Physician's Non-Compete Agreement Unenforceable Due in Part to a Documented Physician Shortage

Posted: Thursday, July 16, 2009

By: Joshua C. Dickinson

Topic: Non-Compete Cases

T he Iowa Court of Appeals Finds a Physician's Non-Compete Agreement Unenforceable Due in Part to a Documented Physician Shortage.

By:      Joshua C. Dickinson

The Iowa Court of Appeals recently held that a non-compete agreement was unenforceable because it was overly restrictive and against the public interest.  Board of Regents v. Warren, 2008 WL 5003750 (Iowa App. Nov. 26, 2008).  The non-compete agreement purported to restrict Dr.Warren from practicing medicine for two years within 50 miles of his former employer.

Dr. Warren was employed as an Associate Professor with the College of Medicine at the University of Iowa in the Department of Hematology/Oncology, a tenure track position.  Dr.Warren was expected to spend eighty percent of his time conducting research, and one day a week in clinical practice.  Dr.Warren also spent about two months each year covering for other physicians at the University of Iowa Hospitals and Clinics.

After four years as an associate professor, Dr.Warren realized he was not going to achieve tenure.  The University cut off his research funding and his supervisor suggested he take a full-time job as a clinical physician and become a clinical faculty member.  Dr.Warren, who wanted to pursue laboratory research, resigned his position.

Dr. Warren signed an employment agreement with a physician's group in Cedar Rapids, Iowa, within the fifty mile radius of Iowa City contemplated in the Non-Compete Agreement.  The University sought an injunction to prohibit Dr.Warren from practicing medicine in violation of the Non-Compete Agreement.  The district court denied the University's injunction request and the University appealed.

Under Iowa law, Non-Compete Agreements are reviewed using a reasonableness standard.  Three factors are considered in determining the enforceability of these agreements:  (1) whether the restriction is reasonably necessary for the protection of the employer's business; (2) whether it is unreasonably restrictive of the employee's rights; and (3) whether it is prejudicial to the public interest.  Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 761 (Iowa 1999). 

The Court of Appeals addressed these three factors.  First, the Court concluded the University failed to demonstrate that the restriction was reasonably necessary to protect the University's business because 80 percent of Dr.Warren's time was spent doing research.  In addition, Dr.Warren arranged to have all of his patients remain in the care of the clinic's physicians.  Second, the Court found the Agreement's two year and fifty mile restrictions were not unduly restrictive as to time and distance, but found the restriction overly broad because it restricted Dr.Warren from the practice of medicine generally, rather than just restricting him from practicing in his specialty.  Finally, the Court found that Cedar Rapids was underserved by physicians, a condition that would be exacerbated if Dr.Warren was restricted from treating cancer patients in Cedar Rapids.  After considering all three factors, the Court determined that the balancing test weighed in favor of Dr.Warren, concluding that enforcement of the Non-Compete Agreement would be unreasonable under the facts of the case.

This decision makes clear that Non-Compete Agreements are still viable in Iowa, if properly drafted.  The scope of an Agreement must be no broader than necessary to protect the interests of the employer while taking into account any possible prejudice to the public interest that may arise from enforcing the Non-Compete Agreement.