Physician Restrictive Covenants in Arizona - Sacks Tierney, PA, Attorneys - Scottsdale Arizona Law Firm providing legal services in real estate, business and corporate law, construction, employment, family law, immigration and civil litigation

HEALTHCARE LAW

July 2002

The Current State of Physician Restrictive

Covenants in Arizona

Physicians who have employees subject to non-competes would be wise to have those restrictive covenants reviewed

Most physicians in Arizona have heard of the Arizona Supreme Court decision, Valley Medical Specialists v. Farber. In that case, the Arizona Supreme Court refused to enforce a non-competition clause against Steven Farber, D.O., an internist and pulmonologist who treated AIDS and HIV-positive patients and specialized in brachytherapy. The Court focused on several aspects of the restrictive covenant in striking it down, all of which are instructive as we try to write and enforce (or avoid) such clauses in the future.

First, the clause in Dr. Farber’s agreement prohibited him from practicing medicine, and the Court held that any restrictive covenant must be limited to the particular specialty of the physician.

Second, the Court found the geographic scope of the covenant to be overly broad. The clause prohibited Dr. Farber from practicing within a five-mile radius around each of three offices. However, the offices were spread around the Phoenix area, so that the non-compete clause covered a total area of 235 square miles. The Court found this area to be far in excess of what would be reasonable.

Third, the Court found the duration of the non-compete to be unreasonable. The covenant prohibited the practice of medicine for three years after the termination of Dr. Farber's employment agreement. The Court stated that the practice of pulmonology dealt with patients with chronic conditions who require regular contact with the treating physician at least once within each six-month period. Consequently, a provision intending to restrict patient contact for more than six months would be unreasonable.

The Court also addressed restrictive covenants for physicians in general terms, finding that they limit the patient's right to choose his or her physician and therefore would be strictly construed. The provision contained what is commonly known as a "blue pencil" clause, which permits a court to modify an unreasonable restrictive covenant. The lower court in the Farber case permitted a modification that would have permitted Dr. Farber to treat HIV-positive and AIDS patients and to perform brachytherapy. However, the Supreme Court held that a blue pencil clause would only permit a court to remove "grammatically severable portions" and would not allow a court to rewrite an unreasonable restrictive covenant. Thus, the Supreme Court rejected the lower court’s modification, thereby significantly limiting the effectiveness of the "blue pencil" doctrine. In essence, unless a court can remove whole sentences or paragraphs to modify an offending provision, the court may not rely upon the blue pencil rule to save an otherwise unreasonable restrictive covenant.

Arizona lawyers have relied upon prior case law to assume that a restrictive covenant for physicians of three years with a five-mile radius around each office is appropriate. This stems primarily from the case of Phoenix Orthopaedic Surgeons, Ltd. v. Peairs, a 1989 Arizona Court of Appeals decision. However, Farber represents the first time that the Arizona Supreme Court has spoken on the subject. While it did not reverse the Peairs decision, it substantially altered the way Arizona lawyers now look at restrictive covenants for physicians. They need to be much more narrowly drawn in order to be enforceable.

One conclusion that should not be drawn from Farber is that restrictive covenants for physicians are dead in Arizona. The Arizona Supreme Court in Farber delivered a clear message that it looks upon restrictive covenants against physicians with a strong suspicion and with an eye toward finding them unenforceable. However, the Court refused to declare such clauses per se unreasonable, and a properly written restrictive covenant can still be enforced against a physician.

Those physicians who have employees subject to non-competes would be wise to have those restrictive covenants reviewed and possibly modified in light of the Farber decision. Those physicians who are asked to enter into restrictive covenants after this decision should be comforted by the notion that a broad restrictive covenant is unlikely to be enforced in Arizona. However, a physician faced with a narrowly drawn non-compete should not ignore its potential restrictions.

These materials are designed to provide general information prepared by professionals in regard to the subject matter covered. It is provided with the understanding that the author is not engaged in rendering legal, accounting, or other professional service. Although prepared by professionals, these materials should not be utilized as a substitute for professional service in specific situations. If legal advice or other expert assistance is required, the service of a professional should be sought.