Defense Digest

The Doctor Can Make House Calls: Non-Competition Covenant Limited By Court

In many businesses and industries, the existence of a restrictive covenant as part of an employment or engagement contract is commonplace. Whether or not such a covenant will be enforced by a court is dependent upon the facts and circumstances involved in each case. Recently, the Pennsylvania Superior Court confirmed its willingness to uphold the enforcement of a non-competition covenant, but only to the extent that the provision is reasonably necessary to protect the employer's legitimate business interests.

In WellSpan Health v. Phillip Bayliss, M.D., 2005 Pa. Super. 76 (February 22, 2005), the Superior Court was asked to review a physician's employment contract, which included a post-employment covenant to not compete in the maternal/fetal specialty for two years in a five-county region. The facts particular to the dispute were pivotal to the court's analysis of the case.

In 1993, WellSpan recruited Dr. Bayliss, a perinatologist, to York Hospital to specialize in the management of high risk pregnancies. Shortly before starting work at York Hospital, Dr. Bayliss signed a professional services agreement that included a post-employment non-competition covenant. By the terms of the covenant, Dr. Bayliss agreed not to engage in the practice of perinatology in York County or its four contiguous counties (Lancaster, Dauphin, Cumberland, and Adams) for two years after termination of his employment.

WellSpan actively promoted Dr. Bayliss and its maternal/fetal medicine division with marketing strategies, including advertisements, to increase the number of referrals. Dr. Bayliss also created referral links with physicians at various hospitals located in York and Adams Counties. Although WellSpan at one time considered expansion of the maternal/fetal practice into Lancaster County, no additional steps were ever taken to create a physical presence in that county.

In 2003, Dr. Bayliss announced his resignation and his intention to establish a maternal/fetal medicine practice at Lancaster General Hospital in Lancaster County. In response, WellSpan filed motions to enforce the restrictive covenant against Dr. Bayliss.

The trial court upheld the restrictive covenant with regard to York and Adams Counties, forbidding Dr. Bayliss from engaging in the practice of perinatology in those counties and from soliciting referrals of perinatology patients from physicians in those counties for the two-year period specified in his employment agreement. The trial judge, however, 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 court held that the covenant, as applied to geographical areas where WellSpan did not provide perinatology care, was unreasonable and, therefore, unenforceable.

On appeal, the Superior Court affirmed the trial court's decision. In analyzing the specifics of Dr. Bayliss' relationship with WellSpan, the Superior Court considered whether a patient referral base and investments needed to generate that base constitute a protected business interest. Drawing upon the analysis conducted by the New Jersey Superior Court in Community Hospital Group v. More, 365 N.J. Super. 84, 838 A.2d 472 (N.J. Super. Ct. App. Division 2003), the Superior Court found that a patient referral base is a protected interest and agreed it was appropriate to give legal protection to a hospital's investments in the generation of such a base.

Finding a protectable business interest, the Superior Court took the next step and applied a balancing test between WellSpan's protectable business interest and Dr. Bayliss' interest in earning a living. In addition, the court considered the interests of the public since non-competition covenants involving physicians may impact the public unfairly. For instance, when patient demand in a geographic region exceeds the ability of appropriately trained physicians to provide expeditious treatment, the public interest may predominate over the rights of an employer to enforce a non-competition covenant.

In the case of Dr. Bayliss, the Superior Court found that the trial court's decision not to enforce the covenant with respect to Lancaster County (as well as Dauphin and Cumberland Counties) was correct. In doing so, the Superior Court reiterated that a restrictive covenant that is applied to a geographical area in which the employer does not compete is unreasonable. Furthermore, the Superior Court also supported its decision based upon a valid public interest - Dr. Bayliss was the only physician practicing his specialty in Lancaster County, a county recognized to have many more deliveries every year than the counties serviced by WellSpan. Accordingly, the Superior Court appropriately affirmed the enforcement of the covenant in part, while permitting Dr. Bayliss to practice his specialty with his new employer in Dauphin, Cumberland, and Lancaster Counties where his former employer, WellSpan, admittedly had no presence.

*Ronda is a shareholder in the Philadelphia, PA office. She can be reached directly at (215) 575-2697 or at srodonnell@mdwcg.com.