Covenants Not To Compete

in Healthcare:A Maryland Primer

Robert R. Niccolini, EsquireMcGuireWoods LLP

rniccolini@mcguirewoods.com

Asking the Right Questions About Covenants

1. Are Covenants enforceable in the

Healthcare Industry?

2. What is the Rule of Reason?

3. What is the Blue Pencil Rule?

4. What Remedies are Available?

5. Drafting Considerations

Are Covenants Enforceable in the Healthcare Industry?

Yes, in Maryland

No, in Minority Rule

Jurisdictions

Are Covenants Enforceable in the Healthcare Industry?

Warfield v. Booth, 33 Md. 63 (1870)

Lofton v. TLC Eye Care Centers, 2001 U.S. Dist. LEXIS 1476

(D.Md. 2001)

Holloway v. Faw. Casson & Co., 319 Md. 324 (1990)

What is the Rule of Reason?

Courts will uphold a covenant “if the restraint is confined within limits which are no

wider as to area and duration than are

reasonably necessary for the protection of the business of

the employer and do not impose undue hardship on the employee or disregard

the interests of the public.”

Holloway, 319 Md. at 334

Rule of Reason Considerations1. Protectable Business

Interest

2. Adequacy of Consideration

3. Temporal Scope

4. Geographic Scope

5. Undue Burden and Public Policy

Protectable Business Interest

1. Customer/Patient Relationships (Importance of personal contact)

2. Specialized Training (Unique?)

3. Confidential Business Info./ Trade Secrets

Adequacy of Consideration

1. Initial employment

2. Change in terms and conditions

of employment

3. Continued Employment

Temporal Scope

1. No longer than reasonably necessary to protect biz

interest

2. In Healthcare: 1 to 5 years *** Over 12-18 months ***

3. Holloway: personal contacts key,

time necessary for clients to “disassociate”

Geographic Scope

1. No wider than reasonably

necessary to protect biz interest

2. Service/Patient Area

3. Length of Patient Travel

Undue Burden/Public Policy

1. Ability to practice profession

2. MD rejects per se ban, but Judges are patients too

3. Minority Jurisdictions

4. AMA Opinion “discourages”

What is the Blue Pencil Rule?1. Typical Approach: Excise invalid/overbroad provisions if severable

2. Flexible Approach: if intent unreasonable/oppressive, invalid; otherwise, make reasonable

3. MD Unclear on approach

Remedies

1. Injunctive Relief and Provable

Damages vs. Liquidated Damages

2. Cost of Injunction and Future

Violations Key to Decision

3. Attorney Fees Provision

Remedies – Injunctions1. Procedure: TRO (ex parte vs. limited notice, 10-20 days); Preliminary Injunction; Trial on Permanent Injunction and Damages

2. Injunction: Likelihood of Success on the Merits; Balance of Convenience (greater injury); Irreparable Injury; Public

Interest

Remedies – Liquidated Damages

1. Clear and Unambiguous

2. For Sum Certain

3. Reasonably Calculated to Anticipated Loss, not a

Penalty

Drafting Considerations

1. Non-Solicitation of Employees and Customers/Patients Separate

2. Confidentiality Separate

3. Temporal Restrictions: Remember

Holloway “time to disassociate”

4. For Physicians: time to rehire/retrain

Drafting Considerations

5. Geographic Restrictions: Area of

Service/ Client Base

6. Geographic Restrictions: Remember Public Policy and Don’t Over-reach

7. Blue Pencil Options: Broader Reach vs. Certainty

Drafting Considerations

8. Arbitration Clauses: Allow for

Injunctive Relief

9. Remedies Decisions

10. Sale of Business Options

Covenants Not To Compete

in Healthcare:A Maryland Primer

Robert R. Niccolini, EsquireMcGuireWoods LLP

rniccolini@mcguirewoods.com