In Texas, Is Paying Buyout Mandatory for Physicians Who Compete?
Under Texas law, a covenant not to compete can be enforceable against a physician only if certain requirements are met.
One requirement is that a physician non-compete agreement, to be enforceable, must contain a buyout provision; i.e., the physician must be given the option of paying a certain sum of money to void the non-compete. If the physician pays the buyout amount, the non-compete goes away.
Here’s what the Texas non-compete statute says about the buyout requirement:
The covenant must provide for a buyout 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. (emphasis added)
This provision confirms that the physician has the “option” to pay the buyout amount.
But what if the physician (a) decides to compete in violation of his noncompete agreement but (b) does not want to pay the buyout? In other words, what if the physician’s attitude towards his former employer is, “Yeah, I’m violating my noncompete agreement—just like many other people in Texas do all the time. If you want to sue me to try to enforce it, knock yourself out. But I’m not paying to buy out of this.”
Then what happens?
Well, according to a recent Beaumont Court of Appeals decision, the physician, if he competes in violation of his noncompete agreement might actually have to pay the buyout, whether or not he wishes to do so. The court explained it like this:
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 the 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. (citations omitted).
Does this holding actually require a physician who competes in violation of a non-compete to pay the buyout amount? If so, then the buyout provision in the noncompete statute might actually put physicians in a worse legal position than non-physicians occupy.
Physicians alone are entitled to a buyout provision in their non-compete agreements. This is because Texas has a strong public policy in favor of wanting doctors to be able to work (which makes sense—we need doctors, after all). Thus, physicians are given the right to pay a certain sum of money, if they wish to do so, to void the non-compete. And the buyout amount must be reasonable.
But the Beaumont Court of Appeals’ holding has been read by some attorneys as requiring a physician who violates a non-compete to pay the buyout amount (which arguably converts the buyout into a penalty for competing). Again, many non-physicians violate noncompete agreements without (a) being sued or (b) having to pay a penalty for competing. Is it really the case now that physicians in Texas who compete must pay a buyout?
To our knowledge, no other court has either agreed, or disagreed, with the interpretation of this case that some other practitioners are giving it.
However, a Houston Court of Appeals case could call into question whether some Texas attorneys are correctly reading the Beaumont decision. The Beaumont opinion did not explicitly quote the entire buyout provision upon which its decision was based. But, as clarified by the Houston court, the Beaumont buyout provision “provided that the physician must pay to [the] clinic as liquidated damages an amount to be calculated based on the length of employment.” (emphasis added). The Houston court found that the use of liquidated damages as the buyout price permitted the Beaumont buyout to be used as a penalty for the physician deciding to compete. Further, the use of “must” language, rather than the more permissive “may” language, obligated the physician to pay the buyout price/liquidated damages in the event that she started to compete.
Thus, when trying to assess the impact of the Beaumont court’s opinion in a particular situation, attorneys should focus in part on whether the buyout provision in question is permissive or mandatory (and also on whether it characterizes the buyout as “liquidated damages” or uses similar language).