Greenville Surgery Center, Ltd. v. Walter Beebe, M.D., et. al.
On July 9, 2010, the Court of Appeals of Texas issued a noteworthy opinion that may jeopardize the enforceability of certain "covenants not to compete" in the State of Texas, as applied specifically to physicians. The case, Greenville Surgery Center, Ltd. v. Walter Beebe, M.D., et. al., 2010 WL 2698779 (Tex. App. – Dallas), focused on the interpretation of Tex. Bus. & Com. Code Ann. ยง 15.50, the Texas statute that sets forth the criteria for the enforceability of covenants not to compete (the "Texas Non-Compete Statute").
The facts giving rise to this case were unique in that the covenant at issue, which was ultimately held to be unenforceable, not only forbid the physicians from being employed by competing facilities, but it also forbid them from holding ownership interests in competing facilities. Thus, it appears that the Court's holding could potentially be construed as confirmation that "non-ownership" covenants are deemed to be "covenants not to compete" for purposes of the Texas Non-Compete Statute, and thus require the same criteria for enforceability.
Legislative History
In order to fully understand the enforceability of covenants not to compete against physicians in Texas, one must become familiar with the legislative history of the Texas Non-Compete Statute. The Texas Non-Compete Statute is currently comprised of three subsections, two of which specifically relate to the enforceability of non-compete covenants against persons licensed as physicians by the Texas Medical Board, and a third subsection which generally relates to the enforceability of non-compete covenants in all other employment scenarios. The Texas Non-Compete Statute, as originally adopted in 1989, only contained the subsection that generically applied to all employment scenarios; it did not contain any subsection that dealt solely with licensed physicians.
On September 1, 1999, the Texas Non-Compete Statute was amended by the Texas State Legislature to add subsection (b), which originally read as follows:
(b) A covenant not to compete is enforceable against a person licensed as a physician by the Texas State Board of Medical Examiners if such covenant complies with the following requirements:
(1) the covenant must: (A) not deny the physician access to a list of his patients whom he had seen or treated within one year of termination of the contract or employment; (B) provide access to medical records of the physician's patients upon authorization of the patient and any copies of medical records for a reasonable fee as established by the Texas Medical Board under Section 159.008, Occupations Code; and (C) provide that any access to a list of patients or to patients' medical records after termination of the contract or employment shall not require such list or records to be provided in a format different than that by which such records are maintained except by mutual consent of the parties to the contract;
(2) the covenant must provide for a buy out of the covenant by the physician at a reasonable price or, at the option of either party, as determined by a mutually agreed upon arbitrator or, in the case of an inability to agree, an arbitrator of the court whose decision shall be binding on the parties; and
(3) the covenant must provide that the physician will not be prohibited from providing continuing care and treatment to a specific patient or patients during the course of an acute illness even after the contract or employment has been terminated.
The Texas State Legislature declared that this subsection (b) only applies to covenants that were entered into on or after the 1999 amendment. Therefore, to the extent that a covenant not to compete was entered into with a physician prior to the 1999 amendment, such covenant need not meet the criteria set forth in subsection (b) of the Texas Non-Compete Statute to be enforceable.
Ten years later (September 1, 2009), the Texas Non-Compete Statute was again amended by the Texas State Legislature. The 2009 amendment revised the Texas Non-Compete Statute by amending the introductory paragraph of subsection (b) to read as follows:
(b) A covenant not to compete relating to the practice of medicine is enforceable against a person licensed as a physician by the Texas Medical Board if such covenant complies with the following requirements . . . [emphasis added]
The 2009 amendment also added a new subsection (c) as follows:
(c) Subsection (b) does not apply to a physician's business ownership interest in a licensed hospital or licensed ambulatory surgical center.
Once again, the Texas State Legislature declared that the 2009 amendment only applies to covenants that were entered into on or after the effective date of the amendment (i.e., September 1, 2009). As discussed below, the 2009 amendment will likely curtail the impact of the Texas Court of Appeals decision in Greenville Surgery Center, Ltd., but only with respect to covenants that are entered into or ratified on or after September 1, 2009. Thus, the 2009 amendment offers little comfort to those wishing to enforce, against physicians, "non-ownership" covenants that were executed on or prior to September 1, 2009.
"Non-Ownership" Covenants after Greenville Surgery Center, Ltd.
