Physician Non-Competes Upheld by South Carolina Court of Appeals: Baugh v. Columbia Heart Clinic, P.A

In its first non-compete case involving a physicians, the South Carolina Court of Appeals used mostly well-trodden commercial case precedent to reverse a bench trial holding that the agreements were unenforceable and awarding relief under the Wage Payment Act in Baugh v. Columbia Heart Clinic, P.A., 2013 S.C. App. LEXIS 5, 20 Wage & Hour Cas. 2d (BNA) 202 (S.C. Ct. App. Jan. 16, 2013).  Baugh involved two cardiologists who left Columbia Heart in 2006 and, within one month, established their own cardiology practice approximately 300 yards from Columbia Heart’s then-new Lexington County facility.  The doctors sought an injunction preventing enforcement of no-compete agreements based on forfeiture and liquidated damages clauses that were intended to prohibit them from practicing or assisting in the practice of cardiology for one year within 20 miles of Columbia Heart offices where they had routinely practiced.

 The Court of Appeals upheld the non-compete in a set back for all employees as well as consumers of medical services.  Non-competes in the medical field (like many others) limit choices and limit supply for services.  However, Baugh ignored robust debate in other states– including a  pronouncement by the American Medical Association — concerning what some consider the injurious  public impact of physician non-compete agreements. Among the other holdings in Baugh, Court of Appeals held the following:

  •  the non-compete agreements at issue in the case were supported by consideration (a $5,000-per-month/ $60,000 total for compliance with the non-compete agreement) ;
  • liquidated damages for each doctor of one year’s W-2 income of roughly $591,710 and forfeiture by each doctor of $240,000 — in  a combination earned but unpaid salary, pro rata shares of accounts receivable, and the $60,000 noted above  — were not penalties; and
  • unpaid salary and accounts receivable, along with director’s fees, were not wages “due” under South Carolina’s Wage Payment Act (on the rationale that the doctor’s forfeited their rights to these items).

There were several issues that deserved greater consideration–for more in-depth treatment click and read on.

Although South Carolina appellate courts had dealt with a non-compete agreement in the context of a veterinary practice, Stringer v. Herron, 309 S.C. 529, 424 S.E.2d 547 (Ct. App. 1992), and confronted cases tangentially involving a non-compete agreements, Keane v. Lowcountry Pediatrics, P.A., 372 S.C. 136, 641 S.E.2d 53, (Ct. App. 2007) (medical practice dissolution) and McElveen v. McElveen, 506 S.E.2d 1, 332 S.C. 583 (S.C. App. 1998) (divorce), Baugh is the first time by a South Carolina appellate court has grappled directly with physician non-compete issues.

At the core of Baugh was the question over how far the employers can go in restricting post-termination activities by subspecialist physicians whose practices require facilities with special licensing.  The Court of Appeals reversed a bench trial ruling that had deemed unenforceable the liquidated damages-based prohibition from merely assisting any person in the practice of cardiology within 20 miles of Columbia Heart offices for 12 months after their departure from the practice and that this provision not necessary to protect the employer’s legitimate interest.  The trial court had found that this provision could not be blue-penciled from the rest of the liquidated damages provision, and therefore deemed the entire provision unenforceable.  Because the liquidated damages and forfeiture provisions were inextricably related, the trial court reasoned, the forfeiture provision was unenforceable as well.

 The doctors based their arguments against the no-compete’s prohibition on assisting in the practice of cardiology on a pair of cases where similar agreements were deemed unenforceable: Preferred Research, Inc. v. Reeve, 292 S.C. 545, 357 S.E.2d 489 (Ct. App. 1987) and Faces Boutique, Ltd. v. Gibbs, 318 S.C. 39, 455 S.E.2d 707 (Ct. App. 1995), both of which the Court of Appeals nevertheless said were inapposite in Baugh.  In Preferred Research, which applied Georgia law, an agreement prohibited licensees who left a title search business from engaging “in a similar business, in any capacity”; in Faces Boutique an agreement had prohibited departing employees from participating in or being connected with any direct competitor of the employer in Hilton Head for three years. 

  In deeming these cases inapplicable, the court said, “The ‘any capacity’ restrictions employed in Preferred Research and Faces Boutique are broader than the restriction here.  Assuming Respondents do not violate the other restrictions, they could work for a business that practices medicine in the field of cardiology so long as they do not assist a person to engage in the practice of cardiology.”  Whether the physicians’ future activities constitute such assistance, the court stated, “could be a question of fact in other cases.”

  Similarly, the court upheld the 20-mile radius of the noncompete provision against arguments that the nearest facilities where the doctors could perform their subspecialty of invasive “interventional cardiology” procedures were actually 55 miles away. 

