Restrictive Covenants and "Incorporated by Reference"

In this entry, we address restrictive covenants, and documents that are “incorporated by reference.”
Restrictive Covenants
Restrictive covenants, in the most basic sense, are contractual clauses designed to prevent the physician employee from engaging in specific behavior both during the term of the contract, and usually following termination.  Restrictive covenants can come in several different forms. 

Some prohibit disclosure of confidential information (also known as “confidentiality clauses”).  The type of information that cannot be disclosed will include obvious material such as patient records, but can also include a range of business-related information, such as business methods, insurance company participation agreements, client and referral lists, etc.  Most confidentiality clauses also include language to permit the physician employee to disclose such information if it is required by a subpoena, or to disclose to the physician's own attorney.  Some include language that permits disclosure of information that is already known to the party to whom it is disclosed, or who also has an obligation of confidentiality relating to the information being disclosed.

Other restrictive covenants prohibit solicitation of patients, referral sources, and current or even former employees of the practice.  These “non-solicitation clauses” always apply after termination for any reason, and are designed to prevent the physician from actively attempting to “poach” business or other employees from the employer.  In other words, they will prohibit you from leaving your job and convincing your favorite medical assistant to join you at your new job, or from stealing patients away from the practice to come see you at your new job.  That, however, is not the same as the medical assistant or patients voluntarily following you, without you prompting them. 

Finally, restrictive covenants can include “non-competition clauses” which prohibit the physician employee from leaving the employer to practice in a way that competes with the employer.  These clauses are usually based on a geographic area within which the employee cannot compete.  The range of that geographic area, however, can vary, depending on the circumstances.  Courts generally will not enforce a restrictive covenant that is too broad, although what constitutes a covenant that is “too broad” is highly fact-specific.  The underlying question is whether the employee can reasonably be seen as competing with the employer.  Within a rural setting, the employer may draw patients from as far away as a 20 mile radius, whereas within an urban setting, the employer might only draw patients from within a 5 mile radius.  Such clauses also are usually limited in their duration.  This may be as short as 6 months, or as long as 5 years, although we commonly see restrictions for between 1 and 3 years.  In many cases, these covenants will apply regardless of the reason for termination, meaning that even if the physician terminates because of the employer's breach, the restriction will still apply.  While we often request that the non-competition clause not apply if the physician terminates for the employer's breach or the employer terminates the physician without cause, not all employers agree to such a change.  Lastly, not all states permit such non-competition clauses, either.  California, for example, has a general prohibition on such language in employment contracts.  If you are reviewing a contract with a non-competition clause, find out whether they are legal in your state.

“Incorporated By Reference”

Similar to “representations and warranties,” the phrase “incorporated by reference” is language with a very specific legal meaning that can have a profound impact on the contract itself.  This language means that the document that is being incorporated is treated as every bit as legally binding as the formal contract itself.  The types of documents that are often “incorporated by reference” include things such as exhibits or addenda to the contract, but they can also include policies, procedures, manuals, handbooks, etc. 

To put this concept into context, if the contract states that the employee handbook is “incorporated by reference,” that means that the employee handbook is now effectively part of the contract itself.  In other words, a breach of the requirements within the employee handbook will constitute a breach of the contract, even if the document is not physically attached to the contract at the time of signing.  When reviewing a contract, be sure also to obtain and review copies of any documents which are “incorporated by reference,” given that they will be treated as legally binding.

Daniel F. Shay is an attorney with Alice G. Gosfield and Associates, P.C., a practice restricted to health law and health care regulation, focusing primarily on physician representation. He has focused his attention on electronic health records license agreements, enrollment in Medicare, quality reporting and quality measurement, physician use of non-physician practitioners and physician use of social media. He regularly represents physicians in reviewing and negotiating their employment agreements. He speaks publicly and has published on all of these topics.