• Deferred Compensation Forfeiture Clause Declared to Be an Unenforceable Non-Compete Agreement
  • March 19, 2009 | Author: Robert M. Wolin
  • Law Firm: Baker & Hostetler LLP - Houston Office
  • A Texas Court of Appeals recently held that a medical practice’s deferred compensation program’s forfeiture provision was an unenforceable non-compete agreement. Where a deferred compensation program provides that a former employee’s deferred compensation would be forfeited if he or she practiced medicine within the group’s practice area, the court held that the provision must comply with the stringent requirements applicable to Texas non-compete agreements. Valley Diagnostic Clinic v. Dougherty, No. 13-08-00201-CV (Tex. App.—Corpus Christi Feb. 12, 2009)

    The court found that a damages provision, which impacts the ability of a person to render personal services, operates as a restraint of trade and must be judged under the standards applicable to covenants not to compete: (1) the damages provision must be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made in which the consideration given by the employer must give rise to the employer’s interest in restraining the employee from competing, and the covenant must be designed to enforce the employee’s return promise in the agreement; (2) the limitations applicable to the forfeiture as to time, geographical area and scope of activity to be restrained must be reasonable; (3) the forfeiture provision must not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promise; and (4) in the case of a physician, the forfeiture provision must comply with the patient information and access provisions and covenant buy-out provisions of Tex. Bus. & Com. Code § 15.50(b).

    In this case, the court held that the deferred compensation forfeiture provision failed to satisfy the requirement that there be an agreement that is enforceable wholly separate from the covenant not to compete. A promise by the employee to continue practicing with the group cannot support the forfeiture clause because, by its own terms, the forfeiture clause could take effect only after the physician had ceased working for the group. Secondly, according to the court, a compensation provision made only in exchange for a non-compete promise is precisely the sort of restraint of trade that Texas law prohibits. Consequently, deferred compensation provisions must be drafted carefully to assure that they comply with Texas’ non-compete restrictions.