Beaumont Court of Appeals Upholds a Physician Non-Compete

On June 13, 2013, the Beaumont Court of Appeals issued its decision in Sadler Clinic Association v. Hart, No. 09-12-00086-CV (Tex. App. -- Beaumont 2013, pet. denied). This case discussed the enforceability of a non-compete in a physician's contract. The court made three important holdings. First, the court considered the reasonableness of the buyout provision in the non-compete agreement. Texas law provides a set of rules for physician non-competes that are different from the rules for non-physicians:

A covenant not to compete relating to the practice of medicine is enforceable against a person licensed as a physician by the Texas Medical Board if such covenant complies with the following requirements:

(1) the covenant must:

(A) 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;

(B) 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 Section 159.008, Occupations Code; and

(C) 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;

(2) the covenant must provide for a buy out 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; and

(3) 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.

The non-compete at issue in the case contained a buy-out provision, but the physician claimed that it was unreasonable. The trial court agreed and refused to enforce the non-compete. The Beaumont Court of Appeals reversed, holding that the proper remedy was to appoint an arbitrator, not to void the non-compete:

The agreement here includes a buyout provision. The covenant does not include an express reference to the arbitration option, but that is not fatal to the agreement and does not preclude arbitration of the issue of reasonable price. We presume that the parties contracted with knowledge of the statute's arbitration provision concerning the price, and that the parties intended the statute's application in determining a reasonable price.

Under the statute, if the physician elects to compete despite signing a valid noncompetition covenant with a buyout provision, the physician must pay the agreed amount or elect to have a reasonable price determined by an arbitrator. The statute does not give the trial court the role of determining a reasonable price. An arbitrator is given that role. We hold the trial court erred in declaring the entire covenant not to compete unenforceable because the court believed the stipulated buyout price was unreasonable. The proper remedy was binding arbitration to determine a reasonable price. Issue one is sustained.

(Citations omitted).

Second, the court considered the issue of whether the time period applicable to a non-compete can be equitably extended due to litigation. In this case, the trial court had voided the non-compete, and thus the physician had practiced medicine in violation of the non-compete during the pendency of the litigation. The employer argued that the non-compete period should be extended. Ultimately, the Beaumont Court of Appeals did not decide the issue. The court found that the parties had expressly contracted for a potential extension, thus eliminating the need for an equitable extension. However, the court indicated its disagreement with an opinion of the Dallas Court of Appeals, which had rejected the availability of an equitable extension:

The Texas Supreme Court has indicated that the issue of reformation becomes moot after the term of the noncompetition covenant has expired. See Weatherford Oil Tool Co. v. Campbell, 161 Tex. 310, 340 S.W.2d 950, 952 (Tex. 1960). One court has concluded that Weatherford means that a Texas "court will not extend the period provided in a restrictive covenant contained in an employment contract." Rimes v. Club Corp. of Am., 542 S.W.2d 909, 912 (Tex. Civ. App.—Dallas 1976, writ ref'd n.r.e.). While we do not believe Weatherford addressed [an equitable extension of the non-compete period], we nevertheless decline to grant an equitable extension under the circumstances here. The parties to this contract apparently anticipated delay due to litigation resulting from a possible breach, and provided for a maximum tolling period in the contract.

Third, the court held that the Covenant Not to Compete Act was the exclusive remedy with respect to attorneys' fees. The court held that the physician could not recover attorneys' fees under the declaratory judgment statute, but instead could seek attorneys' fees only under the Covenant Not to Compete Act.

David C. Holmes is a Houston employment lawyer with The Law Offices of David C. Holmes

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