- Physician Non-Compete Agreements Go Under the Knife: The Tennessee Supreme Court Strikes Down Physician Non-Compete Agreements 36 U. MEM. L. REV. 115 (2006)
- March 31, 2010 | Author: Oscar C. Carr
- Law Firm: Glankler Brown, PLLC - Memphis Office
*1115 CONTRACTS--MURFREESBORO MEDICAL CLINIC, P.A. v. UDOM: PHYSICIAN NONCOMPETE AGREEMENTS GO UNDER THE KNIFE: THE TENNESSEE SUPREME COURT REJECTS PHYSICIAN NONCOMPETE AGREEMENTS
Copyright © 2006 by The University of Memphis Law Review; Oscar Carr
“Public policy is a very unruly horse. Once you get astride it, you never know where it will carry you.” [FN1]
In Murfreesboro Medical Clinic, P.A. v. Udom, [FN2] the Tennessee Supreme Court, relying on public policy, banned noncompete agreements between physicians and their private employers. [FN3] In Udom, a physician signed an employment agreement with a private medical practice that contained a noncompete provision. [FN4] The provision provided that upon termination of the employment agreement the physician would not “engage in the practice of *1116 medicine within a twenty-five mile (25) radius of the public square of Murfreesboro, Tennessee for a period of eighteen (18) months.” [FN5]
The court had three realistic options in addressing the legality of the noncompete agreement between a physician and his private employer: (1) it could have evaluated the covenant as it would any other commercial noncompete agreement to examine if it were reasonable under the circumstances; [FN6] (2) it could have applied a special level of scrutiny, specifically for physician noncompete agreements, [FN7] or (3) it could have invalidated the agreement as a violation of public policy. [FN8] The Tennessee Supreme Court, relying primarily upon public policy, patient access to healthcare, and the American Medical Association Code of Medical Ethics, held that such agreements are “unenforceable and void” unless specifically protected by statute. [FN9] In making this decision, the court created a bright-line rule prohibiting noncompete agreements between physicians and their private employers.
The court, however, could have achieved the same objectives without making such a harsh rule. First, rather than filling the perceived legislative silence with its own view and infringing upon *1117 the Legislature's domain, the court could have allowed the Tennessee Legislature to set public policy in this area as it has done in the past. [FN10] Second, the majority's support for its ruling is weak because it contravenes its own stated rule of statutory construction. [FN11] Third, the Tennessee Supreme Court should have deferred to the legislature in this matter because the legislature can conduct hearings and have a full debate on this important contractual right. Fourth, the majority's comparison of the legal profession and medical profession is faulty. [FN12] The American Bar Association totally bans noncompete agreements amongst attorneys, while the American Medical Association only discourages such agreements between physicians. [FN13] Last, the majority's complete ban on physician noncompete agreements is too harsh because of its negative commercial effect on medical practices. The court should have avoided a bright line rule and relied on the more flexible test of reasonableness, which the court chose to ignore. [FN14]
II. COVENANTS NOT TO COMPETE IN TENNESSEE
Historically, Tennessee courts have enforced noncompete agreements that are “deemed reasonable under the particular circumstances,” and a total ban of reasonable agreements was not within the court's traditional jurisprudence. [FN15] This history suggests *1118 that the court was wrong to create a bright line rule, which prohibits even reasonable covenants not to compete. The term “reasonable covenants” when used in this comment are defined as covenants that limit such agreements in a reasonable degree of time, scope, and geographic area.
For instance, in Turner v. Abbott, [FN16] the Supreme Court of Tennessee held that a noncompete agreement between a dentist and an employee prohibiting the employee from practicing in his employer's vicinity after the termination of his employment was “reasonable and not oppressive; nor was it in any way detrimental to the interests of the public.” [FN17] The employee was a recent graduate of dental school who contracted with his employer not to practice in the employer's town after his termination. [FN18] The court opined that a total restraint on the practice of a profession would be void against public policy, but a partial restraint limited in time or place is not contrary to public policy but is enforceable. [FN19] The court discussed a number of other factors, in addition to time and location, in balancing whether a noncompete agreement is valid: (1) the right of the burdened party to work and support his family; (2) the existence of valuable and sufficient consideration; and (3) the community's interest in being deprived of the restricted party's profession. [FN20] Having examined all of these factors, the court still enforced the noncompete agreement because it was reasonable under the circumstances. [FN21]
After Abbott, the Tennessee Supreme Court created a more modern test allowing reasonable noncompete agreement to be enforced. In Allright Auto Parks, Inc., v. Berry, [FN22] a number of parking firms merged and became Allright Auto Parks (Allright). The managers of each acquired firm executed a noncompete agreement.*1119[FN23] The agreement stated that the defendant, a manager of one of the acquired firms, could not compete with the parent corporation for five years in any location where the parent corporation operated. [FN24] Approximately four years later, the defendant went to work for a competitor in violation of the agreement, and Allright sued to recover damages and enjoin the defendant from further competition. [FN25] In refusing to enforce the agreement, the court adopted the rule that “before a non-competitive covenant will be upheld as reasonable and enforceable, the time and territorial limits involved must be no greater than is necessary to protect the business interests of the employer.” [FN26] The court also adopted an approach, which focused on four relevant factors in deciding whether such an agreement is reasonable: (1) the consideration supporting the agreement; (2) the threatened danger to the employer if the agreement is not enforced; (3) the economic hardship fixed on the employee by such a covenant; and (4) whether the covenant is against the public interest. [FN27] In applying these factors, the court concluded that the noncompete agreement prohibiting the defendant from competing in forty-six cities in Canada and the United States was “unreasonable since the area encompassed in the prohibition is beyond what is necessary to shield the [defendant] and beyond any reasonable necessity to protect the legitimate interest of the [plaintiff].” [FN28] Additionally, the court held that noncompete agreements, which cover geographic areas where the employee has never worked, are unreasonable and unenforceable.” [FN29] Finally, the court noted that the modern trend is to construe noncompete agreements in favor of the employee. [FN30]
