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It is not at all uncommon for employment agreements between physicians and their employers (be they hospitals, health care systems, medical practices or others) to have noncompetition covenants within them. An interesting case, WellSpan Health v. Bayliss, was decided by the Superior Court earlier this year. WellSpan is a nonprofit health care system based in York, Pa., the primary components of which are Gettysburg Hospital and York Hospital. In 1993, WellSpan recruited Philip Bayliss to York Hospital. He was a perinatologist, focused on the management of high-risk pregnancies. He was hired not only to practice medicine but also as a medical director of the perinatal/genetic program at York Hospital. Bayliss also served as a member of the WellSpan management team, participating in business strategy and marketing activities. Prior to his recruitment to WellSpan, Bayliss had had no contact with the south central Pennsylvania area. Bayliss had signed a professional services agreement that included a post-employment noncompetition covenant. The terms of the restrictive covenant stated that Bayliss would not engage in the practice of perinatology in York County, Pa., or its four contiguous counties (Lancaster, Dauphin, Cumberland and Adams) for two years after termination of employment. Under Bayliss, York Hospital’s Maternal Fetal Medicine Division expanded to include two additional physicians and a substantial amount of new equipment (including approximately $900,000 in equipment purchased during his last five years of employment). WellSpan promoted the Maternal Fetal Medicine Division and Bayliss extensively. As a specialized medical practice, maternal fetal medicine is dependent upon a strong and broad referral base for its viability. Strong referral linkages were created with physicians at York Hospital, Memorial Hospital in York County, Pa., Hanover Hospital in York County, Pa., and Gettysburg Hospital in Adams County, Pa. In mid-2001, Lancaster General Hospital opened a new Women and Babies Hospital (WBH) in Lancaster County, Pa., approximately 26 miles from WellSpan. As early as 1999, WellSpan and Bayliss had contemplated some type of expansion into Lancaster County. However, WellSpan never got past the discussion phase and never created a physical presence in Lancaster County. In February 2003, Bayliss announced his resignation from WellSpan, effective June 30, 2003, and his intention to establish a maternal fetal medicine practice at WBH in Lancaster County beginning July 1, 2003. On June 17, 2003, WellSpan filed a motion for preliminary injunction seeking enforcement of the restrictive covenant. The trial judge upheld the restrictive covenant with regard to York and Adams counties, forbidding Bayliss from engaging in the practice of perinatology in those counties and from soliciting referrals of perinatology patients from physicians in those counties until June 30, 2005. However, the trial judge refused to enforce the covenant in Lancaster, Dauphin or Cumberland counties based upon his conclusion that WellSpan did not compete for perinatology patients in those counties. The trial judge also enjoined Bayliss from soliciting any past or present WellSpan perinatology patients and from using or disclosing any information pertaining to WellSpan’s past or present patients, except as requested by the patient. On Oct. 1, 2003, WellSpan filed a petition for permanent injunction. The trial court issued its order on Feb. 25, 2004. It contained the same terms as the preliminary injunction order and was based on the same reasoning. WellSpan filed a timely appeal of the Feb. 25, 2004, order, particularly as it applied to Lancaster County. It ended up in the Superior Court. The WellSpan court determined what a protectable interest was. At a minimum, for a noncompetition or restrictive covenant to be enforceable, it must be “reasonably related to the protection of a legitimate business interest.” Among the types of interests that are protectable in a noncompetition covenant are trade secrets or confidential information, unique or extraordinary skills, customer goodwill and investments in an employee specialized-training program. A post-employment covenant that merely seeks to eliminate competition per se to give an employer an economic advantage is generally not enforceable. The presence of a legitimate, protectable business interest of the employer is a threshold requirement for an enforceable non-competition covenant. The interest protected under the umbrella of goodwill is a business’s positive reputation. A business’s goodwill is considered a protectable interest even when the goodwill has been acquired through the efforts of an employee. The concept of customer goodwill as a protectable interest has been applied to patient relationships when the noncompetition covenant at issue involves a health care professional. The state Supreme Court in Hayes v. Altman enforced a noncompetition covenant that barred an optometrist from practicing his profession within a radius of six miles from his former employer for three years after termination of employment. In 1999, the Superior Court cited the erosion of an ex-employer’s patient relationships as one factor in the decision to affirm the grant of a preliminary injunction against an oncologist. That was in West Penn Speciality MSO Inc. v. Nolan. A second protectable interest is confidential information or a trade secret. A trade secret may include a compilation of information that is used in one’s business that gives one an opportunity to obtain an advantage over competitors. However, if a competitor could obtain that information by legitimate means, it will not be given injunctive protection as a trade secret. The WellSpan court noted that an issue that had not yet been explicitly addressed by a Pennsylvania appellate court was whether a patient referral base and the investments needed to generate that base constitute a protected interest. A New Jersey appellate court has directly confronted that issue. In Community Hospital Group v. More, a medical institute’s patient referral base was recognized as a legitimate, protectable interest. More was a not-for-profit neuroscience institute whose mission comprised specialized clinical care, physician training and research. As a tertiary care