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Tuesday, August 4, 2020

What is a reasonable buyout? Update on physician non-compete agreements in Texas

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Here’s a scenario:

Dr. Smith is unhappy with his cardiology practice group,

Specialty PA, and wants to quit to set up his own practice. However, when Dr. Smith started with Specialty PA, he signed an employment agreement that included a non-compete agreement. Now he wants out of it, and some recently decided cases may help him out.

Texas hates any restraint on free trade. This sentiment was put into law when, in 1983, the Texas Free Enterprise and Antitrust Act was enacted and codified the rule that any contract which unreasonably restrains trade is unlawful. At the same time, Texas respects an individual’s right to contract and will generally uphold the agreements or contracts of consenting parties. So, how do Texas courts handle Dr. Smith’s non-compete agreement that restrains free trade but is a valid contract between the good doctor and Specialty, PA?

This conundrum caused the Legislature to pass the Covenants Not to Compete Act in 1989 in hopes of providing employees and employers guidelines for the allowable scope of non-competes. Though the Legislature legitimized non-competes through this act, courts are still wary about restraining trade and closely scrutinize employment agreements that contain non-competes. This is especially true for non-compete agreements that apply to physicians.

The Texas Business and Commerce Code governs the creation and enforceability of non-competes. Physician non-competes contain numerous additional requirements not necessary when applied to other occupations. Specifically, for a non-compete to be enforceable against a physician, it:

1. Cannot deny the physician access to a list of patients he/she has seen or treated within the past year;

2. Must allow access to medical records of the physician’s patients;

3. Must contain a buyout provision; and

4. Must not prohibit the physician from providing continuing care to a patient during the course of an acute illness.

At first glance, these requirements may look straightforward, but each has been tried and tested by Texas courts and arbitrators. A full-blown analysis of the intricacies and pitfalls of each requirement is beyond the scope of this article, but recent court decisions have given us some clarification as to the buyout provision requirement.

In case there was a question, the buyout provision is not optional!

Section 15.51(c) is a “savings clause” that allows a court to revise a non-compete agreement if it contains restrictions that are deemed unreasonable instead of voiding the entire non-compete. However, courts have recently found that this savings clause does not apply to section 15.50(b)(2) — requiring physician non-competes to contain a buyout provision. Simply put, if a physician non-compete does not contain a buyout provision, the non-compete is unenforceable.

What is a “reasonable” buyout?

In addition to ensuring that a buyout provision is included in the non-compete, the buyout provision must give a “reasonable price” or provide that the reasonable price will be determined by an arbitrator. The statute, however, does not define what makes a buyout price reasonable or at what point in time reasonableness is determined.

Having been involved in a number of cases in which a determination of a reasonable buyout was at issue, it is clear that courts consider different types of evidence, including the physician employee’s prior earnings, the number of patients seen by the physician and the profit generated therefrom, and the costs associated with recruiting/training a physician to replace the departing physician.

A recent Texas court decision has provided additional guidance on this issue by cautioning that “price” does not mean the same as “damages.” The Legislature’s choice of words in using “price” rather than “damages” or “lost profits” makes a difference in what will be deemed reasonable. In essence, while proof of damages may represent a reasonable buyout price, the two are not identical and evidence is still required to demonstrate that the buyout amount is reasonable.

When is “reasonableness” determined?

Another question that has recently been answered is, “Should the court determine reasonableness at the time of creation of the non-compete or when the physician leaves the employer?” A recent court of appeals decision definitively stated that when assessing the reasonableness of a buyout provision, the court is to look to reasonableness at the time of the non-compete’s creation, not at the time of enforcement. The court reasoned that when parties agree to a specific amount or formula to calculate a specific amount in a non-compete, that calculation remains, even though “intervening circumstances may make the amount seem unreasonable at the time the buyout provision is sought to be implemented.” The amount or calculation must remain because the statute “does not give the trial court authority to reform the price” regardless of whether the price becomes unreasonable at the time the buyout provision is enforced.

Conclusion

The largest takeaway from recent litigation on physician non-competes is that buyout provisions are absolutely vital. The specific price can be arbitrated if the non-compete is ever enforced,but without the option for the physician to buy his or her way out of the non-compete, it will be unenforceable.

David Speed and Timothy Davis are partners in the Employment Practice Group of Cantey Hanger LLP. They handle labor and employment matters, including workforce and workspace compliance, employee contracts and handbooks, and termination/whistleblower claims. For more information, call 817-877-2800 or visit www.canteyhanger.com.

This article is for information purposes only and is not intended to be legal advice or substitute for consulting an attorney. We recommend that you discuss your particular situation with your attorney when you need legal advice.

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