Greenville Surgery Center, Ltd. (the "Joint Venture") owns and operates an ophthalmology surgery center in Dallas, Texas (the "ASC"). At the time of the dispute giving rise to the litigation, the Joint Venture was owned, in part, by 17 physician investors. Each of the physician investors was a party to the limited partnership agreement that governed the Joint Venture (the "LP Agreement"). The LP Agreement was amended on January 5, 2006, at which time the terms of the covenant not to compete were modified as to read as follows:
"Covenants of Limited Partners. A Limited Partner . . . shall not serve . . . as an officer, director or employee or consultant of, or hold or acquire any direct or indirect ownership interest in, or manage, lease, develop or otherwise have any financial interest in any business or entity . . . competing with the Partnership in the development, management or operation of an outpatient surgical care facility within a ten-mile radius of the Center from the date of his admission as a Limited Partner and extending to the date two years after the date he is no longer a Limited Partner . . .provided, however, that no Limited Partner . . . shall be prevented from (i) serving as a member of the Board of Trustees or medical staff, or holding any position other than medical staff, of any hospital; (ii) performing outpatient surgery in his office or in any other location he may desire at any time; or (iii) [owning] less than 1% of the voting stock of a publicly-held company which owns or operates one or more health care facilities."
In October of 2007, nine of the 17 physician investors in the Joint Venture (the "Competing Physicians") jointly purchased a parcel of land located approximately 1.5 miles from the ASC. It was the intent of the Competing Physicians to build a new ambulatory surgery center on this site, in part because the ASC's lease was expected to expire. The Competing Physicians filed suit seeking a declaratory judgment that the covenant not to compete contained in the LP Agreement was unenforceable because it did not provide for a buy out of the covenant by the physicians, as required by subsection (b)(2)of the Texas Non-Compete Statute.
Since the LP Agreement was amended as of January 5, 2006, the LP Agreement is subject to the Non-Compete Statute as it was amended by the 1999 amendment, but not as it was amended by the 2009 amendment. Therefore, the Joint Venture could not avail itself of the "relating to the practice of medicine" qualifier that is now contained in subsection (b) of the statute, nor could it rely upon subsection (c) of the statute, which would appear to preserve the enforceability of "non-ownership" covenants (as opposed to the conventional "non-compete" covenant).
The district court in Dallas held that the absence of a "buy-out" right in the covenant rendered the covenant unenforceable pursuant to subsection (b)(2) of the Texas Non-Compete Statute, and the Court of Appeals of Texas affirmed this decision. Based upon a plain reading of the Texas Non-Compete Statute, as it was drafted prior to the 2009 amendment, this holding is not entirely surprising. If the LP Agreement were executed (or amended) by the parties on or after September 1, 2009, then the Court would likely have held that the covenant was enforceable.
Ultimately, the Greenville Surgery Center, Ltd. opinion is noteworthy because the Court of Appeals refuses to specifically address whether it would treat traditional "non-compete" covenants, which are focused on employment opportunities, differently from "non-ownership" covenants, which merely restrict one's right to own equity in competing ventures. If a "non-ownership" covenant is not treated as the equivalent of a "covenant not to compete", then "non-ownership" covenants, even if drafted prior to the 2009 amendment, arguably need not comply with the requirements set forth in subsection (b)(2) of the Texas Non-Compete Statute. However, since it is apparent from the appellate brief filed by Greenville Surgery Center, Ltd. that this issue was plead to the Court of Appeals, one can infer from the Court's holding that the Court construed the word "compete" in the Texas Non-Compete Statute so as to include instances wherein the party bound by the covenant owns equity in a competing venture, even if no other competitive activities are being alleged. Such a construction of the word "compete" is arguably overbroad, and thus one would expect a court to at least explain its reasoning for such a broad interpretation of a critical term in its opinion (something the Texas Court of Appeals failed to do in Greenville Surgery Center, Ltd.).
The uncertainty regarding whether "non-ownership" provisions executed in Texas prior to September 1, 2009 must comply with the requirements set forth in subsection (b)(2) of the Texas Non-Compete Statute will likely invite future litigation. In this respect, the Greenville Surgery Center, Ltd. opinion appears to have raised more questions than it answered regarding the enforceability of "non-ownership" covenants in the State of Texas.
In the absence of a fix from the courts or the Texas State Legislature, physician-owned ambulatory surgery centers and hospitals in Texas that include non-ownership covenants entered into prior to September 1, 2009 should evaluate their ability to amend their organizational documents to avail themselves of the protections provided under the 2009 amendment to the Texas Non-Compete Statute.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.