provider of highly specialized medical services, it actively sought and depended upon patient referrals from physicians in other specialties. The continued viability of its programs was dependent on the maintenance of a broad referral base. The More court enforced a noncompetition covenant against a neurosurgeon-defendant who had voluntarily left the employ of the institute after having joined fresh from his residency. The defendant had not previously practiced in that geographic area. The More court noted the significant investment that had been made in the defendant who, as an entry-level physician, did not have a patient following when he was recruited. The court determined that such an investment was not truly compensable through monetary damages when the referral base was dependent upon the network of professional relationships that had been developed. The WellSpan court noted the concerns expressed by the More court that, without legal recognition that the referral bases of an institution that provides highly specialized medical care was a protected interest, there would potentially be serious harm caused not only to clinical care but also to physician training and research programs, to the detriment of the public. The WellSpan court found much merit in the More court’s holding, and therefore determined that the recognition of a patient referral base as a protected interest fit squarely within Pennsylvania case law. The court believed that in the context of a noncompetition covenant the referral bases of a specialized medical care institution were analogous to a physician’s patient relationships or an employer’s customer relationships. Once it determined that the threshold requirement of a protectable business interest was met, the WellSpan court turned to Hess v. Gebhard & Co. Inc. to apply the balancing test. First, the court needed to balance the employer’s protectable business interest against the employee’s interests in earning a living. Then the court needed to balance the employer and employee interests with the interests of the public. In weighing the competing interests of the employer and employee, the court must engage in an analysis of reasonableness. First of all, the covenant must be reasonably necessary for the protection of the employer. In addition, the temporal and geographical restrictions imposed on the ex-employee must be reasonably limited. The determination of reasonableness is a factual one. An unreasonable covenant will not be enforced. Although the public interest is sometimes neglected in the balancing of employer and employee concerns, the interests of the public are of paramount importance in the context of noncompetition covenants for physicians. The WellSpan court depended heavily upon the state Supreme Court case New Castle Orthopedic Associates v. Burns. That case made clear that the courts will undertake a “close judicial scrutiny” of noncompetition covenants involving physicians because of the value of their services to the public. In New Castle, evidence of long delays experienced by patients who attempted to obtain appointments for orthopedic services led the court to conclude that there was a shortage of orthopedic specialists in the geographic area. That was the major factor in the court’s decision to reverse the grant of a preliminary injunction against an orthopedic surgeon. The public interest analysis of the noncompetition covenants involving physicians requires a determination of the quantitative sufficiency of physicians in that specialty practicing in the restricted area. When patient demand in the geographic region exceeds the ability of appropriately trained physicians to provide expeditious treatment, then the public interest dominates over the right to enforce a non-competition covenant by injunction. In the West Penn case, the court found that there were numerous oncologists in the area and that there was no evidence of a shortage of oncology services. The preliminary injunction in that case was granted. The WellSpan court opined that the trial court had properly considered the public interest in its decision. Bayliss was the only perinatologist in Lancaster County. That led the court to infer that he would have more than enough work just caring for residents of that county and that there was a need for perinatology there. That inference was supported by the fact that York County, with fewer residents than Lancaster County, provides enough work for more than one perinatolgist. The WellSpan court agreed with the trial court that a noncompetition covenant applied to a geographical area in which the employer does not compete is unreasonable. The trial court in WellSpan cited at least two stipulated facts in support of its conclusion that WellSpan did not compete with WBH and Bayliss in Lancaster County. WellSpan did not have any offices nor did it provide maternal fetal medicine services in Lancaster County. Evidence was presented that no more than 1 percent of WellSpan’s new maternal fetal medicine patients came from Lancaster County. Conversely, less than 2 percent of obstetrics patients treated at WBH came from York County. This provided more than enough support for the trial court’s conclusions that WellSpan and WBH were not competitors and that WellSpan did not compete in Lancaster County. Therefore, the Superior Court found that the trial court properly determined that the non-competition covenant as applied to Lancaster County was unreasonable and against the public interest and that the trial court therefore appropriately used its authority to blue-line the covenant, enforcing it in York and Adams counties but refusing to enforce it Lancaster County. Vasilios J. Kalogredis is president and founder of Kalogredis Sansweet Dearden & Burke, (a health care law firm) and Professional Practice Consulting Inc., (a health care consulting firm) in Wayne, Pa. He has been advising physicians, dentists and other health care providers since 1974. Among his areas of expertise are group practice arrangements, practice sales and mergers, doctor contract drafting and negotiation, tax and retirement planning for physicians, joint ventures, fraud and abuse matters and evaluation of practice options for physicians. He can be contacted at 800-688-8314 or by e-mail at [email protected]

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