Tennessee Supreme Court Decision Limits Enforceability of Physician Covenants Not to Compete

On June 29, 2005, the Tennessee Supreme Court filed an opinion on the case of Murfreesboro Medical Clinic, P.A. v. Udom (No. M2003-00313-SC-S09-CV).  The opinion effectively prohibits physician covenants not to compete (i.e., non-compete agreements) except in limited circumstances. 

Prior to the Udom decision, Tennessee courts had generally applied a "reasonableness" standard when analyzing physician non-compete agreements.  Although recent cases raised public policy concerns associated with such agreements, Tennessee courts continued to uphold physician non-compete agreements under a "reasonableness" standard in appropriate circumstances.
 
However, with the Supreme Court's ruling, the "reasonableness" standard no longer applies to physician non-compete agreements.  Rather, the Court rejects the validity of all physician non-compete agreements except those specifically allowed by Tennessee statute.

The Supreme Court reasoned that restrictive covenants in the medical profession implicate important public policy considerations, such as the right to freedom of patients to choose physicians, the right to continue an on-going relationship with a physician, and the benefits derived from having an increased number of physicians practicing in any given community.  The Court also took into account ethical considerations including the position of the American Medical Association that such agreements "restrict competition, disrupt continuity of care, and potentially deprive the public of medical services."

So which non-compete agreements are enforceable against physicians after this Supreme Court decision?  Only those limited agreements permitted under Tennessee Code Annotated Section 63-6-204, where the non-compete is imposed by: (1) a hospital or hospital affiliate following a bona fide purchase of the physician's practice or (2) faculty practice plans.  In both circumstances, however, the statute does not permit non-compete agreements for physicians practicing ophthalmology, radiology, pathology, anesthesiology or emergency medicine.  The statute also prohibits non-compete agreements for physicians practicing primary care, obstetrics, or pediatrics in an area in which there is a shortage of these services.

Hospital as Employer.  Where the employer is a hospital (or a hospital affiliate) and has made a bona fide purchase of the physician's practice, the maximum geographical restriction allowed in the non-compete agreement is (1) the county in which the primary practice is located or (2) a ten mile radius from the site, whichever is greater.  The maximum duration of the restriction is two years.  If the employer does not purchase the physician's practice, the employer may restrict only the right to treat or solicit former patients for a period of only one year.  Furthermore, if the physician's employment terminates for any reason other than "breach by the employee," then all non-compete restrictions are void.

Faculty Practice Plans.  Where the employment is through a faculty practice plan, the agreement may restrict a physician's right to practice medicine, but only within the county in which the primary practice site is located or a ten mile radius, whichever is greater.  The maximum duration of the restriction is two years.  However, the contracting parties may agree to terms which exceed the statutory limits if such restrictions are "reasonable and not inimical to the public interest." 

This new Supreme Court decision clearly alters the ground rules by which physicians and their employers may negotiate employment agreements in Tennessee.  This decision will dramatically affect all physician practices and other physician-employers that attempt to directly or indirectly restrict competition by a physician.  Given the breadth of the decision and its practical relevance to the health care profession, we strongly recommend that you review the non-compete provisions of your existing agreements.  The attorneys in our health care section are willing to assist you with your questions about the practical implications of the Udom opinion for your practice.