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Wisconsin Makes Swiss Cheese of Non-Compete
A Wisconsin state Appeals Court has refused to enforce a restrictive covenant in a medical practice group’s employment agreement with an employed physician, finding that the 30-mile area covered by the covenant was impermissibly broad. While courts frequently find that restrictive covenants are too broad in duration, area or scope, this case is unique because the surgical specialty group’s patients resided throughout the entire 30-mile area covered by the covenant. But instead of looking at where the patients lived, the Court in this case focused on where the practice competed for patients. As a surgical specialty practice, virtually all of its patients came from referrals, and the Court reasoned that the covenant should therefore be measured by the location of the referral sources, not the location of the referred patients. Because Wisconsin (like many states) will not rewrite an overly broad covenant, the Court’s decision invalidated the covenant in its entirety and allowed the former employee to open an office in the same building as his former employer.
Courts disfavor restrictive covenants in employment agreements, viewing them as devices that stifle competition and limit physicians’ right to practice. Despite being disfavored, a restrictive covenant in an employment agreement will be enforced in most states (California being the most prominent exception) if it is reasonably necessary to protect a legitimate business interest of the employer. The lesson of this case is the importance of determining where the goodwill of the practice truly resides and limiting the scope of a restrictive covenant to the minimum necessary to protect that goodwill.
Like so many things, it is best to act reasonably when crafting a restrictive covenant. This is not to say that you must let a formerly-employed physician sit at the border of your market area and poach your patients – after all, you are allowed to protect your business. But when determining the scope of your restrictive covenant, you need to consider not only the geographic area in which your patients reside, but also the sources from whom you obtain referrals, and limit your contractual provisions to the area necessary to prevent former employees from appropriating your goodwill for their own benefit.
Tom Conley
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