Published by Becker’s Hospital Review
Increasingly, physicians are choosing to enter employment relationships with larger practices or hospital-affiliated entities instead of owning their own practices.
Employment contracts will often include non-competition covenants that restrict the employed physician from competing with the practice during and after the employment relationship has ended. Unfortunately, with the rise in physician employment, there has also been an increase in disputes when the employment is terminated and the physician chooses to compete with the practice.1
Employment laws and covenant not to compete requirements vary from state to state. For example, in Texas, covenants not to compete are intended “…to protect the goodwill or other business interest of the promisee [which in most cases is the employer]”.2 Among other requirements specific to physicians, “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…”.3
In some cases, the parties may choose to indicate a specific buy out price or formula for the covenant within the employment contract, such as 1 times the physician’s annual salary. While convenient, setting a price upfront in this manner may not reasonably capture the value of the goodwill or other business interest at risk should the physician choose to compete. Alternatively, the parties may decide to state the buy out price will be based on a fair market value price to be determined at the time of termination, which can be complicated and beyond the capabilities of the parties to determine on their own.
Therefore, parties often turn to appraisers to assist in determining the “reasonable price” for the buyout of a covenant not compete.