Valley Medical Specialists v. Farber

Supreme Court of Arizona · Contracts

ContractsRestrictive covenantsNoncompete agreementsPhysician employment agreementsPublic policynoncompetephysicianspublic policy

Facts

VMS hired Dr. Farber, an internist and pulmonologist, in 1985, and he later became a shareholder, officer, and director. In 1991, the directors entered new stock and employment agreements containing a restrictive covenant that, as amended, barred Dr. Farber for three years from practicing medicine within a five-mile radius of any VMS office and from treating any persons who had been VMS patients during his employment. After Dr. Farber left VMS in 1994 and began practicing within the restricted area, VMS sued to enforce the covenant. The trial court found the covenant unreasonable and against public policy because of its duration, geographic sweep, lack of an emergency exception, and failure to limit itself to pulmonology.

Issue

Whether the restrictive covenant in Dr. Farber's employment agreement with VMS was enforceable. More specifically, whether a physician noncompete of this breadth and duration was reasonable and consistent with public policy, and whether a court could modify it to make it enforceable.

Rule

A restrictive covenant is unenforceable if the restraint is greater than necessary to protect the employer's legitimate interest or if that interest is outweighed by hardship to the employee and likely injury to the public. In the physician context, because of the special doctor-patient relationship and public policy concerns, such covenants are strictly construed for reasonableness, and the enforcing party bears the burden of showing the restraint is no greater than necessary and not outweighed by likely public injury. Arizona courts may blue-pencil grammatically severable unreasonable provisions, but they may not rewrite the covenant or add terms to make it enforceable.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakeshore Pulmonary Group in Chicago employs Dr. Nina Shah, a pulmonologist. Her contract bars her for two years from practicing pulmonary medicine within a 20-mile radius of any group office after departure; many of her chronic-care patients would need to travel far outside the city to continue seeing her, though other pulmonologists remain available in the area.

If the group seeks an injunction enforcing the covenant, which is the strongest argument against enforcement under the governing rule?

Explanation. Physician restrictive covenants are strictly construed for reasonableness, with close attention to patient and public interests. The majority rejected the idea that adequate overall supply of specialists alone answers the public-policy question; courts must consider the extent to which patients are foreclosed from seeing the departing physician if they wish. The covenant is not automatically valid merely because it is specialty-limited, and the court did not hold all physician noncompetes per se void.