Most physicians in
Arizona have heard of the Arizona Supreme Court decision, Valley Medical
Specialists v. Farber. In that case, the Arizona Supreme Court refused to
enforce a non-competition clause against Steven Farber, D.O., an internist and
pulmonologist who treated AIDS and HIV-positive patients and specialized in
brachytherapy. The Court focused on several aspects of the restrictive covenant
in striking it down, all of which are instructive as we try to write and enforce
(or avoid) such clauses in the future.
First, the clause in Dr.
Farber’s agreement prohibited him from practicing medicine, and the Court held
that any restrictive covenant must be limited to the particular specialty of the
physician.
Second, the Court found
the geographic scope of the covenant to be overly broad. The clause prohibited
Dr. Farber from practicing within a five-mile radius around each of three
offices. However, the offices were spread around the Phoenix area, so that the
non-compete clause covered a total area of 235 square miles. The Court found
this area to be far in excess of what would be reasonable.
Third, the Court found
the duration of the non-compete to be unreasonable. The covenant prohibited the
practice of medicine for three years after the termination of Dr. Farber's
employment agreement. The Court stated that the practice of pulmonology dealt
with patients with chronic conditions who require regular contact with the
treating physician at least once within each six-month period. Consequently, a
provision intending to restrict patient contact for more than six months would
be unreasonable.
The Court also addressed
restrictive covenants for physicians in general terms, finding that they limit
the patient's right to choose his or her physician and therefore would be
strictly construed. The provision contained what is commonly known as a "blue
pencil" clause, which permits a court to modify an unreasonable restrictive
covenant. The lower court in the Farber case permitted a modification
that would have permitted Dr. Farber to treat HIV-positive and AIDS patients and
to perform brachytherapy. However, the Supreme Court held that a blue pencil
clause would only permit a court to remove "grammatically severable portions"
and would not allow a court to rewrite an unreasonable restrictive covenant.
Thus, the Supreme Court rejected the lower court’s modification, thereby
significantly limiting the effectiveness of the "blue pencil" doctrine. In
essence, unless a court can remove whole sentences or paragraphs to modify an
offending provision, the court may not rely upon the blue pencil rule to save an
otherwise unreasonable restrictive covenant.
Arizona lawyers have
relied upon prior case law to assume that a restrictive covenant for physicians
of three years with a five-mile radius around each office is appropriate. This
stems primarily from the case of Phoenix Orthopaedic Surgeons, Ltd. v. Peairs,
a 1989 Arizona Court of Appeals decision. However, Farber represents the
first time that the Arizona Supreme Court has spoken on the subject. While it
did not reverse the Peairs decision, it substantially altered the way
Arizona lawyers now look at restrictive covenants for physicians. They need to
be much more narrowly drawn in order to be enforceable.
One conclusion that
should not be drawn from Farber is that restrictive covenants for
physicians are dead in Arizona. The Arizona Supreme Court in Farber
delivered a clear message that it looks upon restrictive covenants against
physicians with a strong suspicion and with an eye toward finding them
unenforceable. However, the Court refused to declare such clauses per se
unreasonable, and a properly written restrictive covenant can still be enforced
against a physician.
Those physicians who have
employees subject to non-competes would be wise to have those restrictive
covenants reviewed and possibly modified in light of the Farber decision.
Those physicians who are asked to enter into restrictive covenants after this
decision should be comforted by the notion that a broad restrictive covenant is
unlikely to be enforced in Arizona. However, a physician faced with a narrowly
drawn non-compete should not ignore its potential restrictions.
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These materials
are designed to provide general information prepared by professionals in regard
to the subject matter covered. It is provided with the understanding that the
author is not engaged in rendering legal, accounting, or other professional
service. Although prepared by professionals, these materials should not be
utilized as a substitute for professional service in specific situations. If
legal advice or other expert assistance is required, the service of a
professional should be sought.