Expanding on its reasoning in Allright, the court in Hasty v. Rent-A-Drive, Inc. [FN31] added more factors in balancing the interests *1120 of the public, the employer, and the employee when construing noncompete agreements as reasonable. In Hasty, a trucking company sought to enforce a noncompete agreement against a former driver of the company. [FN32] At the outset of his employment, the driver signed an employment contract, which prohibited him from working for any of his former employee's customers for six months after the termination of his contract. [FN33] Less than six months after his termination, the driver went to work for a competitor of his former employer. [FN34] In deciding whether the agreement was reasonable, the court prefaced its holding by adding a new presumption to the balancing test: restrictive “covenants are not favored in Tennessee because they are in restraint of trade.” [FN35] The court also added that employers cannot restrain ordinary competition and that for a noncompete agreement to be enforceable “special facts” must exist that show that “without the [agreement] the employee would gain an unfair advantage in future competition with the employer.” [FN36] The court noted that such an advantage might occur “where the employee closely associates or has repeated contact with the employer's customers so that the customer tends to associate the employer's business with the employee.” [FN37] Equally important, if the employer provides the employee with specialized training, then the court will find such a factor to weigh in favor of finding a noncompete agreement reasonable. [FN38] In applying these new factors, the court focused on whether the employee's activity threatened the employer. [FN39] The court held the noncompete agreement was unreasonable because, although the driver had personal contact with the customers of his former employer, he had no influence in persuading that customer to transfer *1121 its business to the competitor. [FN40] Furthermore, his former employer provided the driver with no extra training or specialized knowledge, and the cost of replacing the driver was minimal. [FN41]
Applying the Hasty analysis to medical groups and their physician-employees, “special facts” arguably entitle the medical employers to protection via reasonable noncompete agreements. [FN42] Physician-employees have special access to their employer's confidential customers who are their patients. These patients also tend to associate closely the physician-employee with the employer's business because of patients' repeated visits and their closeness to the physician-employee. Also, many medical employers consist of more experienced physicians who provide specialized training to younger physicians as well as access to their patient base. Additionally, physician-employees would have significant influence in persuading an existing customer to leave their employee's business, and the cost of replacing a departing physician is significant. Because of these “special facts,” physician-employers should be protected by reasonable noncompete agreements to keep their employees from gaining an “unfair advantage” because of their unique access to customers. Moreover, the private employer incurs significant costs when replacing a departing physician, in addition to losing customers, and forfeiting their investment of specialized training in the physician-employee. [FN43] For these reasons, noncompete agreements should be reasonable under these circumstances.
However, one Tennessee case suggests that public policy overrides even reasonable noncompete agreements. The Tennessee Supreme Court in Spiegel v. Thomas, Mann & Smith, P.C. [FN44] created a per se ban of noncompete agreements that restrict the practice of law. In Spiegel, an attorney left his firm and became in-house counsel. [FN45] Under the terms of his employment contract, he would be denied deferred compensation if he continued to practice*1122 law after leaving the firm. [FN46] The court held that the denial of the deferred compensation amounted to a restriction of the right to practice law and that such an agreement harmed the public good. [FN47] In reaching this conclusion, the court relied heavily on the American Bar Association's (ABA) Model Code of Professional Responsibility (Code) that governs how lawyers practice law and which expressly prohibits the restriction of the practice of law. [FN48] The court pointed to the ABA's formal opinion that restrictions upon the practice of law are unethical. [FN49] Additionally, the court made an important distinction that lawyers are not equivalent to a normal business and “that the practice of law is a profession, not a business, that clients are not merchandise, and that lawyers are not tradesman.” [FN50] In the same vein, the court found the principle that an attorney should always be available to his client paramount, and that any restriction on such a principle is void because it violates public policy. [FN51]
Unlike the per se ban in Spiegel, the Tennessee Court of Appeals in Medical Education Assistance Corp. v. Mehta[FN52] enforced a noncompete agreement after finding it reasonable under the circumstances.*1123[FN53] In Mehta, Dr. Mehta, a pediatric cardiologist, signed an employment agreement that included a noncompete agreement with a non-profit corporation, Medical Educational Assistance Corporation (MEAC), which was affiliated with East Tennessee State Quillen College (ETSU). [FN54] Dr. Mehta left MEAC because of inadequate facilities and declining pay, and he set up a private practice that was in direct competition with the University's own faculty practice plan. [FN55] ETSU chose to enforce the agreement after it hired a new cardiologist who could not compete with Dr. Mehta because there was a limited patient base in the area. [FN56] The trial court found that validity of the noncompete agreement turned on what was in the public's interest. [FN57] In weighing the factors from Hasty, the court found that the school's interest in having a patient base for its medical students outweighed Dr. Mehta's interests. [FN58] The appellate court affirmed and examined the “competing interests” and “considerations” surrounding Dr. Mehta's noncompete agreement. [FN59] The court noted that Dr. Mehta made a binding *1124 agreement not to compete with his employer and that “there should be some sanctity to a contract.” [FN60] The appellate court also found that the need for the medical college to have a large enough patient-base to teach and train interns effectively outweighed any of Dr. Mehta's interests, including “the public's interest in having access to a highly skilled professional such as Dr. Mehta.” [FN61] In fact, the court rejected Dr. Mehta's contention that the noncompete agreement violated public policy. [FN62] The court added the caveat that its ruling had no bearing on whether the public interest would require the enforcement of a restrictive covenant against a physician and his private employer. [FN63] As the case history suggests, with the exception of Spiegel, Tennessee courts have historically enforced noncompete agreements that are deemed reasonable in time, scope and duration.