  This situation, the former Columbia Heart doctors argued, resembled the one in Cardiovascular Surgical Specialists, Corp. v. Mammana 61 P.3d 210 (Okla. 2002) where a court deemed unenforceable a non-compete agreement that — on its face — prohibited a doctor who specialized in cardiovascular and thoracic surgery from performing cardiovascular or thoracic surgery within 20 miles of a practice for two years.  Because the nearest hospitals in Mammana were at least 100 miles from the practice, the doctor in that case was effectively barred from operating within 100 miles of Tulsa.  Citing Mammana, the Columbia Heart doctors argued that forcing them to move 55 miles away was unduly oppressive restraint on their ability to earn a living and was not tied to the legitimate interests of Columbia Heart. 

 But the court distinguished Mammana, saying

Unlike in Mammana, Columbia Heart  is a full-service cardiology practice, and Respondents specialized in general cardiology, with a subspecialty in interventional cardiology.  While the restriction in Mammana prevented the physician from practicing in his field far beyond the technical terms of the provision, here Respondents can continue to practice in their field–offering cardiology services not involving interventional cardiology–outside the 20-mile radius.

But the court avoided any discussion of public policy concerns that non-compete agreements limit the supply of medical professionals.  While reasonableness  “from the standpoint of sound public policy” is a standard criterion of analysis in non-compete cases, it has received scant treatment South Carolina non-compete cases, see, i.e., Rental Uniform Serv. of Florence, Inc. v. Dudley, 278 S.C. 674, 675-76, 301 S.E.2d 142, 143 (1983) and is only fleetingly discussed in Baugh.

In other states, however, public interest in the context of physician non-competes is given much more expansive significance.  Although rejecting a per se rule against physician non-competes the New Jersey Supreme Court nonetheless said

 Significant here is the demand for the services rendered by the employee and the likelihood that those services could be provided by other physicians already practicing in the area. If enforcement of the covenant would result in a shortage of physicians within the area in question, then the court must determine whether this shortage would be alleviated by new physicians establishing practices in the area. It should examine also the degree to which enforcement of the covenant would foreclose resort to the services of the “departing” physician by those of his patients who might otherwise desire to seek him out at his new location.

Karlin v. Weinberg, 390 A.2d 1161, 1169-70(N.J. 1978).

Even more dramatically, an Ohio case, Williams v. Hobbs, 460 N.E.2d 287 (Ohio Ct. App. 1983), shows how Baugh might how turned out differently with the above-described public interest analysis.  Williams involved the seeking of an injunction to enforce a non-compete agreement against a doctor who practiced in a subspecialty of “interventional radiology.”  In affirming the trial court’s refusal to issue an injunction based on a non-compete agreement against the doctor, the Tenth District Court of Appeals of Ohio said,

The transcript of proceedings indicates that there was evidence before the court that Dr. Williams is a skilled radiologist, particularly in his subspecialty of interventional radiology. The evidence also indicates that his particular skill is not common among radiologists in the community. There is also evidence that the covenant in the employment contract constitutes a hardship to Dr. Williams and the public since Doctors Hospital is one of the few osteopathic institutions in which he can practice his specialty. …

Williams, 460 N.E.2d at 290 (emphasis supplied); see also Ellis v. McDaniel, 596 P.2d 222 (Nev. 1979) (enforcement of non-compete agreement unjustified  where doctor would be barred from the city where he had practiced, thus “patients in need of orthopedic services will be forced to travel great distances at considerable risk and expense in order to avail themselves of such services.”); Iredell Digestive Disease Clinic v. Petrozza, 373 S.E.2d 449, 455 (1988) (stating that with respect to the doctor/patient relationship, the court was “extremely hesitant to deny the patient-consumer any choice whatsoever”); Valley Med. Specialists v. Farber, 982 P.2d 1277 (1999) (“We stop short of holding that restrictive covenants between physicians will never be enforced, but caution that such restrictions will be strictly construed.”); Ohio Urology, Inc. v. Poll,  594 N.E.2d 1027 (1991) (though denying summary judgment to a defendant doctor against whom non-compete enforcement was sought, the court said the law’s disfavor of non-competes is “especially acute concerning restrictive covenants among physicians which affect the public interest to a much greater degree” and that these covenants should be strictly construed); Statesville Med. Group, P.A. v. Dickey,  418 S.E.2d 256, 260 (1992) (enforcing a no-compete physician covenant ” would create a substantial question of potential harm to the public health, the covenant not to compete is unenforceable as a matter of law.”); cf. Bauer v. Sawyer, 134 N.E.2d 329, 331 (Ill. 1956) (referring to “the interest of the public … in having adequate medical protection,” but deciding ultimately that, there was no reason why the affected doctor could not serve the public interest equally well in another community); Calhoun v. WHA Medical Clinic, PLLC, 632 S.E.2d 563 (N.C. Ct. App. 2006) (analyzing the shortage of specialists, the impact of a monopoly, the impact on fees, the emergency availability of doctors, and the public interest in choice in the selection of a physician, but nonetheless deciding covenant should be enforced).

Arguments against physician non-completes are even more compelling because the American Medical Association discourages them.  In Opinion 9.02, the AMA stated

 Covenants-not-to-compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services. The Council on Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership, or corporate agreement. Restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician….

