Case Study: Mitigating Medical Practice Split Ups with Enforceable Agreements and Recordkeeping

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For medical practices, being prepared for the unexpected can help mitigate the fallout of disputes and practice split ups. That means ensuring all corporate documents are in order, key physician agreements such as non-competes are clear and enforceable, and that financial records are up-to-date and accurate.

In this case, our client’s employment and operating agreements – soundly structured by our Houston non-compete attorneys – along with careful recordkeeping practices proved instrumental in protecting his practice when his partner staged a coup.

Background: The Beginnings of a Medical Practice Split Up

Our client, the majority owner of a medical practice, worked with Hendershot Cowart P.C. to set up his private practice and governing documents. After several years, he recruited a young physician whom he compensated well – above and beyond what was provided for by the employment agreement – and eventually awarded the young physician a minority ownership interest in the practice.

Through the vision and diligent work of the founding member, the partners began to acquire other practices to utilize the Group Practice Exceptions under Stark Law and provide designated health services. With the help of our firm, a compliant and thriving group practice was structured from the purchase of many primary care family practices.

Unfortunately, our client’s minority-owner partner soon decided he wanted more.

In his efforts to wage a partnership dispute, our client’s partner recruited and convinced other physicians from the practice to breach their non-compete agreements and set up a competing group practice. The defecting group proactively filed suit to enjoin our client from filing suit for breach of the non-compete agreements included in their employment contracts. Their objective was to take the thriving practice and assets, into which our client had invested millions of dollars and countless hours, to set up a competing practice in the same geographic area.

Our client’s partner and his recruited physicians filed suit in state district court for:

  • Anti-suit injunction seeking to enjoin (stop) our client from suing his minority owner partner and his associates for breach of contract of the non-compete / employment agreement.
  • Breach of fiduciary duty and demanded an accounting, alleging that our client was using practice accounts to pay personal expenses.

The Strategy to Protect Our Client's Medical Practice

With the help of the in-house CPA, we were able to present clear and consistent financial records that accounted for every expense and transaction. Because the books and records were in good order, the presiding Judge knew a proper accounting had been done and took that into consideration when reviewing the case.

Our team was also able to quickly bring the appropriate expert on board and prepare a report within 14 days for the hearing. Expert witnesses provide critical testimony in physician non-compete disputes by opining as to the reasonableness of the scope, geographic area, and the duration of a non-compete.

In this case, our expert witness was able to testify that patients in our client’s municipality tend to stay close to home for treatment, thus demonstrating that setting up a competing practice within the same area would compete unfairly for the same patient population.

In addition to our expert’s testimony, the prevailing non-compete agreement (drafted by our firm) included language expressly stating that if a court determined the duration, geographic area, or scope of activity is too broad, the judge can reform it to what he / she believes is reasonable.

The Resolution: Mediating a Dispute Between Physician Partners

Language contained in the non-compete agreements and testimony from our expert helped secure a very favorable outcome for our client. Upholding the non-compete agreements required our client’s partner and his competing practice to move outside the restricted area thus protecting the original practice.

Given the records and books maintained by the practice, we were also able to have the accounting limited. The remaining claims for dissolution of the group practice were resolved through mediation, a form of alternate dispute resolution that can protect against unpredictable juries and produce binding and enforceable agreements.

Houston Attorneys for Health Care Providers

This case study serves to highlight the undeniable importance of having soundly structured governing documents and employment agreements in place before disputes arise. It also speaks to the importance of sound record-keeping practices, which can ensure that documentation can be immediately produced to verify the accuracy of accounting when needed.

Perhaps most importantly, it provides a lesson in the unpredictability that can come from entering into business relationships – even with those with whom you have a positive rapport in the early stages of a growing and successful enterprise.

Things do not always go as planned in the business world, which is why partners should always be looking to protect their interests, prevent business disputes, and mitigate potential problems at the outset of formation and partnerships. A proactive approach can make all the difference.

At Hendershot Cowart P.C., our business law and health law teams represent a range of clients across Texas in matters of business formation, employment and partnership agreements, and litigation. We are readily available to discuss how we can help you safeguard your health care practice or business against devastating litigation or regulatory actions.

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