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Physicians: Protect Your Professional Ideas, Business Relationships, Pricing And Goodwill

Today, creating and maintaining appropriate protections for “idea capital,” “relationship capital” and “information capital” are critical to any organization’s success in this competitive and knowledge-based world. Creativity, ideas, vendor relationships, customer relationships, pricing and goodwill are vital to your success.

This is true whether one is a manufacturer of machine components, an advertising agency, a surgeon or a pediatrician. However, physicians are affected by Colorado’s special rule for noncompete agreements between physicians. Colorado Revised Statute 8-2-113 states that:

“Any covenant not to compete provision of an employment, partnership or corporate agreement between physicians which restricts the right of a physician to practice medicine, as defined in [the Colorado Medical Practice Act], upon termination of such agreement, shall be void; except that all other provisions of such an agreement enforceable at law, including provisions that require the payment of damages in an amount that is reasonably related to the injury suffered by reason of termination of the agreement, shall be enforceable. Provisions that require the payment of damages upon termination of the agreement may include, but are not be limited to, damages related to competition.”

At Watrous | Goodwin | Reha, our highly experienced attorneys provide knowledgeable and innovative resolutions to disputes between private medical practitioners, professional practices and other businesses.

Defining The Term ‘Physician’

The question of who qualifies as a “physician” would seem clear. Those authorized to “practice medicine” are within the statute’s express language. But some issues still exist as to who else may qualify. For instance, an oral surgeon may hold an M.D. degree or possess a D.D.S. degree. Some radiologists are chiropractors.

Assuming one is a “physician” for purposes of the statute, a noncompete that prohibits, restricts or limits the physician’s actual practice is void. Thus, physicians cannot be prohibited from practicing in any location they desire.

Instead, what is available is an agreement or clause in an agreement, such as a physician employment agreement or a buy-sell agreement between partners in a medical group practice, that requires a physician exiting the practice who intends to establish another practice to pay to the practice or the former employer those “damages … reasonably related to the injury suffered by reason of termination of the agreement … which may include, but not be limited to, damages related to competition.” This typically leads to “liquidated damages” clauses — those that provide for an approximation of damages before the contract is even breached — being incorporated into restrictions on a physician’s ability to practice in the future.

Lost Net Profits, Not Gross Profits

This provision has caused significant consternation in Colorado’s courts. As a matter of general damages law in Colorado, liquidated damages must not constitute a penalty and they must approximate lost net profits to be incurred by the party that will be harmed. Further, recent Colorado case law requires that the party attempting to enforce the physician noncompete establish that damages have in fact already occurred.

Thus, provisions in competition restriction agreements between physicians who adopt any measure — other than true lost net profits to the practice attributed to the exiting physician — will be unenforceable. It is imperative that medical practices and medical practice managers take special care to ensure that provisions that toe this narrow line are used instead of those that simply look to an arbitrary amount or that measure loss on lost billings or revenue, which represent gross, not net, numbers. Conversely, physicians are often provided a reasonable path to continued practice without the burden of a liquidated damages provision in their employment or other agreement.

Contact Our Firm To Discuss Your Noncompete Agreement

Noncompete agreements for physicians are complex. To schedule a consultation with our seasoned lawyers in Littleton, call Watrous | Goodwin | Reha at 720-594-7400. You may also reach out to our firm online.