquired trade secrets or other confidential information as a result of her employment.

    Moreover, the court held, enforcing the covenant would violate public policy, as set forth in a written opinion by the American Medical Association. The AMA opinion discourages restrictive employment agreements among physicians as unfair limitations on both the physician's professional autonomy and the patient's freedom to choose a doctor.

    Eventually, the Illinois Supreme Court may decide to unravel the conflict created by these decisions. In the meantime, medical professionals should be aware that the restrictive covenants in their employment agreements, and even the agreements themselves, may be unenforceable.