New Tennessee Law Approves the Enforcement of Certain Physician Covenants not to Compete

On June 21, 2007, Governor Phil Bredesen signed a new law which makes covenants not to compete enforceable against health care providers in many circumstances.  The new statute, Tennessee Code Annotated Section 63-1-148, specifically authorizes covenants not to compete if certain criteria are met.  The Legislature's action is in response to the Tennessee Supreme Court's decision in Murfreesboro Medical Clinic, P.A. v. Udom (166 S.W.3d 674 (Tenn. 2005)), where the Court held that physician covenants not to compete are unenforceable unless specifically approved by statute.  T.C.A. § 63-1-148 substantially expands the circumstances under which a physician noncompete will be held reasonable and enforceable under Tennessee law.  The new law will take effect January 1, 2008.  The following are key points associated with the new law:

• The law recognizes two distinct categories of covenants not to compete that will be enforceable:  (1) covenants not to compete arising out of a health care provider's employment agreement or other contractual relationship and (2) covenants not to compete arising from purchase or sale of the health care provider's practice.  
• In the employment/contract setting, a covenant not to compete will be deemed reasonable if it meets certain requirements:
• The restriction is in writing and signed by the health care provider and the employer.
• The duration of the restriction is two (2) years or less.
• If there is a geographic restriction, the maximum geographic restriction is the greater of the county in which the primary practice of the health care provider while employed is located or a ten (10) mile radius from the primary practice site of the health care provider while employed.
• If there is no geographic restriction, the health care provider may be restricted from practicing his or her profession at any facility at which the employer provided services while the health care provider was employed or under contract with the employer. 
• The law also provides that a noncompete covenant will not be enforceable against a health care provider who has been employed by, or under contract with, the employing or contracting entity for at least six (6) years.  
   
• Where there is a purchase or sale of the health care provider's practice, or substantially all of the assets of the practice, the covenant not to compete will be enforceable if the duration and geographic area of the restriction are reasonable.  The law creates a rebuttable presumption that the duration and geographic restriction as agreed upon by the parties are reasonable.  As such, a noncompete used in a sale of practice transaction has the potential to be broader than in an employment agreement.
• The law applies to podiatrists, chiropractors, dentists, physicians, optometrists and psychologists. 
• Osteopathic physicians were removed by a last minute amendment, thereby apparently making osteopathic physicians exempt from the law.  Therefore, non-competition restrictions against osteopathic physicians remain unenforceable.
• Physicians specializing in emergency medicine and radiology are expressly exempt from the application of the noncompete restrictions.  Again, noncompete restrictions are apparently unenforceable with respect to these physicians.
• There is some ambiguity relating to health care providers who have been employed by, or under contract with, the employing or contracting entity for at least six (6) years.  We understand that such "experienced" physicians were intended to be exempt from any employment-based restrictions, but the actual grammar of the statute is confusing on this point.  It is our understanding that this will be clarified by the time the law goes into effect. 

While the new law allows employers and others to re-institute the use of non-compete agreements in certain situations, the new law presents some challenging issues.  Employers will need to review whether their existing agreements are enforceable under the new law or whether new agreements should be executed with their providers.  In addition, for employers who deal with varying types of providers, including those who are exempted from the new law because of their specialty or because they have been with a group for at least six (6) years, issues of how to fairly implement covenants not to compete should be dealt with carefully so as to avoid causing issues within the practice.  Finally, given the exemption of certain types of physicians, the new law may create valuation issues for practices having those exempt physicians.

If you have any questions regarding the new law or any related health care issues, please don't hesitate to contact any of the following members of our Health Care Practice Group.  To access a copy of the new law, please click here. 

Chambliss, Bahner & Stophel, P.C. – Health Care Practice Group

William P. Aiken
(423) 757-0216
waiken@cbslawfirm.com 

Mark A. Cunningham
(423) 757-0219
mcunningham@cbslawfirm.com

E. Stephen Jett
(423) 757-0229
sjett@cbslawfirm.com

James A. Hurst
(423) 757-0238
jhurst@cbslawfirm.com

Amy J.L. Mason
(423) 757-0213
amason@cbslawfirm.com