Warning: Know What You Sign

Restrictive Noncompete Clauses Can Ruin You

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Law Feature – February 2011

Tex Med. 2011;107(2):33-35.

By Crystal Conde
Associate Editor 

Physicians who sign employment arrangements, listen up. A majority of employment contracts have provisions known as covenants not to compete, or noncompete clauses, which prevent you from competing with your former employer if you decide to leave and open a practice somewhere else.

Legal experts urge physicians to take these covenants seriously. They are frequently enforced under Texas law.

The Texas Covenants Not to Compete Act sets the criteria for the enforceability of the covenants.

The law says noncompete clauses are enforceable if they contain reasonable limits on when, where, and how a physician can establish a new practice. For example, an overly restrictive noncompete clause could unreasonably limit the geographic area in which the physician can establish a new practice, prohibit him or her from opening a practice for more than two years, or require an unreasonably high buyout amount that prevents the physician from competing, according to Mike Kreager, JD, a San Antonio attorney who represents physicians and health care entities.

Mr. Kreager says physicians must understand the noncompete clause in contracts before signing them. He has received more phone calls from physicians about restrictive noncompete clauses because hospitals and other health care groups are stepping up their purchase of medical practices. He urges physicians to have an attorney look over contracts before signing them.

"Physicians may not think about the covenant not to compete when they sign a contract, but when they're unhappy and trying to leave, it's a nightmare," he said.

Bruce Levy, MD, JD, chief executive officer of Austin Gastroenterology PA, says his group has never had disputes over covenants not to compete in employment contracts with physicians.

"I believe noncompete clauses are only worthwhile if they're reasonable. They should be fair on both sides," Dr. Levy said. "In our group, the noncompete clauses are protective to both sides and don't include onerous provisions."

A Texas Medical Association Board of Councilors opinion says covenants disrupt continuity of care, deprive the public of medical services, and restrict competition. The board discourages any agreement that limits a physician's right to practice medicine, and considers such covenants unethical if the geographic scope or duration specified is unreasonable.

The Board of Councilors says physicians should not be subject to a lawsuit for violating a noncompete clause if they continue to treat patients they believe will suffer if they stop seeing them.

The American Medical Association's policy on restrictive covenants is similar to that of TMA's Board of Councilors. It specifies that such covenants are unethical if they fail to allow patients to choose their own physician.

Noncompete Clauses Are Enforceable 

Austin Gastroenterology is an independent group of 24 physicians practicing in several Central Texas locations. Fortunately, Dr. Levy says, it has never had to enforce a noncompete clause because all the physicians who've joined the group have either subsequently become partners or are employees presently.

"Our physicians find the clauses reasonable. We've never had complaints from any employees," he said.

Not all groups are so lucky.   

Bob Corrigan, JD, a partner in Fulbright & Jaworski's Houston office, represents hospitals, medical schools, physician groups, and other health care professionals in business and regulatory matters.

When there is a dispute over a noncompete clause, Mr. Corrigan says, a judge first looks at the clause to determine if it meets the requirements of Section 15.50 of the Covenants Not to Compete Act.

"Assuming the contract meets the legal requirements, you'll see the judge look at geographic scope and the time period stipulated. The law provides that the judge can rewrite the provisions if he or she deems it appropriate. The judge can redraw the geographic scope and time period or can declare the covenant invalid," he said.

Section 15.50 says, generally, the covenants are enforceable against a Texas physician if they:  

  • Allow a physician access to patients' medical records;
  • Allow a physician access to a list of patients seen within one year after the contract or employment is terminated;
  • Include a reasonable buyout; and
  • Do not prohibit a physician from caring for a patient during an acute illness, even after the employment is terminated. 

Mr. Corrigan says the issue of noncompete clauses traditionally surfaces in employment contracts and when a health care system purchases a physician's practice.

"It's going to become increasingly important that health care systems, in providing integrated care, use covenants not to compete to protect the value of their investments in developing a medical home," he said. "For example, when a hospital or medical group hires a doctor out of residency and covers his or her expenses while developing a practice with a medical home model, there's value in each patient. If that physician can leave and set up shop across the street, the hospital or group will lose the value of its investment."

He advises physicians "to be willing to accept the terms of the covenant at the front end, or don't sign the contract. Don't assume it's unenforceable or can be redrawn later. That's an expensive process."

Physicians Can Negotiate  

According to an article Mr. Kreager wrote for the spring 2009 edition of the Baylor Law Review, a buyout covenant "allows a physician to purchase his or her freedom to compete with a former employer by paying a reasonable amount."

