Buy Out Clause Saves the Day; Non-Compete Enforced

By J Steven Collins steve@bcnattorneys.us In Murfreesboro Medical Clinic v. Udom, 2004 WL 193049 (Tenn Ct. App., January 30, 2004), the Court enforced a non-compete agreement against a physician. The agreement contained an imaginative clause which caused the Court to uphold the agreement. The non-compete agreement included language which allowed the employee the option of honoring the non-compete agreement or of paying the equivalent of one year’s salary to buy out of it. The doctor signed a two (2) year employment agreement. The agreement was presented to him in writing and he was given an opportunity to review it. The agreement contained a non-compete clause. That clause prohibited the physician from engaging in the practice of medicine within twenty-five (25) miles of the clinic for a period of eighteen (18) months. The non-compete provided that if the doctor wished to open another practice within the restrictive parameters of the agreement he could if the clinic was “compensated twelve (12) times the amount of the employee’s most recent monthly salary.” After the expiration of the initial employment term, the clinic did not renew the physician’s employment. The physician opened a medical practice within fifteen (15) miles of the old clinic. The clinic sued for injunctive relief and prevailed in the trial court. An appeal to the Court of Appeals was made. The Court of Appeals reviewed the law regarding the enforceability of non-complete agreements and affirmed. The Court noted that non-compete agreements are not invalid as a matter of law. Such agreements are, however, disfavored. They will only be enforced if they meet certain conditions, such as the agreement must be reasonable under the particular circumstances, there must be consideration (exchange for value - typically compensation) supporting the agreement, and the employer must be threatened with some real harm to its business. Courts are also to consider the severity of the economic hardship of the employee caused by the covenant and whether the public interest in unrestricted competition outweighs the enforcement of the agreement. The Court found there was consideration since the employee received compensation for two (2) years. The Court found the employer had demonstrated the non-enforcement of the agreement would cause it unreasonable harm. The Court reasoned that relationships between physicians and patients are such that patients associate their care with their particular physician and not the employer. The Court also observed that the fact the physician had the financial ability to satisfy the buy out clause demonstrated that the enforcement of the covenant would not work a severe economic hardship on him. Finally, the Court considered the public interest. The Court found that patients who wished to continue treatment with the defendant needed only travel twenty-five (25) miles, a distance not unreasonable when balancing that potential hardship with the interest of the employer in protecting its contractual right. What was unusual about this case was the fact that the employer had the foresight to include the buy out provision. The Court paid particular attention to that fact and noted the employee had: “the opportunity to fully review the non-compete clause . . .and [he] knowingly entered into [the] agreement. Second, this non-compete clause contained an option for [the employee] to continue his practice and compete in the proscribed area provided he compensate [the employer] one year’s worth of his salary.” In preparing non-compete agreements, consideration should be given to the technique used in this case. The presence of the buy out provision helps to demonstrate there has been bargaining over the terms of the non-compete agreement. Further, the inclusion of the buy out provision helps to demonstrate that the employee has the option for which by payment to the employer, the employee can continue the work otherwise restrained. This kind of clause causes the agreement to be seen as more balanced, and thus, more likely to be enforced. A buy out clause increases the likelihood the employee will honor the non-compete since odds are the Court will enforce the agreement unless the employee pays the money required in the buy out provision. One can almost hear the Court telling an employee challenging such an agreement, “You can not have it both ways.”