III. LEGISLATIVE PROTECTION OF PHYSICIAN NONCOMPETE AGREEMENTS IN TENNESSEE
The Tennessee Legislature, in 1997, decided to give certain contracts in the medical field special statutory protection. [FN64] The legislature set very specific standards outlining the scope, time, and circumstances of such protection. The legislature carved out these exceptions since “special facts above and beyond ordinary competition” existed giving physicians competing against a faculty practice plan an “unfair advantage” and “any financial hardship” to the employee is outweighed by the “faculty practice plan's right to be free of unfair competition.” [FN65] Additionally, a Tennessee state *1125 senator said that the statute did not change Tennessee's law regarding restrictive covenants; “[I]t [the statute] really clarifies it. It doesn't change [it]. It clarifies existing law.” [FN66] The statute protects restrictive covenants when the employer is a faculty practice plan associated with a medical school such as the one in Mehta, and when the employer is a hospital or an affiliate of a hospital. [FN67] Also, if the employer is a hospital that has bought a physician's practice, then the maximum geographical restraints on that physician are the county in which the primary practice site is located or a ten mile radius from this site, whichever one is greater. [FN68] The legislature held that the maximum time restriction was two years, unless the parties agreed by mutual consent to more but not to exceed five years. [FN69] Additionally, where a physician's practice has not been purchased, the employer may only restrict the physician's right to solicit or to treat former patients for a maximum of one year. [FN70] Further, if the employer terminates the agreement for any reason other than a breach by the employee-physician then the noncompete agreement is void. [FN71] The statute does not allow noncompete agreements by a hospital or faculty practice plan where the physician is an ophthalmologist, radiologist, pathologist, anesthesiologist, or an emergency room physician, or where the physician is practicing primary care, obstetrics or pediatrics in an area, which has a shortage of these services. [FN72] The Legislature, thus, set certain boundaries for when noncompete agreements could be used in the medical context while endorsing Tennessee court's historical analysis of such agreements.
*1126 IV. PHYSICIAN COVENANTS NOT TO COMPETE IN OTHER STATES
Similar to courts prior to Udom, a majority of states have examined noncompete agreements between physician and private employers using the reasonableness standard. [FN73] For instance in Kansas, in Weber v. Tillman, [FN74] an employee, a dermatologist, entered into an employment contract containing a noncompete agreement with another dermatologist, his private employer. [FN75] After a dispute, the employee left his employer and promptly began practicing medicine within the restricted area. [FN76] His employer sued to enforce the agreement, and the trial court found it was reasonable, enforceable, and did not violate public policy. [FN77] The Supreme Court of Kansas affirmed and held that the rationale for enforcing a noncompete agreement is the freedom of contract, [FN78] although, the agreement must protect a legitimate business interest. [FN79] The court used a set of factors similar to that in Hasty and Allright that “the determination of reasonableness [of a noncompete agreement] is *1127 made on the particular facts and circumstances of each case.” [FN80] The court found that the geographic and time restrictions were reasonable and that there would be no “substantial public injury” to the public. [FN81] Moreover, the court noted, that although the reasonableness of the contract and the interest of public are important, “the paramount public policy is that freedom to contract is not to be interfered with lightly.” [FN82] Furthermore, the Supreme Court of Kansas found the following facts persuasive in upholding the physician noncompete agreement: the employer introduced the employee to the community; provided him with an immediate patient base; the employee's patients could drive thirty miles to see the restricted employee if they wished; and the employee knowingly signed the contract. [FN83]
On the other hand, a minority of states has applied a higher level of scrutiny to noncompete agreements governing physicians. [FN84] In Ohio Urology, Inc. v. Poll, [FN85] the plaintiff, a professional corporation consisting of two physicians, hired the defendant, a urologist. The defendant signed an employment contract that restricted him from competing with the plaintiff for two years and *1128 within five miles of the plaintiff. [FN86] After a dispute, the defendant left and opened an office a block away, and the plaintiff sought to enforce the agreement. [FN87] The trial court appointed a referee who found that agreements that restrict the practice of medicine are contrary to public policy and unenforceable. [FN88] The referee based his opinion on the American Medical Association's (AMA) Principles of Medical Ethics that “discourages” such agreements between physicians and employers. [FN89] The court of appeals reversed the trial court's holding that all noncompete agreements restricting the practice of medicine were per se unenforceable because of medical ethics. [FN90] The court noted that the AMA “only ‘discourages”’ such agreements and that it could have made an outright prohibition if it so chose. [FN91] In spite of applying a heightened scrutiny test to noncompete agreements involving the practice of medicine, the court of appeals ruled that the lower court should reevaluate the need for a temporary injunction against the defendant using a reasonableness type of approach. [FN92]
*1129 V. THE UDOM DECISION
