Not Including a Buy Out Clause in a Medical Non-Compete Can Be Fatal to Its Enforcement

In Texas, non-compete agreements that relate to the practice of medicine must meet certain statutory requirements in addition to the consideration and reasonableness conditions discussed here.  Last week, the Fourteenth Court of Appeals in LasikPlus of Texas, P.C., et al. v. Mattioli  denied a lasic clinic’s application for a temporary injunction against a former doctor precisely because his non-compete agreement failed to comply with one of the requirements, thus allowing the doctor to proceed with the competitive practice while the parties litigated their dispute.

Pursuant to Tex. Bus. Com. Code § 15.50(b), 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 as long as such covenant:

  1. does 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;
  2. provides 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;
  3. provides 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;
  4. provides 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
  5. provides 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.

In LasikPlus of Texas, after working for the laser eye surgery center for nine years, Mattioli, a licensed ophtalmologist, terminated his employment and notified LasikPlus that he was opening his own clinic featuring laser surgical procedures less than two miles from his former clinic’s location.  LasikPlus requested a temporary restraining order (TRO) as well as a permanent injunction seeking to enjoin Mattioli from operating his clinic within the area and for the time-period prohibited by the covenant not to compete. The district court first granted an ex parte TRO, but then dissolved it after the hearing on a temporary injunction.

The Court of Appeals affirmed the district court’s decision after finding that LasikPlus had failed to prove the likelihood of success on the merits on its breach of contract claim. Since the parties conceded that the non-compete agreement did not contain a buy out clause required under Tex. Bus. & Com. Code 15.50(b), the agreement was probably not enforceable and LasikPlus would ultimately loose its breach of contract claim.  Thus, in absence of the required clause, the probability of ultimate success on the merits for LasikPlus was too low to justify a temporary injunction.

The Court of Appeals also explained that while Section 15.50(b) authorized a court to reform i.e. rewrite a buy out clause that was unreasonable, it did not authorize the court to write a buy out clause into a contract where one was absent. The Court of Appeals specifically stated that “there is no indication in Section 15.50 that the legislature intended to invest courts or arbitrators with the authority to reform noncompete covenants to create buy out provisions.  To the contrary, the section as a whole provides that if a noncompete covenant involving a physician does not have a buy out clause, it is not enforceable.” Thus, the Court rejected LasikPlus’ argument that it was likely to succeed on the merits with respect to the reformation request.

In denying the temporary injunction, the district court allowed Matiolli to compete with the clinic while the parties litigated their dispute and also determined that LasikPlus was not likely to prevail on its breach of contract claim because the non-compete agreement was not enforceable.

CONCLUSION:  In Texas, non-competition agreements that relate to the practice of medicine are subject to a specific list of requirements.  Failing to comply with these requirements will result in a non-compete agreement being unenforceable, and, therefore, completely useless.  Thus, the parties should always include a buy out clause in the agreement with an understanding that if they disagree later about the reasonableness of the clause, a court or an arbitrator can be asked to resolve their dispute.

For more information regarding the enforcement or drafting of non-competition agreements in Texas, contact Leiza Dolghih.

4 Comments on “Not Including a Buy Out Clause in a Medical Non-Compete Can Be Fatal to Its Enforcement

  1. Great Info! I wonder what a “reasonable buy out” means. Last one I saw was 50% of gross annual revenues for the entire practice regardless of whether doctor was 1% owner or 25%, didn’t seem that reasonable. What have you seen as the industry standard?

  2. Thanks, Joan. Most of the agreements I have seen, leave it up to an arbitrator to determine the buy out price, and arbitrators typically look at lost profits to determine what would be reasonable. The arrangement you describe seems to be a far cry from being reasonable, especially for the 1% owner of the practice.

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