Last week, the Texas Court of Appeals affirmed a trial court order finding a physician non-compete agreement unenforceable as against public policy. Although Texas has no outright ban on physician non-compete agreements (like Massachusetts or Alabama), the decision suggests that Texas courts may be willing to invalidate physician non-compete agreements where there is evidence of public harm. The lawsuit arose out of a relationship between two cardiologists in the East Texas city of Nacogdoches.
In 1984, Dr. Prabhakar Guniganti opened the Nacogdoches Heart Clinic (NHC). Dr. Vijay Pokala joined the practice five years later. Eventually, the two doctors opened an outpatient lab known as East Texas Cardiovascular Labs (ETC). Both doctors owned a stake in each practice. Guniganti owned 55% of NHC and 65% of ETC. Pokala held 45% and 35% stakes, respectively. Both Guniganti and Pokala were classified as employees of NHC. Both had employment agreements with NHC. Those employment agreements contained a non-compete provision. Each physician agreed that upon termination of employment at NHC, he would not practice medicine (or have any ownership or interest in a medical practice whatsoever) within ten miles of the Nacogdoches city limits for a period of one year. On February 2 2006, following a dispute over a patient, Guniganti fired Pokala from NHC. Days later, Pokala opened his own practice. Two weeks later, NHC and Guniganti filed suit alleging – among other causes of action – that Pokala had breached his non-compete agreement. Pokala countersued for breach of a buy-sell agreement and breach of his employment contract with NHC.
The trial court ruled, in relevant part, that the covenant not to compete contained in the NHC employment agreement was unenforceable. The trial court’s holding was grounded in concern for the public interest. Nacogdoches is a small town and the loss of even one experienced cardiologist could have adversely impacted the community. The record from trial was consistent with this holding. Testimony suggested that the demand for cardiologists in the town was so great that Pokala worked nearly eighteen hours a day and received several calls each night after leaving the office. In light of these considerations, the court refused to enforce the non-compete agreement.
Guniganti appealed. In what may stand as an opinion for the ages, the Texas Court of Appeals affirmed the trial court’s ruling, holding that the non-compete agreement was overbroad, contrary to the public interest and therefore unenforceable. First, the agreement prohibited Pokala from practicing medicine of any sort – not just cardiology – within ten miles of the city limit. The appellate court found that such a restriction was overbroad in scope and was greater than necessary to protect NHC’s legitimate interests. Second, and more significantly, the court held that the public interest in physician choice and access to medical care trumped the freedom of contract.
The court took pains to stress that “Texas law recognizes and protects a broad freedom of contract,” but that such freedom is not unlimited. Private contractual rights must always be balanced against the public interest. And in this case, the record established that enforcement of this specific agreement, in this specific community, would have resulted in public harm. Case in point: When Dr. Pokala opened his practice in 2006, there were only three cardiologists in Nacogdoches. A representative of the Nacogdoches Hospital District testified that if Dr. Pokala was forced out of the market, it would “destabilize the availability of cardiovascular care in Nacogdoches County, and certainly the coverage of the emergency room.” Beyond this, the record established that Dr. Pokala routinely served indigent patients and never turned away a patient simply because they lacked the means to pay. On these facts, the Court of Appeals affirmed the trial court ruling that the non-compete agreement was unenforceable.
In attempting to push back against this reasoning, NHC and Dr. Guniganti argued that Texas law prevented the court from considering the public interest writ large. NHC argued that the validity of the non-compete agreement could be determined only by reference to the two criteria named in Texas Business and Commerce Code Section 15.50, the Texas statute that regulates physician non-compete agreements. That statute lacks a specific public interest factor. The Court of Appeals emphatically rejected this argument, holding that Section 15.50 is merely a codification of the rule of reason, of which the public interest is one factor. Beyond this, the court held that public policy is always a valid consideration in determining the enforceability of a contract.
The case is Nacogdoches Heart Clinic, P.A. v. Pokala, 12-11-00133-CV, 2013 WL 451810 (Tex. App. Feb. 6, 2013)
Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida. He focuses his practice on cases involving non-compete disputes, antitrust and business torts. He represents clients in Miami, Fort Lauderdale, Boca Raton, West Palm Beach, Jupiter, Fort Myers, Tampa, and Orlando. If you have a non-compete question or need a referral to a non-compete lawyer in your area, please contact Jonathan’s Fort Lauderdale office at 954-332-2380.