Uncertainty of Reasonableness – Setting the Buyout Price in Physician Non-Competes in Texas

July 29, 2016

It is common practice in the healthcare industry for physicians to enter into non-compete agreements with their employers. In these agreements, physicians are customarily restricted from practicing medicine in a defined territory surrounding the employer for a set amount of time after termination of the employment relationship. However in Texas, Section 15.50 of the Business and Commerce Code requires physician non-compete agreements to include a “buyout” provision. The buyout provision must contain a mutually agreed upon “reasonable price” that the physician may choose to pay the employer in order to make the terms of the non-compete agreement obsolete. Unfortunately there is little legislative or case law guidance on how to establish reasonableness of the buyout price. As such, parties are often setting arbitrary amounts as the reasonable buyout price. This uncertainty can cause either party much grief if a dispute arises.

Occasionally the buyout provision is drafted as an optional liquidated damages clause, as was the case in Sadler Clinic Ass’n, P.A. v. Hart. In Sadler, the Beaumont Court of Appeals suggested that the reasonable price required by Section 15.50 may not necessarily be the same as reasonable damages and the legislature chose to use the word “price,” rather than “damages” or “lost profits.” The court resorted to Black’s Law Dictionary for clarification – “price” is the “amount of money or other consideration asked for or given in exchange for something else; the cost at which something is bought or sold.” Although Sadler noted that liquidated damages may represent a reasonable buyout price, the two concepts are not necessarily the same. Expected damages need not be known or contemplated in advance in order to establish a reasonable price under Section 15.50.

Despite the lingering uncertainty of how to compute a reasonable price for a buyout provision, two matters remain crystal clear: (1) physician non-compete agreements must include a buyout provision to be enforceable; AND (2) if, at the end of the employment relationship, either party disputes the reasonableness of the buyout price, the reasonable price must be determined by an arbitrator because by statue courts lack the authority to reform physician non-compete agreements to establish a reasonable buyout price.  The end result is that physicians who elect to practice medicine in violation of a valid, enforceable non-compete agreement must either pay the mutually agreed upon buyout price OR have the buyout price determined through arbitration.

For more information on non-compete agreements please seek legal counsel, or contact Bradford Adatto at badatto@byrdadatto.com.  Thank you for the significant contribution by SMU law student, Chad Nelson, for the research and drafting of this article.

ByrdAdatto founding partner Brad Adatto

Bradford E. Adatto

Brad decided to become a lawyer during sixth-grade Career Day, when he promised to represent his best friend, a future doctor. A few decades later, he started his own law firm that focused on representing health care and corporate clients.