WALTER E. SCHULER

Should I stay or should I go? That is the question many physicians and other healthcare providers might be asking themselves after hearing about a new law just passed in Tennessee, which validates certain non-competition covenants with physicians and other healthcare providers. While the new law does not take effect until Jan. 1, 2008, its impact likely will be felt immediately by healthcare providers and those who employ or contract with them.

The new statute endorses two types of non-competition restrictions. The first is a restriction on an employed or contracted healthcare provider’s right to practice his or her profession upon conclusion of the provider’s relationship with the employing or contracting entity. Under the statute, such a restriction shall be deemed reasonable if (1) the restriction is signed by both parties and set forth in writing, (2) the duration is two years or less, and either (3) the geographic region is limited to a 10-mile radius from the provider’s primary practice site with the entity, or the county in which the primary practice of the provider is located while with the entity, or (4) there is no geographic restriction, but the provider is restricted from practicing at facilities where the entity provided services while the provider worked for the entity. The statute does not allow for restrictions on providers who have been with the employing or contracting entity for six or more years.

The second restriction under the new statute allows limitations on a provider’s right to practice his or her profession after the purchase or sale of the provider’s practice (or substantially all of the provider’s assets), provided that the scope of the restriction is reasonable under the circumstances. Both forms of restrictions allowed by the new statute apply only to medical doctors (except for physicians specializing in emergency medicine or radiology), podiatrists, chiropractors, dentists, optometrists, and psychologists.

The new law was prompted by the Tennessee Supreme Court’s 2005 decision in Murfreesboro Medical Associates, P.A. v. Udom, in which the court ruled that all physician non-competition covenants, which are not specifically provided for by statute, are unenforceable based on public policy grounds. That decision left many unanswered questions as to its applicability to healthcare providers other than medical doctors. The decision also left unclear the enforceability of non-competition covenants between those involved in the purchase or sale of a medical practice.

Interesting questions are raised by the new law and its effective date. Suppose a medical doctor signed an employment agreement prior to the Udom decision (but less than six years ago), and at such time, agreed to a non-competition covenant, which is within the scope of the restriction now allowed for in the new statute. Will the enforceability of that non-competition covenant be at all affected by the Udom decision or by the new statute?

The intent behind the new statute clearly is to allow for such covenants beginning in 2008, but it is not clear to what extent such existing covenants are enforceable today. Nor is it clear whether or not such covenants will automatically become enforceable Jan. 1, 2008. Entities will argue that the parties’ agreement should govern, and that the new statute merely nullifies Udom to the extent Udom applies to their relationship, leaving the parties in exactly the same position they were in when they signed their agreement. Providers will argue that Udom merely clarified the law regarding such covenants, making those entered into prior to Jan. 1, 2008 unenforceable.

Even if existing covenants are determined to be no longer valid and not automatically redeemed by the new statute, another question is whether or not an entity today may require a provider to sign a non-competition covenant to take effect on Jan. 1, 2008, if it is within the scope allowed by the new statute, and if it is required by the entity as a condition to the provider’s future or continuing employment.

Since Udom applied directly only to “physicians” (and arguably even more narrowly only to those governed by the AMA code of ethics), another question is whether a restriction which is broader than that allowed by the new statute may be enforced against a healthcare provider who is covered by the statute, but not necessarily by Udom. That is, one might persuasively argue that the new statute simply provides a safe harbor for reasonable restrictions, but it does not preclude non-competition restrictions which exceed the scope of that allowed by the statute.

The new statute will likely have an immediate impact on those who are currently considering a change. Many existing employment agreements require advance notice of termination, and alternative practice arrangements take time to finalize. The new statute’s Jan. 1, 2008 effective date provides those affected with precious time to consider their legal options, and to develop alternative practice arrangements should the need arise.



Walt Schuler is a partner at The Bogatin Law Firm, PLC in Memphis. He may be reached at wschuler@bogatin.com.




August 2007