1. When to Use an Exclusivity Agreement
2. Exclusive Contracts with Hospitals
3. Court Views on Hospital Exclusive Contracts
4. What's an “Incident to and Coterminous” Provision in Hospital Contracts?
5. Deceptive Value of an Exclusive Contract

An exclusive contract is between at least two parties, and it involves purchasing products from only one seller, making the seller the only provider of the goods. New business partnerships can provide new opportunities and bring in additional revenue.

It can also apply to other types of businesses where one company agrees to do business exclusively with one company. An example of an exclusive contract is NBC's contract to broadcast the Olympics in the United States. They paid several billion dollars to obtain exclusive rights to broadcast all games until 2020.

When to Use an Exclusivity Agreement

If you're forming a partnership that includes selling and buying products, you can use an exclusive contract to formulate the contract terms. Use this type of document in these situations:

  • If you will be the exclusive provider of specific products or services to a particular business.
  • You are looking to create a competitive advantage by reducing the number of business partners your contractors can do business with.
  • Someone has consented to provide exclusive products or services to your business.

With an exclusive contract, the buyer cannot solicit or obtain the seller's products from any other seller for the duration of the contract. By restricting who else is eligible to receive those products or services, it can help create a competitive advantage for the seller. These are often used in vertical seller/buyer situations.

Exclusive Contracts with Hospitals

Hospitals sometimes use exclusive agreements in contracting the management of the facility. Hospital boards of directors are afforded fairly broad discretion on how to manage the facility based on applicable corporate law principles. General principles are included in laws at both the federal and state levels, in addition to both related healthcare accreditation boards. The board's authority to enter into a contract on behalf of the hospital is granted by law, not medical staff bylaws.

Medical staff bylaws aren't the source for this authority, but they can affect the overall process and any subsequent consequences of entering into an exclusive contract. An example is when the bylaws detail the process for the Medical Executive Committee to review and add comments on service implications and clinical performance aspects of a potential exclusive agreement. The Medical Executive Committee's review and comments are strictly limited to the clinical performance aspects only. The actual terms, including the financial specifics, would never be disclosed to the committee.

Court Views on Hospital Exclusive Contracts

Some courts can view exclusive agreements as “quasi-legislative” actions rather than “adjudicatory” that is aimed at a specific physician which could give rise to a hearing. Provided the hospital board acts reasonably when utilizing these types of actions, the courts will typically defer back to the hospital board's recommendations and judgment.

What's an “Incident to and Coterminous” Provision in Hospital Contracts?

This provision is one that essentially says that a physician's appointment and clinical privileges to provide services under the exclusive agreement are “incident to and coterminous.” This means that if the exclusive contract is terminated and not renewed, both the physician's appointment and his or her clinical privileges will automatically expire. This will also apply if the physician opts to leave the group that has the contract. His or her privileges and appointment will automatically expire.

There is also a due process provision that applies in situations where a physician's professional conduct or his or her competence is called into question when an adverse action is reported to the National Practitioner Data Bank.

Deceptive Value of an Exclusive Contract

You need to create an incentive for the bigger party of any contract by structuring the deal so that at the contract's termination, there is still a minimum payment required if a threshold isn't met. This protects you, and the larger party has an additional incentive to uphold their end of the contract. If they are hesitant to commit, it is a sign that they don't have faith that they can deliver the value they promise.

A good rule of thumb is 20% of the initial agreement. If the minimum isn't enough to cover expenses or offset the costs of the exclusive contract, do not proceed with the deal. In the event you're a pre-revenue startup and the bigger party wants global exclusivity for a specified period of time, include a demand that they offer an equity investment which shows they are serious and committed to the agreement.

If you need help with an exclusive contract, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.