The Ongoing Saga of Health Care Non-Compete Agreements

The legislative debate on the appropriate parameters of health care non-compete agreements continued this legislative session with another amendment to Tenn. Code Ann. § 63-1-148. This time, the effort was to eliminate the original six-year limitation and to extend the statute to osteopathic physicians.    

By way of background (and still surprising to many), in 2005 the Tennessee Supreme Court held that most non-compete agreements with physicians in private practice were unenforceable as against public policy.[1] The Tennessee Supreme Court’s ruling reversed the longstanding principle that reasonable non-compete agreements, although disfavored, were enforceable against physicians and presumably other health care providers.[2]

In response to the Court Opinion, the Tennessee Legislature enacted Tenn. Code Ann. §63-1-148 effective July 1, 2008, to expressly permit health care provider non-compete agreements (original statute).[3] The statutory non-compete restrictions on duration and geography as applied to health care providers are, at this point, well known.[4] However, in addition to the customary geographic and durational limitations, the original statute also indicated that non-compete restrictions “shall not be binding on a health care provider who has been employed by, or under contract with, the employing or contracting entity for at least six years.”[5] As a result of this inclusion, most lawyers and medical professionals rightly concluded that if a health care provider was employed in excess of six years, there was no circumstance under which a non-compete could be enforced.

Effective April 30, 2010, the legislature passed an important, although apparently fleeting, amendment (the 2010 amendment).[6] This amendment allowed non-compete restrictions with health care providers to apply in specified circumstances even if the health care provider had been employed by, or was under contract with, the employing or contracting entity for more than six years.[7] Under the 2010 amendment, a health care provider and the employing or contracting entity could mutually agree to extend the six-year period for an initial term not to exceed an additional six years.[8] Moreover, the 2010 amendment indicated that the health care provider and the employing or contracting entity could agree to an unlimited number of six-year extensions, provided each extension was in writing; supported by consideration; and each subsequent extension did not itself exceed a term of six years.[9]

The 2010 amendment was confusing because precisely what was required to extend the non-compete was murky and the business likelihood of finding an appropriate circumstance rare.[10] As a result, the legislature has again modified the non-compete statute by enactment of Public Chapter 218 to be effective Jan. 1, 2012 (the 2012 amendment). The primary change resulting from the newly enacted statute is the elimination of subdivision (a)(2) (which dealt with the six-year limitation) in its entirety.[11]

As a result of the 2012 Amendment, health care provider non-compete agreements are now less restricted than previously permitted and more in line with historical case law. The original statute and the 2010 amendment were both entirely legislative creations and had little or no historical basis in case law. At this point, provided the non-compete agreement is compliant with the other statutory requirements in subsection (a)(1) (dealing with the geographic and time limitations), then a non-compete agreement is otherwise presumed reasonable regardless of how long the health care provider has been employed.[12] The nuance of renegotiation and/or expiration of the non-compete is now obsolete.

Also providing debate since Murfreesboro Medical Clinic P.A. v. Udom has been to whom within the health care arena the restrictions can apply. Through express citation to certain Chapters within Title 63 (dealing with Professions of the Healing Arts), the legislature attempted to answer some of this in the original statute and permitted its application to podiatrists, chiropractors, dentists, physicians, optometrists and psychologists.[13] The 2012 amendment furthers this effort and modifies the non-compete statute to include osteopathic physicians.[14] Despite these efforts at clarification, the exact parameters of who is encompassed within the schematic of “health care providers” may still be an issue in some circumstances.

One of the most difficult issues with the legislative enactments has been the effective date. Unfortunately, the 2012 amendment again leaves this issue unclear and does not express whether it applies only to contracts entered after Jan. 1, 2012, or those already in existence. Undoubtedly, there have been scores of employment agreements executed even since the 2010 amendment took effect. The legislature has left open whether an agreement entered prior to the 2012 effective date will be governed by the 2010 amendment (which would include that a non-compete could not continue beyond 6 years unless expressly agreed) or will be governed by the 2012 amendment (which would allow the non-compete to continue). Compounding the problem, an agreement entered under the original statute could not extent beyond six years at all. As to those employers who had health care providers enter an amendment to extend the non-compete beyond six years as allowed by the 2010 amendment, the certainty of that application is certainly left unclear.

To be sure, one of the primary concerns in Murfreesboro Medical Clinic was the sanctity of the patient- provider relationship and patient care. It was in part to secure this relationship that the court eliminated the use of non-compete agreements, despite that the medical community had long relied on them as part of its business model. While the legislature continues to tinker with the non-compete statute, employers and health care providers are left with the thing business likes least — uncertainty — which may itself negatively impact patient care.

Notes

  1. Murfreesboro Medical Clinic, P.A. v. Udom, 166 S.W.3d 675 (Tenn. 2005).
  2. See Medical Education Assistance Corp. v. State of Tennessee through the East Tennessee State University Quillen College of Medicine v. Mehta, 19 S.W.3d 803 (Tenn. Ct. App. 1999) (Perm. App. Denied 2000); Kayem v. Stewart, 2003 WL 22309466 (Tenn. Ct. App. 2003).
  3. See Tenn. Code Ann. §63-1-148; “Physician Non-Compete Agreements Revisited and Revised,” Tenn. Bar Journal Vol. 43, No. 8 at 17 (August 2007).
  4. Tenn. Code Ann. §63-1-148 provided that a restriction in an employment agreement must be two years or less and, in terms of geography, restricted to a 10-mile radius from the primary practice site or the county in which the primary practice site is located. See Tenn. Code Ann. §63-1-148(a)(1)(B).
  5. Id.(a)(2).
  6. See S.B. No. 3154, 106th Leg. Sess. (Tenn. 2010) (amending Tenn. Code Ann. § 63-1-148(a)(2)).
  7. Id.
  8. Id.
  9. Id.
  10. While the 2010 amendment at least theoretically permitted non-competes to bind healthcare providers who had been employed more than six years, the application was not without complication. For example, an agreement to extend the six-year time period had to be accomplished through “subsequent negotiations.” To that end, an extension of the non-compete provision could not be by an automatic renewal provision in an employment contract. Moreover, as long as the term of an employment contract then in effect was longer than month to month, a refusal by either party to extend or enter into a new employment contract (presumably to extend the non-compete agreement) could not be considered grounds for terminating an existing contract.
  11. See S.B. 611, 107th Leg. Sess. (Tenn. 2011) (signed by Gov. Haslam on May 20, 2011).
  12. Tenn. Code Ann. § 63-1-148(a)(1)(A)-(b) require a non-compete agreement to be in writing, two years or less in duration and limited to a 10-mile radius from the primary practice site or the county where the primary practice site is located (whichever is greater).
  13. Tenn. Code Ann. § 63-1-148 (c).
  14. S.B. 611 at § 2 (Tenn. 2011).

Josh A. McCreary JOSH A. MCCREARY is a member of Cope, Hudson, Reed & McCreary PLLC, a multi-practice firm in Murfreesboro. His practice is focused on general business matters, business related litigation, estate planning, probate and health care. He received his law degree, magna cum laude, from the University of Tennessee in 1998.