Why doctors shouldn't practice law: the American Medical Association's misdiagnosis of physician non-compete clauses.

• Author: Steinbuch, Robert

1. INTRODUCTION

   In its model rules, the American Bar Association (ABA) adopted a restriction on an attorney's ability to enter into non-compete clauses. The American Medical Association (AMA) has no such restriction. This Article discusses the history, case law, and justifications for this restriction in a lawyer's practice; details the reasons why the AMA has failed to implement such a restriction for doctors, despite the AMA's position in favor of the policy; and argues that the AMA should adopt a policy against restrictive covenants that is similar to the ABA's policy.

   The U.S. Constitution states, "No State shall ... pass any Law impairing the Obligation of Contracts.... No State shall ... deprive any person of life, liberty, or property, without due process of law." (1) Pursuant thereto, in Lochner v. New York, the Supreme Court ruled unconstitutional a New York statute that prohibited bakers from working more than ten hours per day. (2) In that seminal case, the Court held,

   The statute necessarily interferes with the right of contract between the employer and employees, concerning the number of hours in which the latter may labor in the bakery of the employer. The general right to make a contract in relation to his business is part of the liberty of the individual protected by the Fourteenth Amendment of the Federal Constitution. Under that provision no State can deprive any person of life, liberty or property without due process of law. The right to purchase or to sell labor is part of the liberty protected by this amendment, unless there are circumstances which exclude the right. (3) The short-lived preeminence of Lochner represented the apex of American law's recognition of a virtually unfettered right to contract. Even during this time, however, courts recognized an exception to this principle in the context of police powers relating to the safety, health, morals, and general welfare of the public. (4) The Supreme Court stated that "[b]oth property and liberty are held on such reasonable conditions as may be imposed by the governing power of the state in the exercise of those powers, and with such conditions the 14th Amendment was not designed to interfere." (5) As a consequence, "restraints of trade"--contracts in which a party agrees to foreclose the method of engaging in, or opportunity to engage in, a vocation--had been regulated or prohibited under British and American common law for centuries, even during the Lochner era. A contemporary court even suggested that "among the most ancient rules of the common law" was that restraints of trade were void--noting their existence as early as 1415--because of the many negative effects:

   1. Such contracts injure the parties making them, because they diminish their means of procuring livelihoods and a competency for their families. They tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions. And they expose such persons to imposition and oppression.

   2. They tend to deprive the public of the services of men in the employments and capacities in which they may be most useful to the community as well as to themselves.

   3. They discourage industry and enterprise, and diminish the products of ingenuity and skill.

   4. They prevent competition and enhance prices.

   5. They expose the public to all the evils of monopoly. And this especially is applicable to wealthy companies and large corporations which have the means, unless restrained by law, to exclude rivalry, monopolize business, and engross the market. Against evils like these, wise laws protect individuals and the public by declaring all such laws void. (6)

   Notwithstanding these strong judicial proclamations eschewing restraints of trade, as early as the seventeenth century courts began to chip away at this limitation on the right to contract. (7) over time, the common law came to recognize the validity of restraints of trade when limited in time or place. (8) And though Lochner recognized the limitation on restraints of trade even while forging a singularly broad view of the rights of privately contracting parties, post-Lochner jurisprudence--although far more accepting of limitations on private contracts--somewhat paradoxically accepted the notion that in certain circumstances private parties may elect to employ restraints of trade.

   The contemporary version of the law on restraints of trade is aptly reflected in the Second Restatement of Contracts, which sets forth the modern scope and boundaries of these restrictive contracts. Restraints of trade are currently prohibited if they fall into either of two broad categories: (1) "the restraint is greater than is needed to protect the promisee's legitimate interest," or (2) "the promisee's need is outweighed by the hardship to the promisor and the likely injury to the public." (9) Moreover, restraints on competition are enforceable only when part of a broader enforceable contract. (10) Thus, "[i]f a restraint is not ancillary to some transaction or relationship that gives rise to an interest worthy of protection, the promise is necessarily unreasonable." (11)

   Doctors generally employ permissible restrictive covenants for restraining trade in their vocation in two contexts: agreements accompanying the sale of a practice and employment or partnership agreements. (12) Agreements accompanying the sale of a practice are implicated when a doctor sells her practice. (13) Employment agreements are typically signed prior to employment and restrict a physician's activities if she leaves the practice. (14) Restrictive covenants used for employment agreements typically are only valid when they apply for a limited time frame, while with the sale of a medical practice courts typically allow restrictive covenants with no time limits. (15)

   The common law rules on restraints of trade are often augmented in the context of licensed professionals by mandatory obligations imposed by private or quasi-governmental governing bodies. For lawyers, the American Bar Association (ABA) developed a set of ethical rules that has been adopted, at least in part, by courts in all states--often with legislative ratification. For doctors, the American Medical Association (AMA) provides ethical rules, compliance with which is typically tied to state licensing. The ABA has adopted a comprehensive body of rules governing restrictive covenants for the practice of law. The AMA, however, has not done the same for the medical vocation.

   The AMA's failure to do so harms both physicians and patients, because the AMA's inaction prevents many doctors from competing with practices with which they were previously affiliated. Doctors, thus, are forced to remain with existing practices longer than they otherwise would, and, when they depart, they often must leave the geographic location. As a consequence of the AMA's failure to prohibit this rational but predatory behavior by existing medical practices, the AMA reinforces the oligopolistic status quo. This reduces both competition and access for patients. Many patients are forced into existing practices and are not offered the opportunity, when those doctors leave their employing practices, to stay with doctors with whom they have developed relationships. The result is that patients and newer doctors suffer economically, while the benefactors are rent-seeking, established practices intent on using protectionist measures for economic gain without increasing productivity.

   This Article proposes that the AMA adopt rules governing restrictive covenants for doctors similar to those already adopted by the ABA for attorneys. The ABA's current rules allow for restrictive covenants in a limited number of situations--including restrictive covenants incident to the sale of a law practice--but specifically prohibit restrictive covenants as a condition to an employment agreement. The ABA's approach is nuanced and equitable. Both the underlying rationales and practical effects of the ABA's current rules governing non-compete clauses in the legal profession serve as persuasive justifications for adopting the same rules in the medical context. These rules serve to regulate competition among lawyers, while protecting both attorney and client freedom of choice, and would serve similar ends in the medical profession.

   Part II will examine restrictive covenants generally and then specifically within the context of medical practitioners. In doing so, it will address the public interest implicated by the physician-patient relationship. After that, Part II will illustrate how limiting restrictive covenants to only those incident to the sale of a medical practice is preferable to the current situation, as the harm to the public of permitting restrictive covenants in that context only is not significant.

   Next, the Article, in Part III, will detail the ABA's approach to noncompete clauses as articulated in the ABA's Model Rules of Professional Conduct 5.6 and 1.17. With this as the basis, it will then describe the AMA's current failure to address restrictive covenants concretely. This Part will also detail the AMA's misguided justifications for its current position--describing the AMA's failure to properly understand the Federal Trade Commission's (FTC) current rulings.

   Finally, Part IV will demonstrate the AMA's need to adopt a position similar to that of the ABA in order to protect the interests of both physicians and patients. In doing so, the analysis will demonstrate how adopting a variant of the ABA's rule in the context of the medical profession comports with the FTC's most recent applicable rulings and alleviates concerns regarding the public interest in the physician-patient context.

2. RESTRICTIVE COVENANTS AND THE MEDICAL PROFESSION

   The two types of restrictive covenants commonly used by doctors for restraining professional trade in the medical practice--employment or partnership agreements and agreements...