Texas is the only state to grant physicians the right to buy out the covenant.

Mr. Kreager explains that Texas law gives physicians two options. Physicians and employers can stipulate the specific amount of buyout in the contract or let an arbitrator decide the amount when the physician leaves.

Mr. Kreager says he's on the fence regarding which option is best.

"If a physician has a stipulated buyout covenant, that doctor at least knows the price to leave the practice. With an arbitration buyout covenant, the amount might be less than what it would have been in a stipulated buyout covenant, but it could take months and a lot of expense for a physician and the group to come to an agreement," he said.

Mr. Kreager says sometimes the buyout amount is the physician's first year's wages or how much he or she was paid in the immediate preceding year before leaving.

"To me, the tragedy of the buyout is it typically doesn't work in practice because the number is so high the doctor can't pay it. If there's a disagreement on what it should be, a lot of resources go into determining the amount. The system is biased against the departing physicians because they have the fewest resources," Mr. Kreager said.

Michael Stern, JD, CPA, has reviewed physician employment contracts for more than 10 years. He says a majority of such contracts include noncompete clauses.

Mr. Stern has seen buyouts range from $150,000 to $500,000. He says the geographic area in noncompete clauses can vary from five miles for primary care physicians to a much broader area for specialists.

Mr. Kreager encourages physicians to estimate what they will earn in net profit for the practice and use that number in contract negotiations. Physicians may also negotiate the time period the covenants cover.

"It's important that physicians try to negotiate a one-year deal. Geographic area is also important. When physicians are deciding on the distance that should be included in the contract, they should look at where most of the patients come from. If most patients are within a three-mile radius, it's ridiculous to have a 15-mile radius specified in the contract," he said.

Mr. Stern says smaller employers are more willing to negotiate with physicians. He also evaluates employment contracts and gives physicians an analysis highlighting any concerns. If he identifies provisions that need revising, he includes suggested language in his review. Physicians can then return to the employer armed with a starting point for negotiations.

Employment Temporary for Most Doctors 

Texas law prohibits the corporate practice of medicine. The Texas Medical Practice Act and Texas Occupations Code prevent physicians from entering into partnerships, employee relationships, fee splitting, or other situations in which a nonphysician controls the practice of medicine.

While many physicians start out practicing with established medical groups, they may not remain there as employees. Preliminary results from the 2010 TMA Physician Survey indicate a majority of physicians eventually become full or part owners of a medical practice. (See Confused, Frustrated, and Broke," January 2011 Texas Medicine, pages 20-37.) Physicians should pay close attention to the noncompete clauses included in their employment contracts, as they affect their ability to leave their current work environment.

Survey results show 47 percent of physicians find it most desirable for most new physicians to start out in an established physician practice with a subsequent option to buy into ownership. Thirteen percent of respondents find it most desirable for most new physicians to start in a nonprofit health corporation (NPHC) run by physicians.

An NPHC is set up in such a way that physicians control all medical decisions and are employees of the nonprofit entity, not the corporate owner. TMA prefers creating a NPHC to hire physicians over requiring them to answer directly to a corporate nonphysician employer.

Eleven percent of physicians rate the ability for most new physicians to immediately buy into an established medical practice as most desirable, followed by working in a solo practice (10 percent) and employment by a hospital (4 percent).

In addition, preliminary survey data reveal 67 percent of respondents aged 40 years and younger and 65 percent of those aged 41 to 50 began as group practice employees. On the contrary, older physicians are more likely to have started as practice owners. Data show 44 percent of respondents aged 51 to 60 and 55 percent of those aged 61 and older started as practice owners.

Survey results point to a trend in practice setting preference that began in the early 1980s. Since that time, the number of new physicians who start practice as an owner of a solo or group practice has declined. That trend hasn't resulted in a commensurate increase in the number of physicians currently employed, however, because the majority of physicians don't stay permanently in those employment situations.  

Crystal Conde can be reached by telephone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by e-mail.

Legal articles in Texas Medicine are intended to help physicians understand the law by providing legal information on selected topics. These articles are published with the understanding that TMA is not engaged in providing legal advice. When dealing with specific legal matters, readers should seek assistance from their attorneys.   


TMA Helps With Employment Contracts

TMA offers an Employed Physicians webinar that features an overview of physician employment trends in Texas and discussion of factors to consider before signing an employment agreement.

Physicians can earn 1 AMA PRA Category 1 CreditTM for completing the webinar.

To register for the webinar, visit TMA's Distance Learning Center online.

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