The Texas Covenant Not to Compete Act (the "Noncompete Act") has long provided that a noncompete agreement is enforceable "if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee."1 Without regard to the employment position or industry at issue, these are "Universal Requirements." However, there are additional criteria for a noncompete to be enforceable against a Texas-licensed physician. The covenant not to compete must:
- Not deny the physician access to a list of the patients he has seen or treated within one year prior to termination of the contract or employment;
- Provide access to his patients' medical records upon patient authorization and any copies of medical records for a reasonable fee as established by the Texas Medical Board under Section 159.008, Tex. Occ. Code;
- Provide that any access to the patient list or patient medical records after termination of the contract or employment shall not require them to be provided in a different format than that in which they are maintained except by mutual consent of the contracting parties;
- 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 the case of an inability to agree, an arbitrator of the court whose decision shall be binding on the parties; and
- Provide that the physician will not be prohibited from providing continuing care and treatment to a specific patient or patients during the course of an acute illness even after the contract or employment has been terminated (the "Physician Requirements").2
In recent years, the Texas Supreme Court has sought to clarify
when a noncompete agreement is enforceable in terms of the
Universal Requirements without particular regard to the industry at
issue.3 Accordingly, those cases have received a
lot of attention within the legal community and among employers
across all industries.
Those cases did not, however, involve the Physician
Requirements. Significantly, however, the Texas legislature
has now attempted to clarify when the Physician Requirements also
apply. Specifically, effective September 1, 2009, §
15.50(b) was amended to provide that its Physician Requirements
apply to a covenant not to compete "relating to the practice
of medicine". There is also a new subsection (c), which
expressly provides that the Physician Requirements do not apply
"to a physician's business ownership interest in a
licensed hospital or licensed ambulatory surgical
center."4
Prior to the amendments, it was unclear whether the Physician
Requirements must be included in a noncompete provision related to
a physician's business investments. Out of an abundance
of caution, many partnership agreements (or LLC agreements) to
which a physician is a party have included the Physician
Requirements in the noncompete provisions, even though they are
often nonsensical in the context of the physician's
relationship to the business. For example, a physician may
invest in a partnership or LLC that owns a surgical center where
the physician does not practice medicine or owns a medical
equipment leasing company. If he later withdraws from the
partnership or LLC, the Physician Requirements for his access to
patient lists or medical records would seem irrelevant.
Moreover, there is no reasonable basis for a withdrawing
physician-investor to be offered a buy-out of the noncompete in
either scenario. This is particularly evident when other
non-physician partners or members (if any) would not have the same
right to a buy-out of their noncompete.
Thus, while these amendments may have little, if any, significance
on the enforceability of existing noncompete agreements for
practicing physicians, they are quite significant for
physician-investors and those with whom they invest.
Notwithstanding, those who contract for medical services with or
employ practicing physicians, as well as practicing physicians
themselves, should at least be aware of the statutory
changes.
It should also be noted that subsection (c) currently exempts the
Physician Requirements in noncompete agreements for only those
physicians investing in licensed hospitals and licensed ambulatory
surgical centers. This narrow exemption has not yet been
interpreted by a Texas court, but it is difficult to see why other
similar investment vehicles for physicians should not enjoy the
same treatment. On the other hand, it begs the question of
whether this narrow exemption necessarily means that the Physician
Requirements must be included in a noncompete relating to a
physician's investment in other types of healthcare businesses,
such as sleep centers or imaging facilities, or businesses which
are not even in the healthcare industry.
Lastly, during the 81st Legislative Session, an attack was made on
the corporate practice of medicine doctrine
("CPOM"). The CPOM generally prohibits
non-physician individuals and non-physician-owned hospitals and
entities from practicing medicine and thus, from employing
physicians.5 The proposed legislation generally
sought to create exemptions from the CPOM for various types of
entities, so that they could hire physicians
directly.6 The attack had limited success.
However, should a future attack on the CPOM succeed, it could open
the door for physicians to invest in all types of facilities,
including "licensed hospitals" as contemplated by the
Noncompete Act, and for those "licensed hospitals" to
employ the physician as a provider. In that instance, the
hospital might seek to restrain the physician from competing in one
or both capacities. The interpretation of the Noncompete Act
in such a scenario may prove quite interesting.
Footnotes
1 Tex. Bus. & Comm. Code § 15.50(a).
2 Id., § 15.50(b).
3 See Mann Frankfort Stein & Lipp Advisors, Inc. v.
Fielding, 289 S.W.3d 844 (Tex. 2009); Alex Sheshunoff
Mgmt. v. Johnson, 209 S.W.3d 644 (Tex. 2006).
4 Tex. Bus. & Comm. Code § 15.50(c). The
amendments also change references to the "Texas State Board of
Medical Examiners" in the prior version to the "Texas
Medical Board."
5 See e.g., Tex. Occ. Code §§ 155.001,
164.052(8) and (17), 165.156. Special purpose statutes exempt
certain entities from the CPOM, such as government-owned and
not-for-profit hospitals.
6 See e.g., S.B. 1500, 81st Reg. Sess. (not passed);
S.B. 1705, 81st Reg. Sess. (passed); H.B. 4670, 81st Reg. Sess.
(not passed); H.B. 4730, 81st Reg. Sess. (passed).
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