I have written several posts outlining the unique requirements that employers must include to create a valid noncompeteition agreement with a physician. (posts here and here). A recent case from the Beaumont Court of Appeals holds that even when a physician noncompetition agreement contains a reasonable buy-out clause, the employer may still have to arbitrate the reasonableness of that buy-out amount at the time the physician seeks to be released from the noncompetition agreement.

In Sadler Clinic Association, P.A. v. Hart, the Clinic sued a former physician seeking to enforce a covenant not to compete precluding the physician from competing within a twenty-two mile radius of the Clinic for eighteen months. The noncompetition agreement contained a buy-out clause that allowed the physician to buy-out of the noncompete for a set amount, but did not provide for arbitration in the event a party believed the buy-out amount was unreasonable. The trial court declared the noncompetition agreement unenforceable stating that it lacked a reasonable buy-out amount. On appeal, however, the appellate court held that the agreement contained a buy-out clause and an amount the physician could pay to be released from the restrictive covenant. Moreover, the court of appeals further allowed that if either party believed the buy-out amount to be unreasonable, the party could elect to have the buy-out amount determined by an arbitrator (despite the absence of any contractual provision authorizing arbitration over a previously agreed to buy-out amount). In essence, the court substituted an arbitration mechanism for a party to revisit the reasonableness of the buy-out amount that the parties themselves had not negotiated and to which they never agreed.

The impact of the Sadler decision is that a physicians and their employers have little certainty that the contractually agreed buy-out clauses they negotiated and agreed to will be honored and not challenged through arbitration by the party who disagrees with the amount at the end of the relationship and at the time of competition. Moreover, parties are not incentivized to agree to a reasonable buy-out amount at the inception of the relationship in order to avoid the time and expense of an arbitration at the end of the relationship when either party can have the negotiated buy-out amount challenged through arbitration.

You can read the full opinion in Sadler Clinic Assoc., P.A. v. Hart here.

Follow me on Twitter @RussellCawyer.