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Primer on Physician Non-Competes

Physicians practicing in Texas must comply with the Physician Non-Compete Statute. A physician’s non-compete must explicitly include a buyout provision and provide physicians with additional protections not applicable in a commercial setting. Various types of contracts incorporate a physician non-compete clause such as employment contracts, non-compete agreements, compensation agreements, and partnership agreements.

At Gardner Employment Law, we can help you navigate the complexities and restrictions in your physician non-compete agreement. If you need support with the terms of your physician non-compete agreement, contact us today.

What are Reasonable Physician Non-Compete Restrictions?

As with any non-compete agreement, Texas law requires the hospital or medical clinics to draft restrictions in reasonable terms. This reasonableness requirement applies to three components:

  1. The time period during which the restrictions apply;
  2. The geographical area where the restrictions apply;
  3. The scope of the activities covered, i.e., what activities the physician is prohibited from performing;

A reasonable non-compete agreement must allow physicians to continue to practice within their chosen specialty, especially if a community of patients could be at risk if the terms of the non-compete are too restrictive. For example, in Nacogdoches v. Pokala, the court rejected a non-compete based on an overbroad geographical restriction in the terms. The non-compete barred Dr. Pokala from practicing cardiology, despite the fact that it was his sole area of expertise and practice. The court deemed that Dr. Pokala’s services were necessary for the town’s overall health given that he served as a number of patient’s primary care physician.

The Physician Non-Compete Statute also requires that restrictions imposed on physicians are not more onerous than necessary to protect the hospital’s or clinic’s legitimate interests or goodwill.

Consider, for instance, if the hospital or clinic employs identical language in all physician non-competes but selectively enforces restrictions against some, but not all, departing physicians. This conduct suggests that the business interests or goodwill are not important enough to warrant protection. Previous non-enforcement can serve as evidence against the claim of “legitimate interest or goodwill” if a hospital or clinic threatens to enforce its non-compete against you. Otherwise, the hospital or clinic would have sought to enforce previous non-competes.

What is a Reasonable Price for a Buyout?

The Physician Non-Compete Statute allows physicians the option to buy out their non-compete agreement at a reasonable price but does not define or explain what is a fair amount that a physician can be required to pay. It stipulates that the non-compete agreement “must provide for a buyout of the covenant by the physician at a reasonable price.” So, what amount is reasonable?

The Texas Court of Appeals held in Sadler Clinic Ass’n v. Hart that “the ordinary meaning of price is not the same as that for damages.” Price, in this context, is the “amount of money or other consideration asked for or given in exchange for something else; the cost at which something is bought or sold.”

The Sadler opinion suggests that the buyout price should reflect the overall cost of acquiring the physician’s practice altogether. One method to determine the value of a physician’s practice would be the “book value,” encompassing assets, gross revenue generated by the physician minus liabilities, and the cost incurred to generate that revenue.

Notably, there are no other Texas cases explaining the concept of a “reasonable price” for a physician’s buyout. As of this article’s date, the Sadler case is the only opinion directly addressing this subject.

Other Protections: To Assure Continuity of Care

The remaining requirements in the Physician Non-Compete Statute emphasize that competition should not adversely affect healthcare, affirming physicians’ right to continue caring for his or her patients after departure from a hospital or clinic.

However, this physicians’ right creates a direct conflict with a hospital or clinic’s need to preserve its business and revenue stream, especially concerning patients whose medical bills contribute to the hospital or clinic’s income. Obviously, the hospital or clinic wants to retain those patients and the income that they represent.

The statute provides limited rights to the departing physician who has signed a non-compete agreement:

  • Access to medical records conditioned upon patient consent;
  • Access to a list of patients seen or treated within the previous year;
  • Ability to continue treating patients with an acute illness.

Upon leaving a practice, physician’s are entitled to inform patients of their new location if patients express a desire to remain under their care. However, physician’s are not permitted to use persuasive tactics to talk patients into leaving a hospital or clinic with them. Any clinic rule preventing a physician from treating patients who choose their services breaches the mandate of continuity of care mandate.

What Should Physicians Do Before Leaving?

These same restrictions and principles apply to all entities that provide health care: large hospitals, private practices, for-profit hospitals, and nonprofit hospitals. They hire lawyers to file suits to enforce their non-compete agreements.

How do you stay out of the courtroom if you have signed a non-compete? Before you even announce your departure, see an experienced non-compete lawyer to help guide you. At Gardner Employment Law, we have years of experience advising clients and litigating non-compete agreements. Give us a call today if you need assistance with your physician non-compete agreement.

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