In 2000, the Tennessee Supreme Court in Murfreesboro Medical Clinic, P.A. v. Udom[FN93] invalidated all physician noncompete agreements as a matter of public policy absent statutory protection. [FN94] The plaintiff, Murfreesboro Medical Clinic (MMC), a private medical practice located in Tennessee, hired Dr. David Udom (Udom). [FN95] Udom signed an employment contract that contained a noncompete agreement prohibiting him from practicing medicine within twenty-five miles of his employer and for a period of two years with the exception that the agreement could be waived only if Udom paid the medical practice twelve times his most recent monthly salary. [FN96] In 2002, MMC informed Udom that they would not renew his contract and would enforce the noncompete agreement. [FN97] MMC told him that the agreement prohibited him from taking a job as a doctor who only worked in a hospital as well a position in the Veteran's Administration hospital, even though neither place directly competed for patients with MMC. [FN98] Finally, Udom told MMC that he was opening a private practice within the restricted area, and MMC filed a complaint seeking an injunction. [FN99] The trial court granted a temporary injunction against Udom and ordered him to file a $120,000 injunction bond. [FN100] The court of appeals reversed the temporary injunction but affirmed the validity of the noncompete agreement and remanded the case to the chancery court to determine the reasonableness of the amount to satisfy the buy-out provision. [FN101] The Supreme Court of Tennessee granted Udom permission to appeal whether the agreement was enforceable. [FN102] Acknowledging this issue as a case of first impression, the Tennessee Supreme Court held that “noncompete agreements such *1130 as the one at issue [between physicians] in the present case are inimical to public policy and unenforceable.” [FN103]Murfreesboro Med. Clinic, P.A. v. Udom, 166 S.W. 3d 674 ( Tenn. 2005).
In arriving at this conclusion, the court first focused on history and evolution of noncompete agreements in the state of Tennessee. [FN104] The court noted that noncompete agreements are disfavored in Tennessee. [FN105] Although, reasonable noncompete agreements that protect legitimate commercial interests within a reasonable time and geographical scope are enforceable. [FN106] The court noted the four factors relevant to whether such an agreement is reasonable: (1) “the consideration supporting the covenant; (2) the threatened danger to the employer in the absence of the covenant; (3) the economic hardship imposed on the employee by the covenant; and (4) whether the covenant is inimical to the public interest.” [FN107] Furthermore, courts must strictly construe noncompete agreements that concern important public policy. [FN108] The court noted that the ABA's Ethics Committee position that noncompete agreements are unethical in the practice of law was a guiding factor in finding them contrary to public policy. [FN109]
After examining noncompete agreements in general, the court examined the public policy effects of noncompete agreements on the practice of medicine. [FN110] The court compared noncompete agreements in the practice of medicine to those restricting the practice of law. [FN111] The court focused on the “public good” and concluded that the public benefits by having a larger number of doctors in the community, allowing for increased patient choice and *1131 improved healthcare with lower costs. [FN112] Moreover, the court found persuasive the AMA's Code of Medical Ethics discouraging noncompete agreements among physicians because “a person has the right to choose his or her physician and to continue an on-going professional relationship with that physician,” and noncompete agreements can impair or deny this right altogether. [FN113] Following this reasoning, the court examines and rejects the majority of states' position that noncompete agreements affecting physicians should be construed using a reasonable test. [FN114] In light of the AMA's position, the court found it “curious” and “surprising” that the majority of states have not placed more emphasis on the AMA's discouragement of such agreements. [FN115] In this same vein, the court noted the need for patients to be able to see their doctors without restriction and compared the doctor-patient relationship to the lawyer-client relationship; “[t]hese relationships [doctor-patient and lawyer-client] are ‘consensual highly fiduciary and peculiarly dependent on the patient's or client's trust and confidence in the physician consulted or attorney retained.” [FN116] The court then asserted that the right of a patient to see his or her doctor is “so fundamental that that we can not allow it to be denied because of an employer's restrictive covenant.” [FN117]
Additionally, the court noted that some states have applied heightened scrutiny to medical noncompete agreements, while others have completely banned such agreements. [FN118] The court examined cases that applied heightened scrutiny, but the court did not find that position persuasive. [FN119] Also, the court noted that three states have enacted statutes totally prohibiting noncompete clauses *1132 in physician contracts. [FN120] Likewise, the court noted that some states have used antitrust statutes to prohibit noncompete agreements between physicians and their employers. [FN121]
In addition to examining other states' various positions, the court examined the only relevant Tennessee statute, which specifically affords faculty practice plans and hospitals the protection of noncompete agreements. [FN122] In its examination, the court noted that the “legislature is presumed to know the state of the law at the time it passes legislation.” [FN123] Based on this presumption, the court had no problem ruling on this issue even though it might be better left to the legislature because the legislature “presumably” [FN124] was aware of how the court would rule. [FN125] The court, however, is on shaky legal ground because it breaks its own rule of statutory construction that focuses on the legislature's presumed knowledge of the law. While noncompete agreements are disfavored in Tennessee, the historical test, especially in the medical context, is one of reasonableness. [FN126] Tennessee courts have never subjected medical noncompete agreements to a per se ban. Hence, it is difficult to understand how the majority in Udom could presume that the Legislature's failure to protect what was already legal became an effective grant of power to the Tennessee Supreme court to abolish medical noncompete agreements based on public policy.
