As with any business, medical practices and hospitals have a need to protect against unfair competition.
In Texas, medical practices can protect their interests by entering into a non-compete agreement with their physicians, restricting them from practicing medicine within a defined geographic area for a period of time after leaving the practice. Non-compete agreements are typically ancillary to the employment agreement.
To be enforceable under Texas law, these agreements must be drafted carefully, balancing the needs of the practice while not overly restricting a doctor’s ability to pursue their career.
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Patients often form strong relationships with their doctors. A non-compete agreement can help prevent a departing doctor from taking a significant number of patients with them to a new practice, which could hurt the original practice's business.
A non-compete agreement can also prohibit a departing physician from establishing a competing practice within a certain geographic area.
Because physician non-compete agreements can impact doctor-patient relationships, Texas Business and Commerce Code establishes special requirements for those agreements. These extra rules are designed to protect a patient's right to receive care from the doctor of their choice, no matter where or by whom the doctor is employed.
For example, physician non-compete agreements must permit the physician to continue treating any patients with acute illnesses after the contract or employment has terminated. Enforceable physician non-compete agreements also require practices to allow physicians to access a list of patients they have treated within one year of separation.
Unlike some states that ban them entirely, Texas allows physician non-compete agreements, but they must meet specific requirements to be enforceable.
A non-compete involving physicians is only enforceable if the following criteria are established:
Additionally, there are general requirements that must be met for the agreement to be enforceable. To be enforceable in Texas, a non-compete agreement must:
If a court deems any of these elements to be broader than necessary to protect the interests of the business, the court can reform or nullify the agreement.
Doctors and medical practices alike should consult with an experienced physician non-compete agreement lawyer before drafting or signing a physician employment agreement to discuss the general and special requirements in Texas.
When drafted and negotiated effectively, these agreements, and employment contracts in general, can sufficiently protect medical facilities without unfairly restricting the rights of physicians.
To speak with a lawyer about drafting or reviewing a physician non-compete agreement or any other physician employment agreement, call (713) 909-7323 or contact us online.
Per Texas law, a physician non-compete agreement must "provide for a buy-out of the covenant by the physician at a reasonable price or, at the option of either party, as determined by a mutually agreed upon arbitrator or, in case of an inability to agree, an arbitrator of the court whose decisions shall be binding on the parties."
This buy-out option allows a departing physician to essentially buy out of the restrictions imposed by a non-compete agreement. This is important because non-competes can restrict a physician's career opportunities. The buy-out option provides them with a way to escape those limitations if they're willing to pay the cost.
Often the amount of the buy-out can be significant or even exorbitant, and going through an arbiter can be an expensive solution. Instead, consider including a defined amount that is fair and reasonable in the agreement before the agreement is signed and executed.
What is a reasonable buy-out price?
At Hendershot Cowart, we have reviewed and negotiated physician employment agreements for more than 35 years. Our attorneys can advise you what is standard for your region and specialty.
No, a physician cannot be forced to buy out a non-compete agreement.
If a physician leaves the practice or hospital and wants to practice medicine in violation of the non-compete provision, the employer cannot force a buy-out. The employer can, however, ask the courts for an injunction to stop improper competitive activity and pursue a lawsuit to recover financial damages.
In addition to Texas Business and Commerce Code requirements, there may also be fact-specific situations where arguments can be raised as to whether or not a physician non-compete is enforceable on public policy grounds.
Public policy, in law, is simply defined as the commonsense principle that injury to the public good is a basis for denying the legality of a contract or other transaction. In certain situations, you can make an argument that the covenant not to compete is unenforceable on public policy grounds and, in Texas, at least one Court of Appeals has done so.
For example, physicians in smaller towns and communities where medical care is limited have a much stronger public policy argument that the non-compete is unenforceable, as opposed to those physicians in large metropolitan areas (such as the Medical Center in Houston with multiple doctors offering services in multiple specialties).
Texas medical practices must also take heed of the Stark Law when drafting physician non-compete and employment agreements. Stark Law is a federal law that generally prohibits medical providers from referring Medicare and Medicaid patients to facilities/service providers with which the providers have a financial relationship. The law has spawned a somewhat Byzantine set of federal regulations, one of which is relevant to Texas physician non-competes.
The regulation in question states that payments made by a hospital to a physician to induce her to relocate to the geographic area served by the hospital do not constitute a financial relationship under the Stark Law, so long as certain criteria are met:
The first of these criteria, as interpreted by the Centers for Medicaid & Medicare Services, appears to permit a medical practice to require physician non-compete agreements as long as they comply with applicable state laws. It remains possible, however, that there could be a divergence between what federal and state laws treat as a “reasonable” non-compete restriction.
As for the second criterion, physicians and medical practices should be aware of the potential to violate anti-kickback laws through the mandatory buyout provision (required to be included in a Texas physician non-compete agreement). For example, a buyout substantially below market price could be interpreted as a future inducement for the departing physician to refer patients to the practice, in violation of anti-kickback statutes.
As a firm that is equal parts business law and litigation and medical and healthcare law, Hendershot Cowart P.C. has earned a reputation for providing comprehensive legal counsel to physicians, hospitals, and other healthcare providers to protect their rights and interests – from medical practice setup and reviewing physician employment agreements to defense against regulatory investigations, audits, and enforcement.
We know physicians provide vital services, and we leverage our understanding of unique Texas laws to ensure their ability to provide care is not compromised by any restrictive covenants reached between practices and providers, while also working to ensure agreements that are reached are compliant and enforceable.
If you have questions about physician non-competes in Texas, enforcing or defending a contractual dispute, or the services our firm provides, please call (713) 909-7323 to speak with a member of our team.