Facts
- Valley Medical Specialists (VMS), an Arizona professional corporation, employed Dr. Steven S. Farber, an internist and pulmonologist who treated AIDS/HIV patients and performed lung-cancer brachytherapy.
- Farber later became a shareholder and minority officer/director of VMS.
- In 1991, Farber and VMS entered an employment agreement containing a restrictive covenant, amended over time.
- At Farber’s departure in 1994, the covenant barred him for three years from competing in the “practice of medicine” within a five-mile radius of any VMS location and prohibited solicitation of VMS patients.
- After resigning, Farber practiced within the restricted area and treated former VMS patients.
- VMS sued for injunctive relief to enforce the covenant and restrict Farber’s practice and treatment of certain patients.
Issues
- Whether a physician noncompetition covenant in an employment agreement was enforceable under Arizona law in light of reasonableness limits and public policy affecting patient choice and continuity of care.
- Whether the covenant was overbroad as to duration, geographic scope, and scope of prohibited medical practice.
- Whether a court could enforce the covenant by judicial modification, or whether such modification would impermissibly rewrite the parties’ contract.
Decision
- The Arizona Supreme Court held the restrictive covenant unenforceable.
- The court vacated the court of appeals’ decision that had enforced the covenant after modification.
- The court affirmed the trial court’s denial of an injunction.
- The case was remanded for resolution of remaining issues not addressed.
Legal Principles
- Post-employment restraints are disfavored and must be no broader than necessary to protect an employer’s legitimate interests (such as protecting confidential information or relationships developed through employment), not merely to prevent ordinary competition.
- In the medical context, noncompetition restraints are subject to especially strict scrutiny because they affect third parties and can impair patient choice and continuity of care.
- Reasonableness is evaluated by examining time, geographic reach, and the scope of prohibited activities; a covenant extending beyond what is necessary to protect legitimate interests is unenforceable.
- Courts may strike grammatically severable overbroad terms (limited “blue pencil” authority) but may not rewrite an overreaching covenant by supplying new substantive limitations.
Conclusion
The court refused to enforce VMS’s physician noncompete because its breadth in duration, territory, and scope of medical practice, combined with the impact on the physician–patient relationship, made public policy concerns outweigh any protectable interests asserted by the employer.