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Breaking News: South Dakota Doctor Fighting Noncompete Clause

SoRelle, Ruth MPH

doi: 10.1097/01.EEM.0000410104.55474.8e
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On July 14, 2008, JoAnn Ormand, MD, a gastroenterologist at the Sanford Clinic in Sioux Falls, SD, was finishing up a busy day when an administrator at her multispecialty clinic handed her an envelope, and said her employment was terminated. The action was taken without notice or an opportunity to contest her dismissal, said her attorney John Hughes, also of Sioux Falls.

“They told her, ‘We will send your property to you, and you need to turn in your pager and keys,’” he said. Dr. Ormand had patients scheduled for endoscopies the next day, but the clinic was adamant that she leave immediately. And losing her job was only one of her worries. A noncompete clause in her contract restricted her from working within 20 miles of her office for two years.

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As emergency physicians know all too well, Dr. Ormand is not alone in facing this issue. As Howard Blumstein, MD, the president of the American Academy of Emergency Medicine, noted, this has always been a hot topic in emergency medicine. “Most emergency physicians with whom I speak seem to believe that this sort of thing can never happen to them,” he said.

Dr. Ormand sued, and over the next few years, the clinic moved to dismiss her complaint because it had released her from further obligation under the noncompete clause as of Sept. 8, 2009. She amended her suit, and because two of her complaints involved federal law, Sanford Clinic successfully petitioned to move the case to federal court, and filed a motion to dismiss the amended complaint, said Mr. Hughes. Dr. Ormand and her attorneys moved to have the case sent back to state court. The federal court voted to retain jurisdiction over the part of the case pertaining to equal pay and another part dealing with her gender. The rest went to the Second Judicial Circuit Court of South Dakota.

In a July 29, 2011, ruling, South Dakota Circuit Court Judge Douglas E. Hoffman ruled that the non-competition clause in the case violated state law because “it restricts the contracting physician's ability to continue treating his or her patients following termination.… After the physician is terminated, those patients that desire to continue their treatment with the physician would be forced to journey at least 20 miles from the office where they had previously sought medical care. This option would likely be impractical for certain patients, particularly those who are hospitalized or suffering from serious medical ailments. For these patients, the non-competition clause results in the abrupt-termination of an ongoing physician patient-relationship.

“In this way, the non-competition clause effectively-supplants the physician's independent judgment concerning the diagnosis and treatment of his or her patients. This is precisely the kind of lay interference with the physician's professional judgment that the prohibition of the corporate practice of medicine is designed to prevent. Thus, this Court finds that the non-competition clause contained in Section 18 of the Employment Agreement violates South Dakota law and is void.”

Some of the other issues Dr. Ormand raised in her complaint were denied and some affirmed by the appeal court, but the noncompete issue because of its more broad principles came to the fore.

Sanford Clinic asked that the noncompete portion of the ruling be made final so that it could appeal that part of the ruling to the state Supreme Court before the other issues in the case were considered. Representatives of the group would not speak to Emergency Medicine News. “The case is at the Supreme Court. Beyond this, we don't comment on cases involving employment or ongoing litigation,” said spokesman Darren Huber in an email.

Dr. Ormand's attorney said he hopes the matter can be taken to the state Supreme Court. “The issue is near and dear to Dr. Ormand's values, and she desires to make physician independence with respect to noncompetes a part of the law in South Dakota,” Mr. Hughes said.

Judge Hoffman's ruling was in keeping with the way Dr. Ormand wants to practice, he said. “South Dakota has for many years banned the corporate practice of medicine, and that statute required that medicine be practiced by individuals licensed as physicians, and has never been changed.” Changes to the law in recent years have-allowed-licensed physicians to enter into employment agreements in some instances, but affirmed the ban on the corporate practice of medicine.

“The statute passed in 1993 that allowed employment by non-physician-owned entities has a number of restrictions that prohibit either the agreement or relationship from in any manner directly or indirectly supplanting, diminishing or regulating the physician's independent judgment concerning the practice of medicine or diagnosis or management of any patient,” Mr. Hughes said.

The ruling by Judge Hoffman also said the matter could be taken up, even though Sanford Clinic said it would not enforce the noncompete clause a year after Dr. Ormand was terminated. While the trial court said the issue was moot because of that decision, Dr. Ormand and her attorneys amended the complaint to seek declaratory judgment that the clinic had engaged in the corporate practice of medicine. Dr. Hoffman said the issue was not moot for a number of reasons, among them that the issue was of “general public importance” because public policy restricts lay control over physician judgment and ensures public access to physicians. He noted that it was also likely that nonmedical corporations might enter into noncompete agreements in the future as well.

“[G]iven the public interests at stake, Defendant's voluntary release of Plaintiff from the non-competition agreement after this lawsuit was initiated should not deprive this Court of the power to hear and determine the merits of Plaintiff's claim,” Judge Hoffman wrote. “In the present case, Defendant's arguments at the hearing indicate that the corporation will continue engaging in the conduct that Plaintiff asserts is-illegal. Instead of affirming that its release of Plaintiff from the non-compete clause was an isolated occurrence, Defendant maintained that it has the right not only to subject its physicians to non-compete agreements, but also to release its physicians from non-compete agreements when the validity of the agreements are challenged in Court.”

Mr. Hughes said the judge agreed that terminating a physician in that manner and then requiring the physician to leave town or face legal action was basically void. “Honestly, I thought that was the law, but there'd never been a challenge at that level,” he said.

AAEM's Dr. Blumstein said this issue is likely to grow under the Accountable Care Organizations that are a part of health reform. “We believe that hospitals will be able to escape prohibition surrounding hiring and firing physicians,” he said. “They are going to be able to exercise direct control of physicians rather than the indirect control they exercise now through contract management groups. I think this is going to be an even bigger problem.”

Dr. Blumstein advises residents to cross out restrictive covenants such as noncompete clauses before they sign. “If they are an honest group and they are really not out to try to control you, they won't mind that you struck it out. If they do, think long and hard if they are as honest as you think,” he said.

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