In reaching a different conclusion, Justice Holder, concurring and dissenting, disagreed with majority concerning the per se unenforceability of noncompete agreements between a physician and *1133 her private employer. [FN127] Based on the legislative history of TENN. CODE ANN. 63-6-204(e), Justice Holder did not think that the legislature intended a “substantive change in the law but merely a clarification of pre-existing law.” [FN128] She also noted that the legislature knew that pre-existing law permitted reasonable noncompete agreements between physicians and their employers and that the legislature chose only to regulate one area of medical noncompete agreements. [FN129] Moreover, she held that if the legislature wanted to prohibit all other noncompete agreements involving physicians, “it could have simply precluded [them].” [FN130]
In addition, Justice Holder distinguished noncompete agreements involving physicians from those involving lawyers. [FN131] She noted that the Tennessee Supreme Court is responsible for governing attorney conduct, but the Tennessee Board of Medical Examiners (Medical Board), “not this Court, establishes ethical standards for physicians.” [FN132] Furthermore, the AMA Code of Medical Ethics only discourages noncompete agreements, where the ABA's Code prohibits them. [FN133] Justice Holder would defer to the Medical Board, which is in a better position to determine if noncompete agreements should be prohibited outright. [FN134]
In construing medical noncompete agreements, Justice Holder would apply a heightened level of scrutiny test and hold that physician noncompete agreements that are not regulated by statute “are enforceable if reasonable and not injurious to the public.” [FN135] The factors to be considered, however, seem very similar to the reasonable standard test and include: “1) the necessity of protecting a legitimate business interest; 2) the reasonableness of the time *1134 and territorial limitations; 3) the economic hardships imposed on the employee, and 4) any harm to the public interest resulting from the covenant.” [FN136] The test would also examine whether the doctor acquired business secrets, confidential information, patient lists, special skills or received advanced training while employed. [FN137] Additionally, Justice Holder found the twenty-five mile area as overbroad and unenforceable. She pointed to the legislature's ten-mile limit or the county in which the employer is located; whichever is greater, as a guide to what is a reasonable geographic restriction. [FN138] Also, the noncompete agreement at issue in Udom was unduly harsh because the employer decided to end the relationship without evidence of cause. [FN139] Finally, the last factor to be considered is whether the noncompete agreement would result in a shortage of physicians in the area. [FN140] Justice Holder acknowledged that this agreement was unenforceable because of its unreasonableness, but she would refuse to create a per se rule against all noncompete agreements involving physicians. [FN141]
VI. PUBLIC POLICY: THE TENNESSEE SUPREME COURT VERSUS THE LEGISLATURE
As to what political body is in the best position to decide this critical issue concerning physicians and noncompete agreements, the Tennessee Supreme Court's deference to the legislature in a number of public policy disputes is instructive on how the court could have ruled. [FN142] In Cavender v. Hewitt, the Tennessee Supreme Court upheld a law in a dispute over whether a police officer's wages could be garnished. [FN143] Traditionally, Tennessee courts “universally” held that the wages of municipal employees could *1135 not be garnished. [FN144] However, when the Tennessee Legislature passed a law allowing such garnishments, the Tennessee Supreme Court acknowledged the legislature's pivotal role in creating law concerning public policy. The court refused to invalidate the legislature's stance, despite its previous decisions, and stated; “[w]here courts intrude into their decrees their opinion on questions of public policy, they in effect constitute the judicial tribunals as lawmaking bodies in usurpation of the powers of the legislature.” [FN145] In Watson v. Cleveland Chair Co., [FN146] the Tennessee appellate court created a cause of action where none existed statutorily by creating an additional right for wrongful discharge. The Tennessee Supreme Court reversed the lower court and warned it not to delve into the Legislature's domain by holding, “only in the most extraordinary circumstances should the courts of this State impose their judgment in an area which, in the first instance, is clearly a legislative function.” [FN147] In Taylor v. Beard, [FN148] a family was in a car accident, and the children sued the defendant for loss of parental consortium. [FN149] The trial court refused to create a claim where none existed statutorily and by “citing the judiciary's limited role in creating public policy.” [FN150] The Tennessee Supreme Court affirmed and declined to create a common law cause of action for parental consortium in personal injury cases because such a decision is “a matter of legislative discretion.” [FN151] The court noted that the legislature had taken a position on the matter by passing a statute on loss of spousal consortium. [FN152] Importantly, the court chose to defer to the legislature for these reasons:
This is an issue of public policy and interest balancing in which the legislature has involved itself before, i.e., loss of spousal consortium, Tenn. Code Ann. § 25-1-106, and *1136 we believe it is particularly appropriate for this Court to defer and leave this issue to the discretion of the legislature ... Where the legislature has thoroughly involved itself in an area of the law and where its decisions in that area appear to set discreet boundaries, we think that it should be left to the legislature to change those boundaries, if they are to be changed, and to define the new ones. [FN153]
The court found that it was not within “the judiciary's role to create the proposed cause of action ... in an area where the legislature has taken action.” [FN154] Similarly, the Tennessee Legislature passed a statute on medical noncompete agreements, and, for the same reasons as outlined in Taylor, the supreme court should have deferred to the legislature.
