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Are Physician Non-Competition Agreements in Texas in Danger?

12.09.13

Non-competition agreements can be an important tool to protect an employer from employees who attempt to use the knowledge they have gained for the benefit of a competitor. To be enforceable, these agreements must be necessary to protect legitimate business interests in addition to being reasonable in time, geographical area, and scope of activity.

As with most things, healthcare is different, and hospitals and other providers must play by different rules. Some states have taken the extreme position that physician non-competes are simply unenforceable, or that they are enforceable only in certain limited circumstances because of the importance of having physicians readily available for patients whenever and wherever they are needed. The Texas state legislature and courts have not taken that extreme step, but they have attempted to balance the public policy of access to medical care with the legitimate business considerations of healthcare providers.

Physician non-compete agreements must abide by the statutory requirements set forth in Texas Business & Commerce Code § 15.50. As a baseline, the statute requires all non-compete restrictions to be reasonable as to time, geographical area, and scope of activity. Additionally, the statute requires the non-compete provision to be “ancillary to or part of an otherwise enforceable agreement.” Employers considering a non-competition agreement should weigh several factors including whether they:

  • Have made a significant investment in recruiting the physician;
  • Will provide substantial resources that the physician will use;
  • Have built an established patient base and reputation or whether they are largely relying on the physician’s existing patient base; and
  • Have spent significant money advertising the practice.

Furthermore, the Texas non-compete statute forbids employers from denying departing physicians access to a list of their patients within the past year or access to the patients’ medical records. Physicians also cannot be prohibited from providing continuing care for any patients during the course of an “acute illness.” Finally, non-compete agreements for physicians must contain a “buyout” clause, which allows the physician to waive the non-compete for a pre-determined price, or have an arbitrator decide the reasonable price later.

Public Interest

The purpose of stricter requirements for physician non-compete agreements is to protect the public interest in obtaining competent and competitive healthcare, and Texas courts take this purpose seriously despite the absence of any such factor in the statutory text. A recent case highlights how unique factual circumstances can propel a court to invalidate a non-compete agreement that seems reasonable otherwise. In Nacogdoches Heart Clinic, P.A. v. Pokala, the appellate court in February 2013 upheld the lower court’s invalidation of a non-compete agreement involving a cardiologist. The agreement prohibited the cardiologist from practicing medicine within a ten-mile radius of the town. Because the town only had three cardiologists, the court held that the public interest in access to medical care and physician choice trumped the freedom to contract. In particular, the court found persuasive testimony that forcing the physician out of the city limits would have “destabilized the availability of cardiovascular care in Nacogdoches County.”

The takeaway from this case is that there is no one-size-fits-all approach to what constitutes reasonable restrictions on a physician’s practice. Every community, practice area, and market is different and must be considered when preparing the scope of the restrictions.

Buyout Clause

The statute gives the contracting parties the option of setting a pre-determined “buyout” price in lieu of arbitration, but the price must be reasonable at the time of the physician’s departure, or a court may invalidate the entire non-compete agreement. Fortunately, a recent Texas appellate decision held that arbitration can still be an option even if the “buyout” price is not reasonable. In January 2013, in Sadler Clinic Ass’n, P.A. v. Hart, the Texas Court of Appeals overturned a trial court’s decision to invalidate the entire non-compete agreement, ruling that the remedy for an unreasonable “buyout” price is to send it to arbitration instead.

If this holding is affirmed by the Texas Supreme Court, employers should feel more comfortable setting a “buyout” price on the high end, knowing that the option to arbitrate will likely be in their back pocket if a court finds the price unreasonable. This judicial remedy is in line with Texas case law; Texas courts generally attempt to reform, or “blue pencil,” an overly restrictive non-compete clause as opposed to invalidating the entire agreement.

Business Ownership Exception

In 2009, the Texas non-compete statute was amended to limit the scope of the physician-specific requirements. A new clause was added, stating that the physician-specific requirements do not apply to a physician’s “business ownership interest in a licensed hospital or licensed ambulatory surgical center.” Additionally, the pre-existing clause was amended to clarify that the physician-specific requirements only apply to non-compete agreements “relating to the practice of medicine.” These statutory amendments make it easier for employers to draft non-compete agreements that relate to an employed physician’s business investments. For example, a hospital seeking to prevent its physicians from owning a competing business interest in another licensed hospital can do so without having to offer a buyout provision.

The effective date of the statute is September 1, 2009. Non-compete agreements between a hospital and a physician formed before the effective date would likely have to offer a buyout provision as it relates to the physician’s business investments. Employers who formed non-compete agreements with physicians prior to September 1, 2009 should consider ratifying a new contract, even if the terms are the same, to take advantage of the new employer-friendly statutory protections.

Conclusion

This bulletin is intended to discuss a few important developments in physician non-competes in Texas. It should always be considered that courts will examine the specific factual circumstances of the physician/provider relationship to determine whether the agreement at issue is enforceable. A carefully drafted non-competition agreement that is in compliance with Texas law will give healthcare providers the greatest chance of being able to protect their interests if a competitive situation with a former employee arises.

John Park is a Labor and Employment partner at Waller practicing out of our Austin and Nashville offices. He is licensed in Texas and has represented national and local employers in matters involving federal and state employment laws. He has extensive experience enforcing, defending, and obtaining injunctive relief in non-compete and trade secret actions on behalf of employers. For additional information on non-competition agreements, contact John at john.park@wallerlaw.com or 615.850.8767.

 

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.