Articles

Physician Non-Compete Covenants

Kathleen Quiroz and Jerry B. Cohen

M.D. News San Antonio (March 2009)

Non-compete covenants entered into in the context of an employment agreement purport to restrict the right of an employee (including physician owners and non-owners employed by a physician practice) to compete with his or her former practice after termination of the employment relationship. Given the complex legal and often emotional issues surrounding non-compete covenants, we frequently receive calls from physician practices or individual physicians regarding non-compete covenants. Should our group require one? Should I sign one? Are these things even enforceable?

The benefits of non-compete covenants for group practices are fairly obvious. No physician group likes the idea of investing time and money in recruiting and training a physician only to have that physician leave the group, take his or her patients and become the competition. Likewise, the concerns of the individual physician are equally obvious. No physician in a group likes the idea of building a practice, developing referral sources and nurturing a patient base only to be forced, upon leaving the group, to relocate his or her practice outside of a defined restricted territory that could be so distant from his or her prior practice location that the physician’s referral sources and patient base may be unlikely to follow.

The General Rule
As a general rule, a non-compete covenant, if correctly structured and reasonable in its terms, is enforceable, even against a physician. Group practices and other employers should understand, however, that non-compete covenants are tightly regulated and the specific prohibitions imposed on an employee’s ability to work must fit within a statutory framework, as interpreted from time to time by state courts.

Statutory Framework
The Texas Business and Commerce Code contains provisions dealing generally with all non-compete covenants and specifically with those applicable to physicians. Under the general statutory provisions, non-compete covenants, regardless of whether in an employment agreement or other type of contract, are deemed to be enforceable only if its terms satisfy all of the following requirements:

(a) The non-compete covenant is ancillary to or part of an otherwise enforceable agreement;

(b) The non-compete covenant does not impose unreasonable restraints as to the time or duration of the restrictions, the geographic area within which the restrictions apply, and the type or scope of the activity to be restricted; and

(c) The non-compete covenant does not impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer or other promisee.

Judicial Clarification
Prior to 2006, non-compete covenants set forth in employment agreements were difficult to enforce because many courts found that they were not ancillary to or part of an otherwise enforceable agreement. Because of the “at-will” nature of most Texas employment relationships, courts were apt to find that employment agreements did not qualify as “an otherwise enforceable agreement” since employers could avoid their obligations by terminating the “at-will” employment relationship at any time.

In 2006, the Texas Supreme Court reexamined this issue and held that an employer’s non-monetary future promises or obligations within an employment agreement could provide the basis for “an otherwise enforceable agreement” if the employer actually follows through on the stated obligations or other promise. Even after this decision, however, the non-monetary consideration to be provided by the employer to the employee, such as additional training or access to confidential information, must be related to the employer’s interest in restraining the employee. Therefore, for example, an employer could assert the need for a non-compete covenant following termination to protect its interest in its confidential information that was provided to the departing physician during his or her tenure.

Statutory Framework Applicable to Physician Covenants
In addition to the generally applicable statutory requirements described above, Texas law further provides that a non-compete covenant applicable to a physician is enforceable only if its terms satisfy the following additional requirements:

(a) The non-compete covenant (i) must not deny the physician access to a list of his or her patients seen or treated within one year of termination, (ii) must allow access to the medical records of such physician’s patients upon authorization of the patient and payment of a reasonable copying fee, and (iii) must not require that a patient list or medical records be provided in a non-typical format, except by mutual consent of the parties to the contract;

(b) The non-compete covenant must allow the physician an opportunity to buy-out of the covenant at a reasonable price; and

(c) The non-compete covenant must not prohibit the physician from providing continuing care and treatment to a specific patient during an acute illness, even after the contract or employment has been terminated.

Judicial Reformation
Under Texas law, if a non-compete covenant is ancillary to an employment agreement, the party seeking to enforce the covenant (e.g., the employer) has the burden of establishing that the covenant meets the criteria discussed above. However, the failure of a non-compete covenant to satisfy one or more of these criteria does not necessarily mean that the covenant will be unenforceable. Instead, under Texas law, a court is permitted to reform or revise a non-compete covenant that is found to be unreasonable as to its duration, its geographic scope or its scope of restrained activity, or that otherwise imposes a greater restraint than is necessary to protect the goodwill or other business interest of the employer. In these cases, the court may itself modify the covenant as necessary to make the offending provision reasonable and then enforce the non-compete covenant as judicially revised.

Wait A Minute . . . Don’t Forget Stark Law
Having satisfied all of the requirements of state law reviewed above, physicians and physician groups need to consider whether the federal physician self-referral prohibitions commonly known as the Stark law might prohibit the use of a non-compete covenant at all. The federal regulations interpreting the Stark law include a specific exception for payments made by a hospital to a physician or physician group in connection with a recruiting agreement entered into with a new physician or the group hiring that physician. This exception recognizes the benefit of recruiting agreements in attracting physicians to potentially underserved areas but requires, among other things, that the physician remain in the area to which he or she was recruited as a condition of receiving payment under the recruiting agreement.

Given the regulatory requirement under the Stark law that physicians entering recruiting agreements with hospitals remain in the hospital’s geographic area for a specified period of time, the regulations establishing this Stark law exception prohibit a physician practice from imposing “restrictions that unreasonably restrict [a] recruited physician’s ability to practice medicine in the geographic area served by the hospital.” Thus, notwithstanding state law, if a physician is a party to or the subject of a recruiting agreement with a hospital, that physician may not be subject to a non-compete covenant for the period during which the physician is required to remain in that hospital’s geographic service area.

Final Thoughts
Given the complex state statutes, the overlay of judicial interpretation and the perhaps unexpected intrusion of the Stark laws and regulations, it seems no wonder that physician non-compete covenants continue to be the subject of so much inquiry. Ultimately, any non-compete covenant must satisfy the federal and state legal requirements described above. However, to be truly effective, a non-compete covenant also must both protect the business interests of the group practice as well as address the individual professional and personal concerns of the employed physician.

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Jerry B. Cohen and Kathleen Quiroz are Shareholders with Oppenheimer, Blend, Harrison and Tate, Inc. - a top ranked Health Care law firm in San Antonio and Kerrville. Collectively, they have served Corporate and Health Care clients for 38 years and have been recognized by their peers in the legal industry as leading attorneys at both the local and national level. You can reach the Health Care Practice of Oppenheimer, Blend, Harrison and Tate, Inc. at 210.224.2000.

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