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Non-Compete Agreements: How Enforceable Are They?

Posted by Erick Cutler, CPA on Jun 2, 2017 10:22:40 AM

When hiring associates for your medical practice, you probably know you should have an employment agreement in place. Many doctors ask associates to sign non-compete agreements at the same time.

In a typical non-compete agreement, the signing employee agrees not to work for a competitor within a specified geographic area for a designated time period after leaving the employer.

Recent Developments
Although the enforcement of non-compete agreements is strictly within the purview of the court system, the Obama White House weighed in on non-compete agreements in a May 2016 report, following the release of a similar report by the U.S. Department of the Treasury in March 2015.

While those reports indicated that non-compete agreements might serve legitimate business purposes, they also made clear that the usage of such agreements should be limited in scope.

Employers who require every employee to sign a non-compete agreement, from the cleaning crew to those in the executive suite, may have difficulty enforcing those agreements. There is a presumption that entry-level workers may not understand what they’re signing. Moreover, employers may be hard pressed to show how losing a member of the cleaning crew to a competitor across town would have any negative impact on the employer’s business.

Several states have enacted legislation over the past several years, formally defining and reducing the enforceability of non-compete agreements and provisions.

Standard Non-Compete/Restrictive Covenants
Most non-compete agreements seek to limit employees’ ability to work for competitors in one or more of the following ways:

Time period – These contract provisions would restrict associates from working in the same field for a given period – often one year but sometimes longer.

Geographical limitation – A non-compete might prohibit the signing associate from working for another clinic or hospital in the same part of the city, the same zip code, or even a medical practice on the other side of the state.

Court Interpretation May Limit Enforcement
When reviewing and interpreting non-compete agreement challenges, courts must weigh the potential harm an employer faces when an employee goes to work for a competing organization, along with the potential harm that employee would face if he or she were restricted from working in their chosen field.

Enforcement also varies from state to state. Employers in California and Oklahoma, for example, may only use non-compete agreements in very limited circumstances; other states like Florida take a much more employer-friendly approach.

Most other states, including Texas, take a centrist approach. Some states allow the courts to “blue pencil” non-compete agreements. This essentially means that if a provision of a non-compete agreement is deemed unenforceable, courts in those states have the authority to change the agreement.

How Texas Courts View Non-Compete Agreements
In Texas, state law considers most non-competition agreements to be unenforceable. However, the Covenants Not to Compete Act provides that non-compete agreement may be sound if they are reasonable, and if they are part of another agreement that is otherwise enforceable (ancillary agreements).

However, Texas Commerce Code Section 15.50b also provides limitations on non-compete agreements that seek to restrict physicians’ rights. Specifically, non-compete agreements cannot restrict physicians from “providing continuing care and treatment to a particular patient or patients during the course of an acute illness even after the contract or employment has been terminated.”

When determining the enforceability of a physician’s non-compete agreement, Texas courts will consider the following factors:

  • Written, signed agreement – To be enforceable, a non-compete agreement must be in writing, signed by both parties to the agreement. Verbal contracts are not enforceable.
  • Patient access and records – Non-compete agreements in Texas must allow physicians access to lists of patients treated in the past year leading up to termination. If patients provide authorization, the physician must also be permitted to access the patient’s medical records
  • Legitimate business interests – Employers must be able to demonstrate they have a legitimate interest to protect, and that the agreement the employee signed would serve to protect that interest.
  • No limit on ordinary competition – Non-compete agreements in Texas may not stop employees from taking basic knowledge and skills to work for a competitor.
  • Reasonable and fair – Courts will review non-compete agreements with an eye toward whether the restrictions on time period, geographical limitations, and scope of the agreements’ terms are reasonable. The time period/duration must relate to the business needs in some way. Also, geographical limitations may be deemed unreasonable if they cover an area greater than the area in which the employee actually worked for the employer.

Texas law allows courts to “blue pencil” or rewrite provisions of non-compete agreements to enforce the agreement without unduly restricting the employee’s rights.

Seek Help from a Strategic Advisor
If you are considering asking associates or other personnel to sign non-compete agreements, make sure you get advice from a strategic advisor who can provide input and guidance to keep your practice in compliance with changing state laws.

Contact us to learn more about how Goldin Peiser & Peiser, LLP can add value designed to help your medical practice grow and thrive.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Medical