Additionally, legal authorities and other states' handling of similar noncompete agreements suggest that the legislature is better suited to determine issues of public policy. Specifically, the Restatement (Second) of Contracts, on the unenforceability of contracts on grounds of public policy, highlights why legislatures are best suited to determine issues of public policy. [FN155] It reads: “Modern role of legislation. The declaration of public policy has now become largely the province of legislators rather than judges. This is in part because legislators are supported by facilities for factual investigations and can be more responsive to the general public.” [FN156] In this vein, the Tennessee legislature passed a statute [FN157] covering noncompete agreements involving physicians, and the legislative history suggests that the legislature did not intend to abolish employers' ability to protect themselves via reasonable noncompete agreements. [FN158] Moreover, three state legislatures *1137 have enacted statutes completely prohibiting noncompete agreements governing physician contracts, and Tennessee could have been the fourth if the legislature had so chosen. [FN159] Despite the countervailing considerations of past precedents, legal authorities, the Tennessee Legislature and other states' actions concerning such noncompete agreements, the Tennessee Supreme Court decided to declare all noncompete agreements between physicians and private employees per se invalid.
The Tennessee Supreme Court could have decided this case along narrower lines by deferring public policy decisions to the Tennessee Legislature and the Tennessee Board of Medical Examiners. Additionally, a ruling that allows for reasonable noncompete agreements would preserve the freedom of contract and protect reasonable commercial interests. The Udom decision will adversely effect private medical groups because nothing will stop a physician from joining a medical group, absorbing specialized knowledge from more experienced physicians, as well as new patients, and then opening an office a block away when the physician feels that he can compete with that group. A similar scenario occurred in Ohio Urology, Inc. v. Poll, [FN160] but in that case, the Ohio Court of Appeals protected reasonable commercial interests and did not create a per se ban on noncompete agreements involving physicians. [FN161] Additionally, the history of noncompete agreements in Tennessee suggests that the Tennessee Supreme Court would have protected reasonable commercial interests using the reasonable standard test or even a heightened scrutiny test. Using either *1138 test, the court still could have protected the public interest because unreasonable noncompete agreements, such as the one in Udom, could be invalidated for a number of reasons without creating a per se ban. Tennessee courts could have invalided such agreements for unreasonable time, geographic area, financial hardship to the doctor, a shortage of medical services, termination without cause and any other reasonable factor. Instead, the court has left those medical groups, which have legitimate commercial interests to protect, with no legal recourse. [FN162]
The majority's decision in Udom is also weak for a number of other reasons. The majority's comparison of the facts in Udom to those in Spiegel, which invalidated noncompete agreements involving attorneys, is distinguishable because the Rules of the Tennessee Supreme Court directly govern attorney conduct. Additionally, the AMA only “discourages” noncompete agreements and does not have an outright ban as the ABA does. [FN163] Also, the court has diminished the freedom to contract between two parties negotiating at arms length, despite noting the importance of what it called the “sanctity to a contract.” [FN164] Most importantly, the Tennessee Supreme Court, relying on a dubious presumption, has usurped the state legislature's role in deciding that all noncompete agreements governing physicians are void as a matter of public policy. [FN165] In the final analysis, the Tennessee Supreme Court, by voiding all noncompete agreements between physicians and private employers, has usurped the role of the legislature, ignored the *1139 Tennessee Board of Medical Examiners, diminished the freedom of contract, and failed to protect private medical groups by denying them the protection of reasonable noncompete agreements.
[FNa1]. Staff Member, The University of Memphis Law Review; J.D. Candidate, May 2007, University of Memphis, Cecil C. Humphreys School of Law; B.B.A., cum laude, 2004, Southern Methodist University. The writer would like to extend a special thanks to Rachael Hutchings, Notes and Comments Editor, and Professor Lee Harris for their comments and suggestions in writing this Comment. The writer alone, of course, is responsible for any and all errors.
[FN1]. Richardson v. Mellish, 130 Eng. Rep. 294, 303 (Ex. 1824).
[FN4]. Id. at 676-77. A noncompete agreement is “[a] promise, usu[ally] in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer.” BLACK'S LAW DICTIONARY 392 (8th ed. 2004).
[FN7]. Udom, 166 S.W. 3d at 685 (Holder, J., dissenting). Justice Holder argued that “physicians' restrictive covenants that are not otherwise regulated by TENN. CODE ANN. 63-6-204(e) (2004 & Supp. 2005) are enforceable if reasonable and not injurious to the public,” and she would “hold these restrictive covenants to a higher level of scrutiny than covenants not to compete in commercial contexts.” According to Justice Holder's dissent, the factors to be considered when applying strict scrutiny in determing the reasonableness of a noncompete agreement are: “1) the necessity of protecting a legitimate business interest; 2) the reasonableness of the time and territorial limitations; 3) the economic hardships imposed on the employee, and 4) any harm to the public interest resulting from the covenant.” Id. at 685;see, e.g., Valley Med. Specialists v. Farber, 982 P.2d 1277, 1282-83 (Ariz. 1999); Iredell Digestive Disease Clinic v. Petrozza, 373 S.E.2d 449, 455 (N.C. Ct. App. 1988); Ohio Urology, Inc. v. Poll, 594 N.E.2d 1027, 1032 (Ohio Ct. App. 1991).
[FN8]. Udom, 166 S.W. 3d at 679. Courts use public policy grounds to invalidate contracts that have a negative “impact on the public good.” Id.; see generally E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS ch. 5 (3d ed. 1999) (discussing the unenforceability of contracts on public policy grounds).
