Physician Non-Competes: Special Considerations

4 minute read

With the rise in non-compete agreements throughout all business sectors, the inclusion of a non-compete in a physician’s agreement with a practicing group has also increased greatly. Non-competes that restrict a physician’s practice of medicine, however, uniquely impact general public health, and a patient’s individual health, more than non-competes in most other industries. While many non-competes are designed to protect a business’s confidential information and customers, physician non-competes are generally intended to prevent the doctor from continuing medical relationships with patients, a relationship typically thought of as more than just business. Therefore, Texas statute and case law impose additional burdens on the party attempting to restrict the activities of a physician pursuant to a non-compete agreement.

The requirements of the Texas Non-Compete Act, section 15.50 of the Texas Business and Commerce Code, for enforcement of a non-compete applies to all industries including physician non-competes. Therefore, under section 15.50(a), a physician non-compete will only be enforced if it: (1) is reasonable as to “time, geographic area and scope of activity to be restrained”; and (2) does “not impose a greater restriction than is necessary to protect the goodwill or other business interest of the promisee.”

Physician non-competes, however, face additional barriers to enforcement because of the circumstances surrounding the provision of healthcare. Therefore, a non-compete related to the practice of medicine must also comply with the provisions of section 15.50(b). Specifically, the law for physician non-competes requires that the agreement must permit the physician to “buy out” the non-compete at a “reasonable price” or it will not be enforced. TEX. BUS. & COM. CODE ANN. § 15.50(b)(2). The Texas Non-Compete Act also prohibits the contractual denial to the physician of a list of patients seen or treated in the last year before termination, and mandates access to medical records upon the patients’ authorization. TEX. BUS. & COM. CODE ANN. § 15.50(b)(1). Lastly, the non-compete must permit the physician to provide continuing care and treatment to patients during the course of an acute illness. TEX. BUS. & COM. CODE ANN. § 15.50(b)(3). Whether a non-compete meets these requirements, and is thus enforceable, is a matter of law for a court to decide. The burden is on the former employer seeking to enforce the restrictions.

Many disputes arise concerning whether the required “buy out” price contained in a physician non-compete is “reasonable,” as required by the statute. To determine whether this element has been met, courts often use an analysis similar to the determination of whether a liquidated damages provision is enforceable. Accordingly, the court will determine if the buy out price is reasonable by comparing it to an estimation of the employer’s forecasted lost profit if the physician were to violate the non-compete. Under this analysis, setting the buy out to be equal to the physician’s previous income, or to the yearly revenue generated by the physician, would be a mistake. Instead, the buy out provision should contain a price that reflects the anticipated net loss by the employer caused if patients follow the departing physician to another healthcare facility. If the parties’ wish to avoid determining the price of the buy out at the time of contracting, the statute allows for the amount to be determined through arbitration.

In addition to the unique buy out provision, the rules specific to physician non-competes prohibit key restrictions usually sought in other industries. For example, most non-competes are designed to prevent former employees from soliciting and obtaining the business of the employer’s customers. Accordingly, former employees are prohibited from retaining customer lists after their termination that would facilitate the easy solicitation of customers. But, in the healthcare context, not only does the statute require that the physician not be denied access to a patient list, but the physician is required by Texas Medical Board Rule 165.5 to send letters to all the patients treated in the last two years to notify them that the physician is no longer available. In addition, Texas Medical Board Rule 165.5 also requires the healthcare facility to post a similar written notice on its premises to alert patients that the physician has left its practice and further instructing patients where and how they can obtain their medical records. Therefore, while most businesses handle an employee’s termination in a manner designed to most effectively retain the customer’s business, when a physician relocates, the rules are designed to put the patients’ interests first.

More than other fields, courts factor in the impact to public policy when determining the enforceability of a physician non-compete. For example, the geographic area contained in the non-compete may be particularly scrutinized. If the non-compete would effectively eliminate a doctor from a city that needs healthcare providers, a court may determine that the restriction is overbroad as a matter of law. In addition, the breadth of the scope of activity prohibited may be subject to challenge. A clause that prevents a physician from generally practicing medicine within a certain radius of the prior place of employment may be overbroad and unenforceable if the physician only practices a certain type of medicine.

When drafting, enforcing, or defending non-competes for a physician, it is important to remember that while the same rules apply as to other fields, there are additional requirements to enforcement and additional concerns to consider. The healthcare industry is definitely a business in today’s economy, but the law still recognizes that it is different, and involves a type of relationship not typical in other areas that utilize non-compete agreements with its employees.

