Time to Dust Off Colorado Physician Liquidated Damage Provisions

By: Gillian McKean Bidgood

Many Colorado physician employment agreements and equity agreements require physicians to pay liquidated damages if the physician competes with his/her former employer after leaving the organization.  The payment of damages are a work-around of the Colorado statute on restrictive covenants, which provides that a physician cannot be prevented from practicing through a restrictive covenant, but permits an organization to require a physician to pay for damages caused by termination of the employment or equity agreement, including damages caused by competition. Two recent legal developments suggest that health care organizations should take a look at their agreements that contain damages provisions for Colorado physicians. 

1. On March 8, 2018, a division of Colorado’s Court of Appeals announced a decision criticizing a physician liquidated damage provision.  Crocker v. Greater Colorado Anesthesia, P.C., 2018COA33.    Specifically, the decision stated that because Colorado’s statute provides that physicians can be required to pay damages “related to the injury suffered,” a liquidated damages provision must be reasonable compared to the actual damages experienced after the physician’s departure and competition.  In other words, the decision stated that, unlike other liquidated damage provisions, courts should not assess whether the liquidated damage provision was reasonable when signed, but whether the liquidated damage provision is reasonable at the time of enforcement and in comparison to actual damages experienced.  Importantly, the decision did not state that physician liquidated damages provisions are categorically unenforceable.  Moreover, there are grounds for later courts to conclude these statements are non-binding dicta.  Nevertheless, the decision highlights an issue that is likely to be raised in future cases and should prompt health care organizations to act.

2. Effective April 2, 2018, the legislature amended Colorado’s statute on restrictive covenants to ensure access to care for patients with rare disorders.  As a result of this amendment, physicians are permitted to notify and continue to treat or consult for patients with rare disorders when they leave one organization for another.  Additionally, the statute protects physicians and the organizations that employ them from paying damages for notifying and providing treatment or consultations for patients with rare disorders.  Rather than defining criteria for rare disorders, the statute uses a list compiled and maintained by the National Organization for Rare Disorders, Inc. 

In response to these developments health care organizations should take the following steps:

  • Review the method used when setting the liquidated damages formula or amount. Assess with experienced counsel whether it demonstrates a desire to and is an attempt to reach an amount that is reasonably related to actual damages.

  • Test the liquidated damage formula or amount against actual experience to assess whether the amount is reasonably related to actual damages.

  • Review accounting and other administrative procedures with experienced counsel to ensure that the organization will be able to prove any  actual damages suffered.

  • Assess with experienced counsel whether the liquidated damages formula or amount should be revised in light of the rare conditions amendment.

Evaluate whether training should be provided to physicians and administration about revisions to the liquidated damage provisions and the rare conditions amendment.