Texas Physician Non-Compete Agreements Not One Size Fits All

Originally published by Alyson Brown.

Like any business that loses a key individual, hospitals and medical practice groups have an interest in retaining their customers (in this case, patients and referral sources) when a physician leaves the practice.

In Texas, unlike some other states, medical practices can protect that interest by entering into non-competition agreements that restrict a doctor from practicing medicine within a defined geographic area for a designated period after leaving the practice.

Because these agreements can impact doctor-patient relationships, Texas imposes additional requirements to create an enforceable physician non-compete agreement. These requirements are in addition to the general requirements that apply to all non-compete agreements in Texas.

Given the risks in signing and enforcing physician non-compete agreements, doctors and medical practices should consult with an experienced employment lawyer who has real expertise in the healthcare industry to ensure the agreement is enforceable and does not impermissibly interfere with the patient’s right to continuity of care.

General Requirements for Texas Non-Competes

A non-competition agreement generally restricts an employee’s ability to compete with a former employer by performing similar work in a defined geographic area for a fixed period after their employment ends. Under section 15.50 of the Texas Business and Commerce Code, a non-compete agreement is only enforceable if:

• it is “ancillary to or part of an otherwise enforceable agreement” entered into at the same time (such as an employment agreement); and
• it only contains limitations on the scope of work, duration, and geographic area that are “reasonable” and do not “impose a greater restraint than is necessary to protect the goodwill or other business interest” of the employer.

These requirements can be both technical and fact-specific, so it is important for employers to carefully draft non-competes to ensure they are not overbroad and unenforceable, and to tailor the agreement to the employee’s role, territory, and duties.

Special Requirements for Texas Physician Non-Competes

In addition to the general requirements above, Section 15.50 also imposes special requirements for physician non-competes. 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.

These additional requirements include:

• Access to patient lists – Non-competes must allow physicians to access lists of patients they have seen or treated within a year of employment contract termination.
• Access to medical records – Physicians must be provided access to medical records of their patients, upon patient authorization, and any copies of medical records for a reasonable fee, as established by the Texas State Board of Medical Examiners.
• Records format – Agreements must ensure any patient lists or medical records are in the same format as they were regularly maintained before providing them to an employee whose contract has been terminated (unless specified otherwise by mutual agreement).
• Buy-out option – Agreements must include provisions to provide physicians with the option to buy out the non-compete and a method for resolving disputes (i.e., arbitration).
• Continued care – Physician non-competes must not prohibit physicians to continue treating patients who suffer from acute illness after employment ends.

Stark Law Considerations for Physician Non-Competes

In drafting physician non-competes, Texas medical practices must also take heed of the “Stark Law”, 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 of particular relevance to Texas physician non-competes.

The regulation in question states that payments made by a hospital to a physician to induce her to join a medical practice in the geographic area served by the hospital do not create a “financial relationship” under the Stark Law, so long as certain criteria are met. Among the criteria are:

• a prohibition against the medical practice the physician is being recruited to join imposing restrictions that “unreasonably” limit her ability to practice medicine in the geographic area served by the hospital, and
• a prohibition against any violation of anti-kickback laws.

The first of these criteria, as interpreted by the federal Centers for Medicaid & Medicare Services (“CMS”), appears to permit a medical practice to require a recruited physician to enter into a non-compete provided it complies with the provisions of applicable state law. It remains possible, however, that federal and state laws may diverge in terms of what they treat as a “reasonable” non-compete restriction.

As for the second criterion, physicians and medical practices should be aware of its potential to conflict with the mandatory buyout provision that is required 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.

In addition to these requirements, there may also be fact-specific situations where arguments can be raised as to whether a physician non-compete is enforceable. This commonly involves arguing enforceability on public policy grounds, such as when smaller communities with limited options for medical care create greater leverage for allowing physicians to compete in a certain location, as compared to larger metro areas where multiple physicians offer services in multiple specialties.

Non-Compete Buyout Considerations

Many disputes arise over whether the required “buyout” price contained in a physician non-compete is “reasonable,” as required by the statute. To determine whether this element has been met, courts often use an analysis like the determination of whether a liquidated damages provision is enforceable.

Accordingly, the court will determine if the buyout price is reasonable by comparing it to an estimation of the employer’s forecasted lost profit if the physician were to violate the non-compete. Under this analysis, setting the buyout to be equal to the physician’s previous income, or to the yearly revenue generated by the physician, would be a mistake.

Instead, the buyout provision should contain a price that reflects the anticipated net loss by the employer if patients follow the departing physician to another healthcare facility. If the parties wish to avoid determining the price of the buyout at the time of contracting, then the statute allows for the amount to be determined through arbitration.

Non-Compete Interplay with Texas Medical Board Rules

In addition to the unique buyout provision, the rules specific to physician non-competes prohibit key restrictions usually sought in other industries. For example, most non-competes are designed to prevent former employees from soliciting and obtaining the business of the employer’s customers.

That means former employees are prohibited from retaining customer lists that would facilitate the easy solicitation of customers. But, in the healthcare context, not only does the statute require that the physician not be denied access to a patient list, but the physician is required by Texas Medical Board Rule 165.5 to send letters to all the patients treated in the last two years to notify them that the physician is no longer available.

Texas Medical Board Rule 165.5 also requires the healthcare facility to post a similar written notice on its premises to alert patients that the physician has left its practice and further instructing patients where and how they can obtain their medical records. Therefore, while most businesses handle an employee’s termination in a manner designed to most effectively retain the customer’s business, when a physician relocates, the rules are designed to put the patients’ interests first.

When drafting, enforcing, or defending non-competes for a physician, it is important to remember that, while the same rules apply as to other fields, there are additional requirements to enforcement and additional concerns to consider.

The healthcare industry is definitely a business in today’s economy, but the law still recognizes that it is different, and involves a type of relationship not typical in other areas that utilize non-compete agreements with its employees. The attorneys at Clouse Brown PLLC have extensive experience representing physicians, practice groups, hospitals, and other health care providers.

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