Connecticut Court Vacates Arbitration Award Enforcing Overbroad Physician Noncompete

The plaintiff physician challenging the noncompete was a shareholder and employee of a radiology practice. The plaintiff, along with his colleagues, participated in the sale of the radiology practice. As part of the transaction, the plaintiff received $2.3 million in cash proceeds and he and his colleagues became members of a new entity that held their rollover equity interests in the defendant company and its subsidiary. The noncompete was embedded in the LLC Agreement governing the new entity, which was a required condition of the transaction. There was no indication that the physician dissented from the sale or protested entering into the noncompete, and he was represented by national health care counsel throughout the transaction.

The physician first lost in arbitration after the arbitrator declared the noncompete provisions were “valid and binding” and ruled that his intended employment with another radiology practice would breach the LLC Agreement. Yet the physician ultimately prevailed on his motion to vacate under CT Gen Stat § 20-14p without any indication in the record suggesting that the physician would be required to forfeit any part of the consideration he received for selling his practice.

Background

• Joseph Sala, a Connecticut-licensed radiologist, is a shareholder and employee of Radiology Associates of Hartford (RAH). In March 2022, Sala and his colleagues executed a stock purchase agreement with the defendant, Premier Imaging Holdings (Premier), under which RAH was sold. Sala received $2.3 million in cash proceeds. Sala and his colleagues became members of the defendant RAH Equity Holdings, LLC (REH), a new entity that held their rollover equity interests in Premier.

• As part of the transaction, Sala and the other physicians executed an LLC Agreement in March 2022, becoming members of REH. The LLC Agreement included restrictive covenants, barring members from competing with REH within the defined territory for a restricted period that included the time of membership and for two years after. The defined territory covered specified hospitals and imaging centers, other facilities tied to RAH or its affiliates, and a 25-mile radius from those facilities.

• In June 2023, Sala gave notice that he was resigning effective June 2024 and intended to work for Radiologic Associates of Middletown immediately.

• In March 2024, almost a year after Sala submitted his resignation notice, the defendants served him with an arbitration demand seeking a declaration that the noncompete provision was enforceable and that Sala’s intended employment would breach the LLC Agreement.

• In August 2024, the arbitrator found that the LLC Agreement’s noncompete provision was “valid and binding” and Sala’s intended employment would breach the LLC Agreement.

• Sala applied to vacate the award, arguing that the arbitration ruling was unauthorized, disregarded CT Gen Stat § 20-14p, and violated the public policy embodied in CT Gen Stat § 20-14p, which prohibits:

  • any provision of an employment or other contract or agreement that creates or establishes a professional relationship with a physician and restricts the right of a physician to practice medicine in any geographic area of the state for any period of time after the termination or cessation of such partnership, employment or other professional relationship” where the restrictions exceed one year or cover more than 15 miles from the physician’s primary practice site.

• The trial court granted the application to vacate, concluding that the arbitrator failed to apply § 20-14p and the award violated its clear public policy.

• The defendants appealed arguing that the trial court improperly held that the award violated public policy.

Holding

• The Appellate Court held that the trial court properly granted Sala’s application to vacate the arbitration award, reasoning that the award enforced a restraint on Sala’s ability to practice radiology that exceeded both the temporal and geographic limits the Connecticut legislature deemed reasonable as a matter of public policy.

• Because judicial enforcement of that award would violate public policy, the Appellate Court affirmed the judgment vacating the award.

Analysis

• Although arbitration awards receive substantial deference from Connecticut courts, arbitration awards may be vacated when they violate clear public policy. Under the court’s two-step framework, the court first examined whether the award implicated a clear, well-defined public policy, and second whether the employment agreement and restrictive covenant as construed by the award violated public policy.

• Connecticut common law disfavors unreasonable restraints on trade, particularly where a noncompete harms both the restricted individual and the public.

• Even though Sala received substantial transaction consideration and became an owner of REH, the court focused on public policy and the statutory limits governing physician noncompetes, not whether the parties were sophisticated or whether consideration was adequate.

• The challenged restrictive covenant appeared in an LLC Agreement connected to a purchase of a business, not merely in a traditional employment agreement. The court determined that 20-14p would apply to an LLC agreement because the statute defines a physician “covenant not to compete” broadly. 

Key Takeaways

• Clear and unambiguous statutes restricting noncompetes may be enforced even where the employee or service provider challenging the covenant is sophisticated, highly compensated, represented by counsel, and may receive what appears to be a windfall given the substantial consideration from the transaction.

• Connecticut employers and buyers of medical practices should draft physician noncompetes within the one-year and 15-mile radius limits, where CT Gen Stat § 20-14p applies.

• In Connecticut, arbitration provisions will not protect overbroad physician noncompetes from judicial review where the resulting award enforces a covenant contrary to clear public policy.

ArentFox Schiff’s Trade Secrets, Noncompetes & Employee Mobility and Health Care teams will continue to monitor developments in this area. If you have any questions, please contact the authors.