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Covenants not to compete

May 2015
By Mark Phelps, Esq., Armstrong & Associates

Hospitals continue to recruit primary care as well as specialist doctors for salaried positions in record numbers. A properly negotiated employment contract can generate income ranging from $200,000 to $225,000 for Internal Medicine specialists; from $388,000 to $482,000 for Invasive Cardiology; and, from $439,000 to $568,000 in Orthopedic Surgery. A written employment contract is essential to define the duties and responsibilities between the Employer and the Employee. This article covers the all-important covenant not to compete and how it applies to physician contracts.

A covenant not to compete is sometimes referred to as a noncompetition agreement. In essence, a promise is made contractually not to compete with a person or business entity “within prescribed limitations as to time, location, and scope of activity”. Tex. Bus. & Com. Code § 15.50 (a).

Covenants not to compete in physician employment contracts are regulated by Tex. Bus. & Com. Code § 15.50 et seq. The key to enforceability for the covenant not to compete is not only that it have reasonable limitations as to time, geographical area, and scope of activity, but it should also be ancillary to or part of an enforceable contract. Tex. Bus. & Com. Code § 15.50 (a).

In Texas, there are specific requirements for a covenant not to compete to be enforceable against a physician licensed by the Texas Medical Board. Tex. Bus. & Com. Code § 15.50 (b).

The covenant must “not deny the physician access to a list of his patients whom he had seen or treated within one year of termination of the contract or employment”. Tex. Bus. & Com. Code § 15.50 (b) (1) (A). Secondly, the covenant must “provide access to medical records of the physician’s patients upon authorization of the patient and any copies of medical records for a reasonable fee as established by the Texas Medical Board under” Tex. Occ. Code § 159.008. Tex. Bus. & Com. Code § 15.50 (b) (1) (B).

Thirdly, the covenant must “provide that any access to a list of patients or to patients’ medical records after termination of the contract or employment shall not require such list or records to be provided in a format different than that by which such records are maintained except by mutual consent of the parties to the contract”. Tex. Bus. & Com. Code § 15.50 (b) (1) (C). A statutory uniqueness to Texas is the buyout provision for a covenant not to compete. The buyout of the covenant must be at a reasonable price, or as determined by a mutually agreed on arbitrator or a court appointed one. Tex. Bus. & Com. Code § 15.50 (b) (2). Without the buyout provision, Texas Appellate courts have determined that the covenant not to compete is unenforceable. Greenville Surgery Center, Ltd. v. Beebe, 320 S.W.3d 850, 852–853 (Tex. App.—Dallas 2010, no pet.).

Physicians also must be provided the ability to provide continuing care and treatment of patients in the course of acute illness after the contract has been terminated by the covenant. Tex. Bus. & Com. Code § 15.50 (b) (3).

A physician’s business ownership interest in a licensed hospital or licensed ambulatory surgical center are not regulated by Tex. Bus. & Com. Code § 15.50 et seq. It is imperative that an experienced attorney be used for the construction, interpretation, and negotiation of severance from such complicated issues as a covenant not to compete.