Tennessee General Assembly Revives Physician Non-Competes

The Tennessee General Assembly has revived physician covenants not to compete in Tennessee.  The General Assembly passed today, and Governor Bredesen is expected to sign, House Bill 240.  The bill is the General Assembly's response to the Tennessee Supreme Court's holding in Murfreesboro Medical Clinic, P.A. v. Udom.  In Udom, the Court held that, except for restrictions specifically provided for by Tennessee 's corporate practice of medicine statute, "covenants not to compete are unenforceable against physicians".  Prior to Udom, reasonable physician covenants not to compete had been enforceable.  Notwithstanding Udom, House Bill 240 deems reasonable, and thus enforceable, covenants not to compete if the covenants satisfy certain criteria.  The criteria that must be satisfied vary depending on whether the restriction is in connection with (i) an employment or other contractual arrangement, or (ii) the sale of a practice.

Non-Compete In Connection With Employment Or Contractual Agreements

A covenant set forth in an employment agreement or other written document signed by the health care provider and the employing or contracting entity will be deemed reasonable if it satisfies the following criteria:

• Duration.  The duration of the covenant is 2 years or less from the termination or expiration of the employment or other contract; and
  
• Restricted Area.  The maximum allowable geographic restriction is the greater of (i) a 10-mile radius from the primary practice site of the health care provider while employed or contracted or (ii) the county in which the primary practice of the health care provider while employed or contracted is located, OR there is no geographic restriction but the health care provider is restricted from practicing his or her profession at any facility at which the employing or contracting entity provided services while the health care provider was employed or contracted with the employing or contracting entity; and
  
• Health Care Providers Employed or Engaged for 6 Years.  The covenant will not be binding on a health care provider who has been employed by, or under contract with, the employing or contracting entity for at least 6 years.

Non-Compete In Connection With Purchase Or Sale Of A Practice

As before Udom, a covenant entered into in conjunction with the purchase or sale of a health care provider's practice, or all or substantially all of the assets of the health care provider's practice, may restrict such health care provider's right to practice his or her profession, provided that the duration of the restriction and the allowable area of the restriction are reasonable under the circumstances.   However, House Bill 240 adds a rebuttable presumption that the duration and area of restriction agreed upon by the parties in such an agreement are reasonable.

Other Key Points

• Included And Excluded Health Care Providers.  House Bill 240 applies to covenants with podiatrists, chiropractors, dentists, most physicians, optometrists, and psychologists.  House Bill 240 does not apply to physicians who specialize in emergency medicine or radiology or to osteopathic physicians.  Because these physicians were explicitly carved out of House Bill 240, under the Tennessee Supreme Court's reasoning in Udom, non-competes with these physicians are likely unenforceable, both in the employment/independent contractor context and in the context of the sale of a practice.  Further, because neither House Bill 240 nor Udom applies to physician assistants, nurse practitioners or pharmacists, it is unclear whether covenants not to compete with these health care providers would be enforceable.
  
• Hospitals And Their Affiliates.  Notwithstanding the general prohibition in Tennessee against the corporate practice of medicine, hospitals and their affiliates are permitted to employ non-hospital-based physicians provided that the employer may not restrict the employed physician's right to practice medicine upon the termination or conclusion of the employment relationship unless the restriction satisfies certain criteria.  House Bill 240 should not change the criteria that hospitals and their affiliates must satisfy in order enforce a covenant not to compete against their employed physicians.
  
• Effective Date.  House Bill 240 will not take effect until January 1, 2008.  Presumably, non-competes unenforceable under Udom will continue to be unenforceable until that date.

For more information on House Bill 240 and its affect on health care professionals' covenants not to compete, please feel free to contact Jay Hardcastle at 615-252-2386 or Mark Lewis at 615-252-2347, or another member of the Health Care Team.