Pros and Cons of the Series LLC

5 minute read

Texas is one of about 16 states that permit the use of series limited liability companies (“LLC”).  Under the series LLC structure, an LLC (referred to here as the “master LLC”) can create separate series to hold different assets that may or may not be under common ownership and/or management with the master LLC or any other series.  The series LLC structure has two main advantages.  The first is its potential to compartmentalize liabilities: as long as certain conditions are met, the assets of each series are shielded from the liabilities of the other series and the master LLC.  Second, the series LLC structure can reduce costs and streamline administration because, in Texas at least, only the master LLC must file a certificate of formation, pay the filing fee, and file annual reports, and, in some cases, only the master LLC may be required to file tax returns.  But while a series LLC as a form of business entity may have many benefits, there are also some negatives that may not make it the right fit in all circumstances.  This article reviews the basics of the Texas series LLC structure and the reasons why it may (or may not) be the right form of entity in a given situation.

In Texas, a series LLC is formed in the same way as any other LLC, i.e., by filing a certificate of formation with the Texas Secretary of State and adopting a company agreement.  However, in order for an LLC to be able to form series, the certificate of formation and the company agreement of the LLC must include statements that “(1) the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular series will be enforceable against the assets of that series only, and not against the assets of any other series or the LLC generally, and (2) none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the limited liability company generally or any other series will be enforceable against the assets of a particular series.”[1]  In other words, no series will be liable for the debts of any other series or of the master LLC.  Simply making the required statements in the certificate of formation and company agreement will not, however, automatically segregate and contain liabilities.  The law goes on to state that the liability protections will apply only if “the records maintained for [a] particular series account for the assets associated with that series separately from the other assets of the company or any other series.”[2]  In other words, the master LLC and each series must maintain separate books and records.

In addition to the potential liability protections, an advantage of the series LLC structure is its great flexibility.  Each series within an LLC may have its own members, managers, membership interests, assets, and purpose.  The assets associated with a series may be held “in the name of the series, in the name of the limited liability company, through a nominee, or otherwise.”[3]  The Texas statute also gives a series the power and capacity to, in its own name, sue and be sued; enter into contracts; acquire, sell, and hold title to assets, including real property; grant liens and security interests in assets of the series; and “exercise such powers or privileges as may be necessary or appropriate to conduct its business or attain its purposes.”[4]

Because assets and bookkeeping must be maintained separately for each series, the series LLC structure will work best where the assets of each series and their respective costs, expenses, and revenue streams can be tracked separately without great difficulty.  For example, interests in oil and gas wells, where the revenue stream from each well can be separately tracked without much difficulty, could be held in different series of the same LLC.  The same holds true for separate real estate assets.  Even though separate books must be maintained for each series, there may be instances when one or more series created by a master LLC would be a disregarded entity for federal income tax purposes and would not have to file separate federal income tax returns. 

The advantages of the series LLC structure are clear.  One series LLC can provide the same benefits as multiple traditional LLCs but without the multiple filings, fees, annual reports, and in some cases, tax returns that would come with traditional LLCs.  So what’s not to like?  In a word, uncertainty. 

Uncertainties surrounding the series LLC arise in part from the fact that the series LLC is still a relatively new form of business entity.  The strength of its liability protections and the legal ramifications of the relationships of the series to each other and to the master LLC have not been tested to any great extent by litigation.  In addition, only about one-third of US states have adopted the series LLC structure.  Whether the courts of a non-series LLC state would respect the liability shields of a series LLC is not known.  Furthermore, the states that have adopted the series LLC structure have not done so in a uniform manner.  Some states, such as Texas and Delaware, do not require any public filing to record the formation of a series by a master LLC, while others, like Illinois, do.  Therefore, a state that either does not recognize the series LLC structure or that imposes more onerous requirements on series LLCs might not respect the series of an out-of-state LLC.   

Alphonse v. Arch Bay Holdings, LLC, 548 F. App’x 979 (5th Cir. 2013), demonstrates the uncertainties arising from state law issues and the relative newness of the series LLC structure.  Arch Bay Holdings, LLC was a Delaware series LLC.  One of its series, Series 2010B, owned a loan secured by a mortgage on Alphonse’s Louisiana home.  When Alphonse’s home was sold at a foreclosure sale, Alphonse sued Arch Bay under the Louisiana Unfair Trade Practices Act.  A lower court had dismissed the case, in part because Delaware law determined Arch Bay’s liability, and under Delaware law, Series 2010B was the real party in interest, not Arch Bay.  The Fifth Circuit Court of Appeals, however, reversed the dismissal.  As the court explained, the law of the state of incorporation of a business entity, Delaware in this case, normally determines issues relating to the internal affairs of an entity, but different principles might apply where the rights of third parties like Alphonse are at issue.  Characterizing treatment of a series LLC as a “novel and complex” matter of state law, the court held that Louisiana law should be applied to determine whether Arch Bay or Series 2010B was the proper party.  The question remains unanswered.

