Tennessee Supreme Court Holds Covenants Not To
Compete In Physician Contracts Are Unenforceable
Tennessee Supreme Court ruled June 29 that a covenant not to compete in an
employment contract between a physician and a medical clinic was unenforceable
as a matter of public policy. The high court's ruling reverses an appeals
court's decision upholding the agreement's non-compete provision. The high
court concluded that the public policy issues at stake--such as a patient's
right to continue treatment with a certain physician and ensuring an area has
an adequate supply of physicians--outweighed an employer's business interest. "The
right of a person to choose the physician that he or she believes is best able
to provide treatment is so fundamental that we can not allow it to be denied
because of an employer's restrictive covenant," the high court reasoned.
According to the opinion, such restrictive covenants, pursuant to a Tennessee statute, are
still permitted where the employer is either a hospital or a "faculty practice
plan" associated with a medical school.
Murfreesboro Medical Clinic (MMC),
a private medical practice employing over fifty physicians, entered into an employment
contract with Dr. David Udom in which he agreed to
work for an initial two-year period practicing internal medicine. The contract
contained a non-compete clause that prohibited Udom
from practicing medicine within twenty-five miles of MMC for eighteen months
after termination of the agreement. The non-compete clause also contained a buy-out
provision, which provided that MMC would waive the non-compete restrictions
provided Udom paid "an amount equal to twelve times
the most recent Initial Monthly Salary" and reimburse any moving expenses paid
on his behalf.
After the initial two-year period
expired, MMC did not extend the contract. Udom
informed MMC that he intended to open a medical practice fifteen miles from the
clinic. MMC sued Udom seeking to enjoin him from
practicing medicine within the twenty-five mile radius pursuant to the non-compete clause. The trial court granted a temporary restraining
order (TRO) to MMC. The trial court held the eighteen-month non-compete period
was reasonable, but set the buy-out amount at $120,000 rather than $250,000 as
provided in the contract. Udom filed an interlocutory
appeal. The Tennessee Court of Appeals held the covenant not to compete was
enforceable but reversed the TRO because Udom had
placed the buy-out funds with the court. The appeals court remanded for a
determination of whether the buy-out amount was appropriate. See HLD,
v. 32, n. 3.
On this issue of first impression,
the Tennessee Supreme Court reversed, holding non-compete provisions in physician
contracts are invalid as against public policy. Such agreements are permissible
in two limited circumstances, which themselves include certain restrictions, as
specified by state statute--namely, when the employer is a hospital or an
affiliate of a hospital, and when the employer is a "faculty practice plan"
associated with a medical school. Tenn. Code Ann. � 63-6-204.
In reaching its decision, the high
court identified a number of public policy considerations that weighed against
enforcing such agreements. "Public policy considerations such as the right to
freedom of choice in physicians, the right to continue an ongoing relationship
with a physician, and the benefits derived from having an increased number of
physicians practicing in any given community all outweigh the business
interests of an employer," the high court said.
The high court likened the
underlying public policy concerns to those applicable to the legal profession,
in which such restrictive covenants are prohibited. The high court saw no
practical difference between the two professions, which it said involve a
public interest not present in the commercial context and "are marked by a
relationship between the professional and the patient or client that goes well
beyond merely providing goods or services."
The high court also considered the
American Medical Association's (AMA) stance on the issue--namely, that
non-compete agreements involving physicians are not in the public interest and
pose certain ethical concerns. In addition, the high court noted that three
non-compete clauses in physicians' contracts and other states' antitrust
statutes have been interpreted as prohibiting them.
the high court found it telling that the Tennessee
legislature enacted a statute specifically allowing non-compete clauses only in
certain instances, and even then with additional geographic and timing
restrictions. "We find it significant that the legislature chose not to
validate all restrictive covenants applying to physicians, especially given
that the legislature presumably knew that this Court had found all such
covenants to be void as against public policy in a similar profession," the
high court reasoned.
dissenting opinion agreed that the restrictive covenant at issue in the case
was unenforceable, but argued that � 63-6-204 should not be read as validating
non-compete provisions only in the two instances mentioned and prohibiting all
Murfreesboro Med. Clinic, P.A. v. Udom,
No. M2003-00313-SC-S09-CV (Tenn.
June 29, 2005). To read the case, go to http://www.tsc.state.tn.us/opinions/tsc/Sc2qtr2005.htm