In Part 1 of this two-part series, I examined the temporal, geographic and scope of activity restrictions for Texas physician noncompetition provisions. Texas law provides another unique feature required only in agreements with doctors. Noncompetes with physicians must include a provision that permits the doctor to buy-out of the noncompete for a reasonable amount. The buy-out can be determined at inception of the relationship by including an agreed liquidated buy-out amount or the parties can defer a determination of the buy-out amount and have an arbitrator determine the amount post-employment. What is a “reasonable amount” depends on the facts and circumstances but is normally an approximate value of lost profit the practice group would realize if the noncompete was not honored. Lost profits are determined by calculating the net income expected or actually made for the practice by the physician with appropriate adjustments for costs that would be incurred in earning that income.
For liquidated (or agreed) buy-out amounts, an analysis should be done in arriving at the reasonable agreed amount. However, in practice, most employer groups and physicians merely choose arbitrary amount normally tied to a multiple of the physician’s annual income (e.g., a year or two of the physician’s base salary). This has little bearing on the actual value of the noncompete to the practice group. Moreover, the failure to conduct a buy-out valuation analysis prior to setting the liquidated buy-out amount may open the practice group up to allegations that it knew or should have known the buy-out amount was not reasonable and increases the likelihood the parties will have the arbitrate the amount of the buy-out. Moreover, this can also have an adverse effect on the practice group’s ability to recover certain damages prior to a determination of a reasonable buy-out amount and may even allow the darting physician to recover his or her attorney’s fees. Deferring a determination of the buy-out amount through arbitration at the end of the relationship can also result in the parties arbitrating the buy-out at a time when the relationship is most acrimonious (i.e., the end of employment). For this reason, it is ideal to negotiate this amount at the beginning of the employment relationship.
The manner in which the buy-out amount is ascertained are all capable subjects to bargaining at the pre-agreement stage. For example, whether a patient attrition rate will be used to lower the buy-out or will the lost profits be reduced by the amounts the practice group makes in mitigating its profits through the hiring or a replacement physician are a few examples of ways physicians can lower the buy-out amount. Minimizing the buy-out amount through negotiation increases the likelihood and feasibility that the physician can purchase his or her way out of the noncompete at the end of employment. Furthermore, decreasing the buy-out amount makes it more likely that a subsequent employer may pay some or all of the buy-out in order to be able to employ the physician from a competing practice group.
There is no end to the subjects of bargaining; however, the bargaining positions of the parties may not be comparable. Before entering into a noncompetition agreement that will restrict the right to practice medicine, the physician should retain experienced labor and employment counsel to advise and assist in minimizing the effects of the noncompete and buy-out clause.
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