Under Texas Law, Is Payment of a Physician Buyout Mandatory?
In Texas, physician noncompetes differ from noncompetes in any other industry in several respects. The primary difference is this:
The Texas noncompete statute requires that the physician be given the option to buyout of the noncompete if the physician wishes to do so. This “option to buyout” is mandatory under Texas law.
Often, if a physician leaves a medical practice and begins to practice medicine in another place, this activity attracts the attention of his former employer–particularly if there is a noncompete in place that prohibits such competitive activity. What can the former employer do about it?
Well, in any other industry (i.e., any industry other than the medical industry), the answer would be obvious. The former employer could sue the person who’s violating the noncompete and attempt to prevent the competitive activity from occurring. In such a lawsuit, the employer would be seeking a court-ordered injunction to make its former employee stop competing with it. Lawsuits like this are frequently filed in Texas
Many times, though, in the physician context, the former employer will have this attitude instead: “I don’t want an injunction. I don’t want to keep my former employee from practicing medicine. Rather, I want my former employee to pay the buyout!”
As physicians who have signed noncompetes in Texas know, the amount of the buyout in a physician noncompete can be significant or even exorbitant (multiple six figures, sometimes). And in many situations, the former employer’s attitude is, “You have decided to practice medicine in violation of the noncompete. Now, pay me the buyout.”
But is that really how it works?
Again, under the noncompete statute, the physician must be given the option to buyout of the noncompete if she wishes to do so. But what if the physician does not wish to pay the buyout? Then what?
The former employer’s attitude typically is, “You have a choice. You can either comply with the noncompete, or you can pay me the buyout. It’s up to you. You must do one or the other.”
But maybe there is a third option for the physician. Why can’t the physician say this:
I’m not paying the buyout. I choose not to pay you multiple six figures to make the noncompete go away. Now, if you want to sue me, and seek an injunction to make me stop, I will defend myself (just as I would defend myself if I were a software engineer bound by a noncompete.) But I refuse to pay the buyout to make the noncompete go away.
An opinion from the Houston Court of Appeals contained this language:
There may be cases in which the parties expressly contract for payment of the buyout amount as liquidated damages in the case of a breach. But this is not such a case. The Agreement at issue here contains no liquidated damages provision. Its buyout provision merely states: “Physician may buy-out this non-compete covenant for a cash price of $100,000 which Physician agrees is a reasonable price.” This provision is permissive—it states that Tummala may pay the $100,000 cash price, which he presumably would have done if he believed that moving on to his next endeavor free from the threat of litigation was worth the $100,000 price tag. But because Tummala nowhere obligated himself to pay the buyout amount in the event of a breach, the buyout amount cannot be construed as a liquidated damages provision that relieves TIPS of the burden to prove “damages” within the meaning of Section 15.51(a).
Thus, under this court’s reasoning, payment of the buyout would have been mandatory if the buyout provision had been a liquidated damages provision–i.e., if it had required the physician to pay. Because this provision was permissive, not mandatory, the physician had the option whether to pay the buyout. If the physician chose not to do so, she would be like every other non-physician bound by a noncompete–she could be sued for violating the noncompete, and she could defend herself.
The bottom line is this: A run-of-the-mill buyout provision is different from a liquidated damages provision. The former is permissive (physician may pay the buyout, if she chooses to do so). The latter is mandatory (physician must pay if she violated the noncompete).
Understanding the difference between these types of provisions is important in deciding how to deal with a particular situation.