Like many businesses, medical practices have an interest in retaining their customers (which is to say, patients) when a physician leaves the practice. In Texas (unlike some other states), medical practices can protect that interest by entering into a non-compete agreement with their doctors, restricting them from practicing medicine within a defined geographic area for a period of time after leaving the practice.
Because physician non-compete agreements can impact doctor-patient relationships, Texas law establishes special requirements for those agreements. These requirements are in addition to the limitations that generally apply to all non-compete agreements under Texas law.
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.
General Requirements for Texas Non-Competes
Physician non-compete agreements, or restrictive covenant clauses, protect health care organizations and the rights of individual practitioners at the same time. Non-competes allow hospitals and offices to safely invest in new doctors and specialists, while practitioners receive legal protections to continue practicing medicine after leaving their hospital or surgical center.
However, non-competes are only useful and beneficial if they are enforceable. Expertly crafted non-compete agreements are reasonable in terms of scope, location, and length of time, while providing value to both parties. If a non-compete is not enforceable, then it has no effect—and it puts both parties’ revenues and rights at risk.
For medical professionals and their patients, the stakes are even higher. Therefore, physician non-competes are subject to stronger regulations—and why physicians and hospitals turn to medical law attorneys to review their employment contracts.
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.
A non-competition agreement generally restricts a person's ability to compete with her former employer by doing a particular type of work in a defined geographic area for a fixed period of time after her employment ends. Because this sort of agreement impacts a person's ability to earn a living, many states, including Texas, place general limitations on their enforceability.
Special Requirements for Texas Physician Non-Competes
In addition to the general requirements above, the Texas Business and Commerce Code 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 his choice, no matter where or by whom the doctor is employed.
The extra requirements for physician non-compete agreements under Texas law are:
- The non-compete must not deny a physician access to a list of the patients she has treated in the year preceding her separation from the practice.
- It must provide the physician reasonable access, upon patient consent, to her patient's medical records.
- Except upon mutual consent of the parties, it must allow for the patient lists and records above to be accessible to the physician in the format in which they are kept in the ordinary course of business of the medical practice.
- It must contain a provision allowing for the buyout of the non-compete at a reasonable price, or, upon mutual consent, for a price set by a neutral third party.
- It must permit the physician to continue treating any of her patients with acute illnesses even after her contract or employment has terminated.
When drafted and negotiated effectively and through the careful insight and attention of a skilled non-compete attorneys, these agreements and employment contracts in general can sufficiently protect medical facilities without unfairly restricting the rights of physicians.
Can a Physician Non-Compete Agreement Be Voided on Public Policy Grounds?
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).
Are Physician Non-Compete Clauses Enforceable in Texas?
The foundation of any restrictive covenant clause, including a non-compete, is enforceability. This is contingent on consideration of both parties and the value each is provided, meeting applicable requirements, and crafting clear terms. Agreements that overreach in reasonableness or are constructed too broadly risk not being enforce by the court.
That’s why it behooves every business – especially hospitals that are subject to unique non-compete restrictions – to have an attorney review and strengthen their employment contracts. By constructing contracts and clauses tailored to their needs, employers can ensure stronger protection over trade secrets, patient relationships, and market share.
Stark Law Considerations When Drafting Physician Non-Compete Agreements
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 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 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 medical practice may not impose restrictions that "unreasonably" limit her ability to practice medicine in the geographic area served by the hospital, and
- The parties may not violate anti-kickback laws.
The first of these criteria, as interpreted by the Centers for Medicaid & Medicare Services (CMS), 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.
Experienced Health Care Attorneys Can Help
As a firm that is equal parts business law and litigation and medical and health care law, Hendershot Cowart P.C. has earned a reputation for providing comprehensive legal counsel to physicians, hospitals, and other health care 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.