See http://www.ama-assn.org/ama/pub/physician-resources/medical-ethics/code-medical-ethics/opinion902.page last visited April 2, 2013.

In a 2005 decision that was later superseded by statute, the Tennessee Supreme Court ruled took note of the AMA concerns and ruled that physician non-competes in general were inimical to public policy and unenforceable.”  Murfreesboro Medical Clinic, P.A. v. Udom, 166 S.W.3d 674, 683 (Tenn. 2005), superseded by statute Tenn. Code Ann. § 63-1-148.  See Central Indiana Podiatry, P.C. v. Krueger, 882 N.E.2d 723 (Ind. 2008) (characterizing Udom as holding “essentially all” physician non-compete agreements are against public policy); Calhoun v. WHA Medical Clinic, PLLC, 632 S.E.2d 563, 568, 573, 574 (N.C. App. 2006) (citing the AMA position on non-competes, but ruling nevertheless that the physician non-compete in that case was not against public policy and should be enforced.).

  The Udom court seemed to chide courts for their lack of activism on physician non-compete agreements, saying

  … [W]e find it curious that a majority of states continue to apply a reasonableness standard in evaluating non-compete agreements between physicians, similar to the evaluation of covenants in commercial contexts. … We note that the largest number of cases dealing with physician’s covenants not to compete were decided prior to the AMA’s adoption of its current ethical guidelines in 1980. …

We further find it most surprising that several of the jurisdictions to have addressed this issue since 1980 have placed little emphasis on the general ethical concerns cited by the AMA in discouraging physicians’ non-compete agreements.

Nevertheless, several states, emphasizing public policy concerns, have subjected these covenants to closer scrutiny than non-compete agreements in other context

Id. at 680-81.

The Udom court also noted also that Colorado, Delaware, and Massachusetts had enacted statutes which purport to render void non-compete clauses in physicians contracts.  Udom, 166 S.W.3d at 681 (citing  Colo. Rev. Stat. Ann. § 8-2-113(3) (2003); Del. Code Ann. tit. 6, § 2707 (1993); Mass. Gen. Laws Ann. ch. 112, § 12X (1991)).  These statutes, however, seem half-hearted because at least two of them — Colorado and Delaware — nevertheless allow damages related to competition.  Somewhat more vaguely, Massachusetts statute says that “nothing herein shall render void or unenforceable the remaining provisions of any such contract or agreement.”  

Despite the legislative ambivalence concerning physician non-competes, it is clear that the issue has raised strong concerns among some legislators.  The Colorado statute was adopted because “the state legislature believed that restrictive covenants between physicians adversely affected patient care and the delivery of health care services.”  Paula Berg, Judicial Enforcement of Covenants Not to Compete Between Physicians: Protecting Doctors’ Interests at Patients’ Expense, 45 Rutgers L Rev 1, 11 (1992). A memorandum by legislators expressed concerns that physician no-compete agreements

  (1) are anti-competitive and inhibit free enterprise;

 (2) restrain trade and enable some medical organizations to engage in monopolistic practices, which increase the cost of medical care; 

(3) protect the business interests of the medical organization, while not protecting the health care needs of patients; 

(4) have -a negative impact on patient care; and (5) sever the doctor-patient relationship.

Id. at 11 n.51.

None of the above public interest concerns, however, were discussed in Baugh.  Although South Carolina case law grudgingly acknowledges the possibility of public injury considerations in non-compete agreements, it treats this issue as generally antiquated and relevant only in the most compelling circumstances.  See Reeves v. Sargeant , 200 S.C. 494, 499-504, 21 S.E.2d 184, 187-89 (S.C. 1942) (acknowledging past concerns that non-compete agreements may deprive society of services but nevertheless ordering enforcement of a non-compete agreement on a photographer).  Standard Register Co. v. Kerrigan, 238 S.C. 54, 69, 119 S.E.2d 533, 541, (S.C. 1961) (acknowledging public policy/supply-and-demand considerations, but finding no shortage of services or products offered by a salesman); Wolf v. Colonial Life and Acc. Ins. Co., 309 S.C. 100, 420 S.E.2d 217, (S.C. App. 1992) (analyzing “reasonableness to the general public”, the court found “nothing indicates a shortage of other insurance agents” and enforced forfeiture provision).  Cf. Alexander & Alexander, Inc. v. Wohlman, 578 P.2d 530, 539-40 (Wash. Ct. App. 1978) (finding that a non-compete covenant entered by insurance brokerage employees was unreasonable in its geographic scope based in part “whether the degree of injury to the public is such loss of the service and skill of the employee to warrant nonenforcement of the covenant.”)

 But the very selective vetting process for physicians combined their much higher societal value and shorter supply would seem to make for much more a compelling public interest debate on non-competes than the photographers, salesman and insurance employees focused on in previous South Carolina cases. In South Carolina appellate courts, however, that debate will have to wait for another day.

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