PE Hub published an article by Bass, Berry & Sims attorneys Angela Humphreys, Bob Horton and Lymari Cromwell highlighting the importance of understanding how to handle noncompete agreements in private equity (PE)-backed transactions involving physician practices.

“You’re acquiring a physician practice in one of ‘those’ states that prohibit noncompetes against physicians in the employment law context. But you still have a five-year noncompete in the purchase agreement, a noncompete with a two-year tail attached to the rollover equity, and you have chosen Delaware as governing law. All set – right? Not necessarily,” the authors said, before explaining some traps for the unwary when enforcing noncompetes in these deals.

First, it is important to be mindful of the purchase agreement scope and sunset. “Although courts are more likely to enforce a noncompete in a purchase agreement for the sale of a business, courts may limit enforcement to ownership or investment in a competing business rather than pure employment,” the attorneys said, adding that those restrictions typically sunset within five years of closing.

Investors should also understand that the governing law provisions agreed upon in the contracts may not be applied if the state in which the physician resides has a stronger connection to the contract than the state chosen for governing law, especially with the enforcement of noncompete provisions having significant variance from state to state. Arbitration provisions are helpful to curb this challenge as an arbitrator may be more likely to honor the choice of law agreement.

PE-backed investment introduces the option to enforce penalties that are often not available in traditional noncompete agreements, such as forfeiture of equity, or liquidated damages, and even some states with unfavorable restrictions on noncompetes will still enforce penalties for breach of contractually agreed upon noncompete terms.

Finally, as with traditional noncompete arrangements, investors should determine their real concerns and make sure the noncompete addresses those. For example, restricting future employment within a 25-mile radius may be enforceable, but if the provider’s is predominantly telehealth, it may not address the real concern.

The full article, “Understanding Noncompetes in PE Physician Practice Transactions,” was published on November 4 and is available to PE Hub Bronze (free) subscribers.