Virginia Doctor Non-Compete Invalid Under Stark Law

In Virginia, it is not uncommon for doctors to have non-compete contracts. Many physicians will be asked to sign a non-compete as a condition of employment, and the non-compete will be included in the physician contract.

For now, the Virginia General Assembly has allowed medical practices to include non-compete contracts when hiring doctors. Not all states allow non-competes, and the American Medical Association strongly disfavors physician non-competes as an impermissible restriction on the doctor-patient relationship.

Despite the prevalence of doctor competes, there are many ways to challenge the enforcement of a non-compete against a Virginia doctor. The non-compete may be overbroad in its function, geographic scope, or duration; it may be void as against public policy depending on the medical practice and the surrounding market for health care services; the medical practice may have “unclean hands” by violating the physician contract first, thus causing the employment separation; or, the doctor’s non-compete may violate the Stark Law, as seen below.

Here is a recent case addressing how one Virginia doctor successfully challenged his non-compete in state court – and prevailed under the Stark Law.

I. Virginia Doctor Signs Non-Compete as a Condition of Employment at Medical Practice

In January 2006, General Surgery Specialists, P.L.C., hired a doctor, Timothy Bowers, M.D., to work at its office in Winchester, Virginia.

Previously, Dr. Bowers worked as a general surgeon in Martinsburg, Virginia. When he joined GSS, he was hired to work as a general surgeon with patients in Winchester an Frederick County.

Dr. Bowers signed a physician employment agreement which contained a doctor non-compete provision:

Covered Activity: Practice of medicine specializing in general surgery

Period of Covenant: Two (2) years

Covered Territory: City of Winchester, Virginia, and Frederick County, Virginia

In other words, Dr. Bowers was prohibited from practicing general surgery within the territorial limits of the city of Winchester, Virginia, or the county of Frederick, Virginia, for a period of two years after the conclusion of his employment.

At the same time, Dr. Bowers and Winchester Medical Center negotiated a Physician Recruitment Agreement. The Medical Center agreed to pay to Dr. Bowers the amount of $15,000 for his moving expenses and $25,000 as a signing bonus in connection with his employment at General Surgical Specialists. Later, the medical center agreed to pay for Dr. Bowers’s tail malpractice insurance premium as an addition incentive.

The President of General Surgical Specialists was made aware of the physician recruitment incentives provided to Dr. Bowers by the hospital.

II. Medical Practice Sues Virginia Doctor for Violating Non-Compete – and Loses Under “Stark Law”

In July 2006, General Surgical Specialists fired Dr. Bowers – less than six months into his employment.

Dr. Bowers continued to practice surgery in the Winchester area, and General Surgical Specialists filed a lawsuit alleging breach of the non-compete contract.

At trial, General Surgical Specialists submitted various evidence substantiating that Dr. Bowers was working in violation of the Virginia doctor non-compete by practicing surgery within the territorial limits of the restrictive covenant. It was generally acknowledged that he was in technical violation of the non-compete’s terms.

But Dr. Bowers argued that the non-compete violated the federal “Stark Law,” which invalidated the non-compete on the grounds of public policy. The Court agreed, and dismissed the suit.

III. Stark Law Invalidates Doctor Non-Compete

The Stark Law, 42 U.S.C. Section 1395nn, prohibits a doctor (Bowers), who received recruitment remuneration from a hospital (Winchester Medical Center), and the physician practice employing him (General Surgical Specialists), from referring patients to the hospital unless certain requirements are met.

One of the requirements or exceptions to avoid the Stark Law’s anti-kickback provision is that “the physician practice may not impose additional practice restrictions on the recruited physician other than conditions related to quality of care.”

The U.S. Department of Health and Human Services explains on its website, “a hospital-funded recruitment arrangement in which the recruited physician is subject to a restriction against competing with the [medical] group [i.e., a non-compete] will not comply with the new joint recruiting exception in the [Stark Law] regulations [42 CF.R. Section 511.357(e)(4)(iv)]. Parties should document that any non-compete clause is void and will not be enforced.” (HSS Centers for Medicare & Medicaid Services, FAQ and Answers, ID No. 3163).

The Court held that Dr. Bowers’s non-compete violated the Stark Law, and therefore it was void.

Under the Stark Law, where a physician practice employs a doctor who gets a recruitment bonus from a hospital where the doctor and practice refer patients, and the practice makes the doctor sign a non-compete as a condition of employment, the non-compete is void because it contravenes the clear language of the Stark Law and violates public policy.

The underlying rationale is straightforward. The Stark Law is intended to prevent doctors from entering into favorable referral agreements with hospitals. The premise is that a doctor should maintain their independence for the sake of patient care. But when a hospital pays a doctor a recruitment bonus, in order to help a practice recruit a doctor, and then the practice locks the doctor into staying at the practice by imposing a non-compete, it is unduly restrictive on the ability of the doctor to leave and refer his patients elsewhere. Thus, a violation of the Stark Law invalidates the non-compete.

The Court dismissed the breach of contract action against the doctor and held the non-compete invalid.

Key Takeaway: For Virginia doctors with non-competes who were paid recruitment bonuses by a hospital, your non-compete may be invalid. If your practice refers patients to a Virginia hospital, and that hospital paid you a recruitment bonus to induce your employment, then you might have a way to escape the non-compete altogether.

Download: General Surgical Associates v. Timothy Bowers, M.D., Case No. CL07000033 (Winchester Circuit Court 2008).