In 2018, the rules changed for physician noncompetes in Colorado.
Since 1982, physician noncompetes have been governed by a rule unique to physicians. Colorado’s noncompete statute voids “any covenant not to compete provision of an employment, partnership, or corporate agreement between physicians” that restricts the right of a physician to practice medicine. As a result of this statute, courts cannot enjoin physicians from practicing medicine – regardless of whether the physician agreed to the restriction. Colorado’s noncompete statue also provides, however, that other provisions in a physician agreement are enforceable, including provisions that require the payment of damages in an amount “reasonably related to the injury suffered”.
To discourage physicians from leaving and to protect themselves from competition, physician groups and hospitals in Colorado have included liquidated damage provisions in their shareholder and employment agreement with physicians. Pursuant to these provisions, a physician becomes liable to the group or hospital, often for a large amount, when the physician quits and practices medicine in the area around the group or hospital. Individual physicians are faced with difficult choices when they decide to leave a practice. They could, of course, honor any contractual obligation and refrain from practicing medicine in the area designated by the agreement. Or, they could breach their agreements and test whether the liquidated damage provision was enforceable under Colorado’s noncompete statute. It took a brave physician to challenge a liquidated damage provision, however, because they risked having a judgment entered against them and, to add insult to injury, employment agreements typically called for the group or hosptal to recover any attorney’s fees incurred from the departed physician.
Little case law existed to guide a physician on whether any liquidated damage provision was enforceable. There was a single decision from the Court of Appeals in 1997; a well-reasoned, unreported decision from the federal district court; and a number of unreported state court decisions. Not much, in other words, for a physician to make a calculated decision about what to do. Earlier this year, this uncertainty was diminished by legislation from the Colorado General Assembly and a new case from the Colorado Court of Appeals.
Under the new legislation, damages should not be recoverable from a physician who continues to treat a patient with a rare disorder after the physician terminates his relationship with one entity and joins another. More specifically, the new statute states:
Neither the physician nor the physician’s employer, if any, is liable to any party to the prior agreement for damages alleged to have resulted from the disclosure or from the physician’s treatment of the patient after termination of the prior agreement.
A “rare disorder” is defined in accordance with criteria developed by the National Organization for Rare Disorders, Inc.
It is hard for us to predict the impact of this new legislation. Rare disorders may be numerous (the website states that over 1,200 diseases are listed) but they are rare, and so, presumably, may be the physicians that treat them. This amendment to the noncompete statute became effective last month, on April 2, 2018.
Only a small number of physicians may benefit from this new legislation, but a new decision from the Court of Appeals, Crocker v. Greater Colorado Anesthesia, should have a broader impact that favors individual physicians who elect to leave practice groups or hospitals. Crocker is a complex decision with several rulings. This blog post will focus on the Court’s rulings that (1) the enforceability of any liquidated damage provision in a physician’s agreement must be determined upon the termination of the physician’s employment, rather than at the time the physician agreement is signed; and (2) the damages set forth in any physician agreement must be reasonably related to the damages actually incurred as a result of the physician’s departure and competition.
In Crocker, Crocker’s shareholder employment agreement stated that Crocker was liable to Greater Colorado Anesthesia for the following amounts if Crocker engaged in the practice of anesthesia within fifteen miles of a hospital serviced by Greater Colorado Anesthesia (from Broomfield to Castle Rock) for two years following termination of the agreement: (1) the three-year annual average of the gross revenues produced by the doctor’s practice; (2) minus the three year annual average of the direct cost of the employee, including compensation and expenses paid for the physician; (3) multiplied by two; (4) plus $30,000 to cover the estimated internal and external administrative costs to terminate and replace the competing doctor. Based on this provision, the practice sought over $200,000 in damages from Crocker after he left the practice and practiced within fifteen miles of a hospital serviced by Greater Colorado Anesthesia.
At trial, however, the court found, however, that the practice had not incurred any actual damages – at all. There was no evidence of any work diverted from the practice, no evidence of any lost revenue or profit caused by the physician leaving and no evidence “other than conjecture’ to support the administrative costs portion of the formula. The absence of this evidence seems to be the result of a calculated decision made by Greater Colorado. It was irrelevant, according to Greater Colorado Anesthesia, that there was no evidence of any actual damages: the validity of the liquidated damage provision should be determined prospectively from the time that any physician agreement was signed.
The Court of Appeals rejected Greater Colorado Anesthesia’s arguments as it affirmed the trial court’s ruling that liquidated damage provision in Crocker’s agreement was not enforceable. The court held that the physician noncompete statute requires “a damages term in a noncompete provision”, “whether a fixed sum or calculated pursuant to a formula”, to be reasonably related to the injury suffered “in the past tense”. The reasonableness of the relationship between any “damages term” or liquidated damages and any actual damages “must be demonstrated, and it cannot be analyzed prospectively; by definition, it can only be determined upon termination of employment.” Not surprisingly, the Court of Appeals found that the amount calculated under Crocker’s liquidated damages formula was not reasonably related to any suffered as a result of Crocker’s departure and competition. The two amounts were not reasonably related because there was no proof that Greater Colorado incurred any damages.
The Crocker decision should cause practice groups and hospitals to re-evaluate shareholder and employment agreements with physicians which contain provisions calling for damages if the physician leaves and competes with the group or hospital. Any effort to re-draft physician agreements will need to balance two conflicting goals. On the one hand, any practice group will want to set the liquidated damages as large as possible. Not only does the practice group want to recover more, rather than less, money upon breach, but also the group will want the damages to be large enough to discourage individual doctors from leaving. On the other hand, the larger the damages set forth in the agreement, the less likely it will be that the practice will be able to show that there is a reasonable relationship between any damages actually incurred and the damages set forth in the agreement. To set the amount of any damages in any physician agreement, practice groups and hospitals also will need to consider how they would prove any damages that they might incur as a result of an individual physician’s departure from the practice. In a decision in 1997, the Court of Appeals noted that any damages awarded against a physician must not be based on speculation or conjecture.
Crocker may be appealed, and the Colorado Supreme Court may yet have the final word on the issues presented.