A recent case from a Texas Court of Appeals demonstrates that the Texas non-compete statute applies not only to the employment agreements or sale of business contracts, but to any contracts that contain provisions restraining trade.
In Wharton Physician Services, P.A. v. Signature Gulf Coast Hospital, L.P., the Corpus Christi Court of Appeals found that a liquidated damages clause in a recruiting contract was unenforceable under the Texas non-compete statute.
Gulf Coast hired Wharton to provide hospitalist services and to coordinate the hiring of individual physicians for Gulf Coast. Their agreement contained the following clause that allowed Wharton to demand $100,000 in liquidated damages if Gulf Coast hired any of the physicians that Wharton had previously presented to Gulf Coast if the hiring took place within 6 months after Wharton’s contract’s termination:
If this Agreement is terminated by either party for any reason, then HOSPITAL [Gulf Coast] shall have the right to contract directly with all or some of the Hospitalist Physicians retained by GROUP [Wharton] to perform the services required by the terms of this Agreement . . . In the event that HOSPITAL, or any individual or entity otherwise affiliated with HOSPITAL, for work or services that would be provided at HOSPITAL, desires to contract directly with one or more of the HOSPITALIST physicians previously recruited retained, and presented to HOSPITAL by GROUP for hospitalist services at any time during the six (6) months period following the termination of this Agreement, HOSPTIAL shall pay to GROUP as liquidated damages in amount of $100,000 per physician.
The Court of Appeals applied the standard non-compete analysis to this liquidated damages clause finding that while the recruiting agreement itself was enforceable, the liquidated damages clause was not because it was a restraint on trade that was not supported by independent consideration. The court explained its reasoning as follows:
“Gulf Coast promised to pay Wharton for services and Wharton promised to perform those services; however, none of those obligations amounted to additional consideration for Gulf Coast’s promise not to hire any physicians if the contract between Wharton and Gulf Coast was terminated.”
In sum, the court construed the liquidated damages clause “as a way to limit competition to Wharton from another company providing similar services.” As such, it had to comply with the Texas Covenants Not to Compete Act’s requirements, which it failed to do.
Takeaway: When entering into a contract in Texas, the parties should consider whether any contract provisions may be viewed as a restraint on competition and an attempt to enhance or maintain prices. If that’s the case, then such contractual provision might have to comply with the Texas non-compete requirements in order to be enforceable.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at email@example.com or (214) 531-2403.