[FN10]. See TENN. CODE ANN. § 63-6-204 (Supp. 1998), where the Tennessee Legislature carved out certain allowances for physician noncompete agreements. See also infra notes 64-72 and accompanying text.
[FN11]. Udom, 166 S.W. 3d at 683 (majority opinion) (quoting State v. Mixon, 983 S.W.2d 661, 669 (Tenn. 1999)) (“The Legislature is presumed to know the state of the law at the time it passes legislation.”); see infra note 123 and accompanying text.
[FN13]. Compare Model Rules of Prof'l Conduct R.5.6. (2004), with AMA, Code of Medical Ethics § e-9.02. (1998).
[FN14]. See, e.g., Allright Auto Parks, Inc. v. Berry, 409 S.W.2d 361, 384-85 (Tenn. 1966) (applying the reasonableness test to determine the validity of restrictive covenants).
[FN15]. Id; see also Greene County Tire & Supply, Inc. v. Spurlin, 338 S.W. 597, 599-600 (1960). For a survey of cases involving noncompete agreements in Tennessee, see Michael L. Agee, Comment, Covenants Not to Compete in Tennessee Employment Contracts: Almost Everything You Wanted to Know but Were Afraid to Ask, 55 TENN. L. REV. 341 (1988).
[FN21]. Id. at 69. Additionally, the court noted “numerous authorities ... where the rule has been applied to the employment of salesmen, teachers, dentists, and others.” Id. at 68.
[FN27]. Id.; see also Welcome Wagon, Inc. v. Morris 224 F.2d 693 (4th Cir. 1955).
[FN28]. Allright, 409 S.W. at 363.
[FN29]. Id. at 364.
[FN36]. Id. at 473. The court noted that such legitimate business interests entitled to protection would include confidential information such as trade or business secrets and customer lists. Id.
[FN41]. Id. at 473-74.
Agreements Restricting the Practice of a Lawyer: (A) A lawyer shall not be a party to or participate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement, except as a condition to payment of retirement benefits. (B) In connection with the settlement of a controversy or suit, a lawyer shall not enter an agreement, except as a condition to payments of retirement benefits.
Id.; see also MODEL CODE OF PROFESSIONAL RESPONSIBILITY R. 5.6 (2004).
[FN49]. ABA Comm. On Ethics and Prof'l Responsibility, Formal Op. 300 (1961).
[FN55]. Med. Educ. Assistance Corp. v. Mehta, 19 S.W.3d at 809-10. “A faculty practice plan is a non-profit professional corporation affiliated with a medical school whose purpose is to allow physician faculty members of the school to conduct a clinical practice in addition to their faculty duties.” Murfreesboro Med. Clinic, P.A. v. Udom, 166 S.W.2d 674, 661 (Tenn. 2005).
[FN56]. Id. at 810. After Dr. Mehta left, ETSU's pediatric cardiology department “had a 62% decline in new patients and a 46% decline in physician referrals.” Id. at 810.
[FN58]. Id. at 811.
[FN59]. Id. at 814-15, 820. The court found seven competing interests:
1. The College's interest in recruiting and retaining skilled faculty members for its teaching and research goals.
2. The College's interest in providing quality medical care, especially in the areas of specialization and subspecialization.
3. The College's interest in giving its medical students and residents adequate clinical experience which can only come through having a sufficient patient base.
4. Dr. Mehta's interest in the likelihood of a greater income and more personal freedom in private practice.
5. Dr. Mehta's interest in remaining in the community where he has now developed significant ties.
6. The public's interest in having access to a highly skilled professional such as Dr. Mehta.
7. The public's interest in having the College of Medicine and its faculty practice plan not only remain viable, but continue to grow in both prestige and its contribution to the community.
Id. at 815.
[FN60]. Id. at 816.
[FN61]. Id. at 815.
[FN62]. Id. at 816.
[FN66]. Med. Educ. Assistance Corp. v. E. Tenn. State Univ. Quillen Coll., 19 S.W.3d 803 (Tenn. 1999) (quoting testimony from the Senate General Welfare Committee on May 21, 1997).
[FN73]. SeePrairie Eye Ctr., Ltd. v. Butler, 768 N.E.2d 414, 422 (Ill. App. Ct. 2002) (“Had [the restricted physician] wished to protect his right to those patients should he leave [the employer], he could have negotiated that point.”); Duneland Emergency Physician's Med. Group v. Brunk, 723 N.E.2d 963 (Ind. Ct. App. 2000). Weber v. Tillman 913 P.2d 84 (Kan. 1996); Armstrong v. Cape Girardeau Physician Assocs., 49 S.W.3d 821, 825 (Mo. Ct. App. 2001) (“Missouri has no per se rule against enforcing covenants not to compete between medical practitioners.”); Cmty. Hosp. Group, Inc. v. More, 869 A.2d 884 (N.J. 2005); Karlin v. Weinberg, 390 A.2d 1161 (N.J. 1978); Paula Berg, Judicial Enforcement of Covenants not to Compete Between Physicians: Protecting Doctors' Interests at Patients' Expense, 45 RUTGERS L.REV. 1 (1992). For a focused look at the reasons supporting the majority approach see Stuart Gimbel & Miles J. Zaremski, Article: Medical Restrictive Covenants in Illinois: at the Crossroads of Carter-Shields and Prairie Eye Center, 12 ANNALS HEALTH L. 1 (2003).
