By Stephen J. Roppolo, Regional Managing Partner, and Brett Holubeck, Associate, Fisher Phillips
Non-competition agreements are becoming much more common in the health care industry for doctors, medical salespersons, and numerous other employees. In Texas, there are a number of considerations for these agreements. But many doctors and even health care businesses fail to understand how these agreements work.
Of course, non-competition agreements serve a critical function within the industry for a number of reasons. For medical salespersons, the need to protect businesses from a salesperson competing with them by joining a new venture and taking clients with them is obvious. For doctors and high-level medical professionals, the reasons are most obvious for professionals that join an existing practice. For example, an OBGYN practice may hire a doctor that does not have a practice of their own. That doctor may gain relationships with current patients of the clinic who may seek to follow the doctor once they leave the practice. Essentially, as in all other industries, non-competition agreements serve an important function of protecting client relationships and ensuring that employees do not poach or compete for current clients following their departure from the company.
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What is a Non-competition Agreement?
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A non-competition agreement is an agreement that an employee will not perform similar work to the work that they currently will perform for their new employer for a certain period of time and in a certain geographic area following the end of their employment.
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In Texas, non-solicitation agreements have the same requirements as non-competition agreements. A non-solicitation agreement is an agreement not to contact customers or prospective customers that you worked with while you were with your former employer. It may also include employees that you worked with while you were with your former employer.
The Basics of Texas Non-competition Agreements
Texas has a number of requirements for non-competition agreements found in Section 15.50 of the Texas Business and Commerce Code. Here are the basics:
First, a covenant not to compete is only enforceable to the extent that it is ancillary to an otherwise enforcement agreement; and (2) contains reasonable limitations as to duration, geographic area, and scope of activity that impose no greater restraint than is necessary to protect the goodwill or other business interest of the person signing the agreement.
When is a Non-competition Agreement Ancillary to an Otherwise Enforceable Agreement?
A valid non-competition agreement must be supported by consideration, which means that the business requiring an employee to sign a non-competition agreement must normally promise and actually provide one of the following items: 1) confidential information; 2) specialized training (which should be specific enough within the agreement to avoid an allegation that the provision is mere boilerplate); or 3) stock options. Confidential information includes trade secrets, customer lists, patient information, pricing information, and other protected information of a company that is not available to the public.
There are a number of items that do not meet the requirements to make a non-competition agreement ancillary to an otherwise enforceable agreement. First, continued employment is not enough to make an agreement enforceable without providing new confidential information or specialized training to the employee. Second, you cannot simply provide payment for someone to create a valid non-competition agreement. Thus, all non-competition agreements need to be carefully reviewed when they are drafted.
What is a Reasonable Limit to Duration, Geographic Area, or Scope of Activity?
One of the most important drafting considerations is the scope of the non-competition in terms of duration, geographic area, and the scope of activity. The non-competition agreement should be no broader than necessary to protect the employer. There are some general rules to consider when drafting a non-competition with these terms.
First, courts take differing views of duration based on a number of factors. In general, courts have found that a two-year non-competition agreement is a reasonable duration, but some courts have found that a five-year non-competition agreement is reasonable.
Second, the geographic area should cover a reasonable area where the employee worked or where patients came from to receive treatment. This may differ based on the type of work that the physician performed and where the office was located (rural practices may have bigger geographic limits compared to urban practices).
Third, the scope of activity should be limited to the type of work that the medical professional performed. A non-compete is overbroad and may need to be revised by a court when it covers activity that the former employee did not perform for their employer. The most common example is when a non-compete lacks any scope of activity within the agreement so that the employee could not even work in a completely different capacity (such as an administrator) for a competitive company.
Texas’s Special Rules for Physicians
Texas has special requirements for physicians that must be followed and are unique requirements that are absent from other non-competition agreements. These standards are found in Section 15.50(b) of the Texas Business and Commerce Code. The basic requirements are that covenants not to compete relating to the practice of medicine against persons licensed as a physician by the Texas Medical Board are enforceable if the covenant not to compete meets all the requirements below:
- Does not deny the physician access to the list of patients that the physician has seen or treated within one year of the termination of their employment or contract.
- Provides the physician with access to the medical records of any of the physician’s patients when the patient authorizes the doctor to obtain the medical records. Copies of these patients’ medical records must be made available for a reasonable fee as required under Section 159.008 of the Occupations Code.
- The access to a list of patients or the patients’ medical records must be provided in the format that the records are maintained unless the parties to the non-competition agreement mutually agree to a different format.
- “the covenant must provide for a buyout 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.”
- The “covenant must 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.”
There is one important exception to the above requirements: They do not apply when a physician has a business ownership interest in a licensed hospital or ambulatory surgical center.
What is a Reasonable Buyout?
A reasonable buyout will depend on the physician’s salary, revenue generated by the physician, the costs to train or recruit a physician to replace the physician that is leaving, the physician’s patient base, and a number of other factors. A reasonable buyout can be in the tens of thousands of dollars to more than a million dollars depending on these factors and will be determined by the arbitrator. Of course, it is also possible for the parties to negotiate this number when a physician’s employment ends.
Final Considerations for Non-competition Agreements
Non-competition agreements for medical professionals are an interesting and developing area of the law. Medical practices and doctors should consult with a qualified attorney when drafting or signing these agreements to ensure that they are enforceable and to protect their interests.