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Tennessee Supreme Court Holds Covenants Not To Compete In Physician Contracts Are Unenforceable

 
 

HLD, v. 33, n. 8 (August 2005)

Tennessee Supreme Court Holds Covenants Not To Compete In Physician Contracts Are Unenforceable

            The 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 states--Massachusetts, Colorado, and Delaware--prohibit non-compete clauses in physicians' contracts and other states' antitrust statutes have been interpreted as prohibiting them.

            Finally, 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.

            A 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 others.

            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

 

 

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