[FN76]. Id. at 88.
[FN78]. Id. at 89 (citing Francis v. Schlotfeldt, 704 P.2d 381, 382 (Kan. 1985)).
[FN80]. Id. at 90. The court used four factors to evaluate the reasonableness of the restrictive covenant: “(1) Does the covenant protect a legitimate business interest of the employer? (2) Does the covenant create an undue burden on the employee? (3) Is the covenant injurious to the public welfare? (4) Are the time and territorial limitations contained in the covenant reasonable?” Id.
[FN81]. Id. at 96.
[FN84]. Valley Med. Specialists v. Farber, 982 P.2d 1277, 1283 (“We therefore conclude that the doctor-patient relationship is special and entitled to unique protection. It cannot be easily or accurately compared to relationships in the commercial context. In light of the great public policy interest involved in covenants not to compete between physicians, each agreement will be strictly construed for reasonableness.”); Iredell Digestive Disease Clinic P.A. v. Petrozza, 373 S.E.2d 449 (N.C. Ct. App. 1989); Ohio Urology, Inc. v. Poll, 594 N.E.2d 1027, 1031-33, (Ohio Ct. App. 1991) (stating “[t]his measure of disfavor [of restrictive covenants] is especially acute concerning restrictive covenants among physicians” and “[t]hese covenants should be strictly construed in favor of professional mobility and access to medical care and facilities.”).
[FN89]. Id. The American Medical Association's 1989 Current Opinion entitled “Agreement on the Practice of Medicine” section 9.02 states:
The Council on Ethical and Judicial Affairs discourages any agreement between physicians which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of employment or a partnership or a corporate agreement. Such restrictive agreements are not in the public interest.
[FN90]. Id. at 1033.
[FN91]. Id. at 1030.
[FN92]. Id. at 1032-33 (pointing out that the “court may consider all pertinent factors affecting the reasonableness of the covenant ... such as time and space limitations, confidentiality concerns, the extent of actual unfair competition, the impact on the defendant's skills, any undue benefit obtaining from enforcement, and the practical impact on defendant's ability to practice adequately”).
[FN96]. Id. at 677.
[FN100]. Id. at 678.
[FN103]. Id. at 683.
[FN105]. Id. (citing Hasty v. Rent-A-Driver, 671 S.W.2d 471, 472 (Tenn. 1984)).
[FN113]. Id. at 680; see supra text accompanying note 89; see also AMA Code of Med. Ethics § E-9.06 (1998).
[FN116]. Id. at 683 (citing Karlin v. Weinberg, 390 A.2d 1161, 1171 (N.J. 1978) (Smith, J., dissenting)).
[FN119]. Id. See also text accompanying note 84 for a list of the cases cited.
[FN120]. Id.; see supra note 118.
[FN121]. Id. (citing Odess v. Taylor, 211 So. 2d 805 (Ala. 1968); Bosley Med. Group v. Abramson, 161 Cal. App. 3d 284 (Cal. Ct. App. 1984); Bergh v. Stephens, 175 So. 2d 787 (Fla. Dist. Ct. App. 1965); Gauthier v. Magee, 141 So. 2d 837 (La. Ct. App. 1962); W. Mont. Clinic v. Jacobson, 544 P.2d 807 (Mont. 1976); Spectrum Emergency Care, Inc. v. St. Joseph's Hosp. & Health Ctr., 479 N.W.2d 848 (N.D. 1992)).
[FN127]. Murfreesboro Med. Clinic, P.A. v. Udom, 166 S.W. 3d 674, 684 ( Tenn. 2005) (Holder, J., concurring and dissenting).
[FN131]. Id. at 684-85.
[FN135]. Id.; see supra note 84 and accompanying text.
[FN140]. Id. at 686.
[FN151]. Id. at 512.
[FN154]. Id. at 510-11.
[FN158]. See supra note 66 (discussing testimony from the Tennessee state senate that the enacted statute did not intend to change existing law but to clarify it).
[FN161]. For a good discussion of the possible negative commercial ramifications and uncertainty for doctors and their practice groups as a result of the Udom decision, see Walter E. Schuler, Article, Knockout? Supreme Court Deals a Blow to Noncompetes for Docs, but This Fight is Not Over, 41 TENN. B.J. 16 (Dec. 2005).
[FN162]. See generallyIntermountain Eye & Laser Ctrs., PLLC v. Miller, 127 P.3d 121 (Idaho 2005). The Idaho Supreme Court called the Tennessee Supreme Court's ban in Udom “unwise.” Id. at 132.
[FN163]. See supra notes text accompanying notes 13, 48, and 91.
[FN164]. Med. Educ. Assistance Corp. v. E. Tenn. State Univ. Quillen Coll., 19 S.W.3d 803, 810 (Tenn. 2000); see also E. FARNSWORTH, CONTRACTS ch. 5 (3d ed. 1999) (citing Printing & Numerical Registering Co. v. Sampson, L.R. Eq. 462 (1875) (Jessel, M.R.: “It must not be forgotten that you are not to extend arbitrarily these rules which say that a given contract is void as being against public policy, because if there is one thing which more than another public policy requires that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts entered into freely and voluntarily shall be held sacred and shall be enforced by courts of justice.”)).
[FN165]. See supra text accompanying notes 142-59.