Reasonableness of physician buy-out clauses in noncompetition agreements

In Sadler Clinic Association, P.A. v. Hart, a Texas district court ruled that a noncompetition covenant in a physician's employment contract was unenforceable because the stipulated price specified in the buyout provision was unreasonable. However, on appeal, the Ninth District Court of Appeals of Texas reversed, finding that the physician's proper remedy was to seek binding arbitration to determine the reasonableness of the buy-out price at the time the physician requests to be released from the noncompetition agreement.

Background and procedural history

The medical clinic filed suit in a Texas district court against a physician, a former employee, of the clinic for a period of 18 months. The noncompetition covenant also contained a buy-out provision giving the departing physician the option to pay liquidated damages to "buy out" and be released from the noncompetition covenant. The buyout clause did not include an arbitration provision in the event a party believed the buy-out amount was unreasonable.

Several other physicians intervened in the suit. The physicians asked the court for a ruling declaring the noncompetition covenant unenforceable, arguing that the covenants were too restrictive.

The district court agreed, ruling that the noncompete clauses were unenforceable as a matter of law because they failed to contain a reasonable buyout price. The court also granted the physicians an award of attorney's fees.

The clinic filed an appeal to the state's Ninth District Court of Appeals.

The decision by the Court of Appeals

The Court of Appeals reversed. Texas has enacted a statute governing noncompete covenants relating to the practice of medicine. The statute provides that the noncompetition covenant must permit a buyout of the covenant by the physician at a reasonable price. If either party asserts that the buyout price is unreasonable, the party has the option to have the reasonable price determined by an arbitrator in binding arbitration.

The agreement with the clinic contained a buy-out clause and a liquidated damages amount which the physician could pay to be released from the restrictive covenant. Even though the contract did not contain any express provisions regarding arbitration in the event of a dispute concerning the reasonableness of the liquidated damages amount specified in the contract, the appellate court said that the district court was incorrect in declaring that the noncompete clause was unenforceable. If either party believed the amount was unreasonable, they each had the remedy that was available under the statute to submit the buyout amount to a determination by an arbitrator in binding arbitration, the court said.

Consult an attorney

Health-care providers, such as physicians, nurses, hospitals, home-health agencies, ambulance companies, nursing homes and other medical entities, who are involved in disputes relating to contracts, regulatory matters, and other legal issues, are urged to seek the advice and assistance of an attorney experienced in such matters to ensure that their rights are adequately protected.