Tennessee physician wins case on non-compete clause

State law allows non-compete contracts when the employer is a hospital or an affiliate of a hospital.

By Beth Wilson, amednews correspondent — Posted Aug. 22, 2005

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Ending a 2½-year legal battle, the Tennessee Supreme Court recently ruled in favor of internist David Udom, MD, declaring invalid the non-compete agreement with his former employer, the Murfreesboro Medical Clinic.

In a 3-1 opinion, the court ruled that a patient's right to receive continued care from his or her physician outweighed the clinic's business interest, effectively negating non-compete agreements between physicians and private medical practices.

"The right of a person to choose the physician that he or she believes is best able to provide treatment is so fundamental that we cannot allow it to be denied because of an employer's restrictive covenant," the court stated.

The private practice, with almost 60 physicians, hired Dr. Udom in 2000. At that time, he signed a two-year employment agreement including a non-compete clause. It prohibited him from practicing medicine within a 25-mile radius for 18 months after the contract was terminated unless he paid the clinic roughly one year's salary as a contract "buy out."

When the medical clinic decided not to renew his contract, Dr. Udom looked for other positions around the Murfreesboro area, where he lived and wished to stay. He considered positions in Nashville, about 40 miles away, but was told he lived too far away to respond to emergencies, said Doug Janney, Dr. Udom's lawyer.

Dr. Udom said he also proposed working for area emergency rooms or a Veterans Affairs Medical Center, which he thought would not pose a competitive threat, to no avail. In the end, Dr. Udom set up private practice in Smyrna, Tenn., which was about 15 miles from the medical clinic. The MMC promptly filed suit charging that Dr. Udom had violated the non-compete provision.

"I had exhausted all my options," Dr. Udom said. "At the time, you do what is right. I looked at what the reasonable thing to do was given my circumstances and what I thought would be best for mypatients."

A matter of public policy

A trial court ruled for the MMC, upholding the non-compete contract. In 2004, an appellate court agreed.

The Tennessee Supreme Court reversed the decision in late June, ruling that the non-compete pact was unenforceable as a matter of public policy because it restricted a patient's freedom to choose his or her physician.

In its opinion, the court noted that state law does allow non-compete contracts when the employer is a hospital or an affiliate of a hospital or when the employer is a "faculty practice plan" associated with a medical school.

"I'm obviously pleased," Dr. Udom said of the ruling. "It's a victory for patients more than anything else. It will definitely impact medical care in this area for the better."

"This was a very close issue," Janney said. "It was a very tough, hard-fought case. It's a victory not only for doctors in small practices but for patients. I believe it better harmonizes the law with the AMA code of ethics."

In fact, the court relied heavily on the American Medical Association's position regarding non-compete agreements, said David Steed, outside counsel to the Tennessee Medical Assn.

"This underscores the impact of organized medicine on legal issues affecting physicians," he said. "[The decision] ultimately comes down to the importance of avoiding interference between the physician and patient relationship."

AMA policy states that non-compete clauses "restrict competition, disrupt continuity of care and potentially deprive the public of medical services."

The AMA also discourages any agreement that restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership or corporate agreement.

Another view

However, some physicians and the private practices in which they work have a different perspective on the issue.

Non-compete agreements provide the ability to recruit specialists and protect the medical clinic's investment in new physicians, which may include not only their starting salary but training, nursing staff, administrative staff, equipment and overhead, said Joey Peay, chief executive officer for the Murfreesboro Medical Clinic.

"I think [the decision] is really going to have an adverse effect in areas of rural Tennessee," Peay said. There, clinics might not be able to justify the expense of hiring specialists, he said.

"Who's going to take that risk?" he asked. "You pay for physicians to get set up, and then they could start direct competition."

Peay believes physicians will take advantage of the ruling, which allows doctors to begin their practice in one place, build a client base and then strike out on their own. "Whenever you're dealing with independent thinkers, they're going to look at what's best for them," he said.

"I was very surprised," Peay said of the court's decision. "The Supreme Court seems to ignore 20 years of precedents."

In Tennessee, courts have historically ruled that non-compete clauses for physicians were enforceable when reasonable, said Josh McCreary, the MMC's attorney in this case.

"If you look at the big picture, I'm not sure if this [decision] helps patient rights," McCreary added. "It has the potential to inhibit patient rights. You may not have a cardiologist in rural areas."

Steed, meanwhile, recognizes the validity to both arguments. "It's a difficult issue for a medical association," he said, "because there are members on both sides."

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