Other uncertainties include treatment of the series LLC as borrowers, under bankruptcy law, and under the Uniform Commercial Code (“UCC”).  If a series LLC is a borrower, must the lender inspect the borrower’s books and records to make sure that separate books are maintained for each series?  On the other hand, if a loan is to be secured by all assets of a borrower that is a series LLC, should the lender require that the liability protections of the separate series be waived?  If a master LLC files bankruptcy, will its series be pulled into the bankruptcy?  Conversely, if a series files bankruptcy, will the master LLC and/or the other series be pulled in?   As for the UCC, in states where the formation of a series does not require a public filing, a series does not fit within the UCC definition of “debtor.”  If a series owns assets that secure a debt, who should be named as debtor on the UCC-1 financing statement that must be filed to perfect the lender’s security interest?  If the series is named as debtor, is the lender perfected?   Texas recently amended its UCC statute so that the definition of “person,” which is incorporated in the definition of debtor, includes “a particular series of a for-profit entity.”[5]  But not every state that has adopted the series LLC structure has done so.

In conclusion, there are pros and cons to consider when deciding whether the series LLC is the best entity structure for a given situation.  Weighing in favor of the series LLC are its tremendous flexibility and streamlined administration.  Weighing against are the uncertainties, particularly if claims could arise under the laws of a state other than that in which the series LLC was formed.  

[1] Texas Business Organizations Code, Section 101.602(a)

[2] Texas Business Organizations Code, Section 101.602(b)(1)

[3] Texas Business Organizations Code, Section 101.603(a)

[4] Texas Business Organizations Code, Section 101.603(a)

[5] Texas Business and Commerce Code, Section 1.201(b)(27)

The Emergence of Professional Student-Athletes: NCAA Rules and State NIL Regulations

3 minute read

By: Kylie T. Jennings

Historically, student-athletes have been prohibited from being compensated for their play in any form outside of scholarships covering the cost of attendance at their school. While the NCAA generates billions of dollars in revenue annually, NCAA rules have consistently restricted student-athletes’ ability to receive compensation. The NCAA begrudgingly voted to loosen some of its restrictions on student-athlete compensation in June 2021 after a unanimous loss before the U.S. Supreme Court in NCAA v. Alston. It has now been a little over a year since the NCAA adopted an interim policy to allow student-athletes to be compensated for use of their name, image, and likeness (“NIL”), and while the NCAA Division I Board of Directors issued a statement in May 2022 offering broad guidance targeted at boosters in an effort to crack down on potential violations, the NCAA has still not issued further detailed guidance in hopes that Congress will adopt federal legislation instead.  

While the interim policy does allow student-athletes to receive compensation from third parties in exchange for use of their NIL, the interim rules continue the NCAA’s prohibition on pay-for-play and improper recruiting inducements.

The NCAA interim policy still does not allow student-athletes to receive any compensation from their school, and the athlete may only be paid for actual services rendered that utilize their NIL (e.g., signing autographs, making personal appearances, posting promoted social media posts, etc.). The NCAA NIL policy continues to prohibit anyone – including institutions and unrelated third parties – from paying student-athletes for athletic participation or achievement. Athletes and recruits are also strictly prohibited from being paid during their recruitment process as an improper inducement to attend, and compete for, a particular school.

In addition to the NCAA policy, there are currently twenty-nine states that have adopted laws governing NIL. Schools, student-athletes, and unaffiliated third parties in those twenty-nine states must comply with their relevant state law as well as the NCAA policies. In any case, where state law conflicts with the NCAA rules, state law supersedes.

Texas, for example, is one of the stricter states with regard to NIL regulations. The Texas NIL law (SB 1385) allows student-athletes to be paid for use of their NIL when the athlete is not engaged in official team activities. The Texas law requires athletes to attend a financial literacy and life skills workshop at the beginning of the athlete’s first and third academic years at their school in an effort to provide student-athletes guidance on how to manage money and navigate other practical issues that may arise from the athlete’s compensation from NIL deals.

Texas, like many other states, also restricts a student-athlete’s ability to enter into a contract for the use of their NIL if compensation is provided in exchange for an endorsement of alcohol, tobacco products, e-cigarettes or any other similar device, anabolic steroids, sports betting, casino gambling, a firearm the student-athlete cannot legally purchase, or a sexually oriented business. In addition, SB 1385 prohibits student-athletes from entering into any contract that conflicts with any institutional contracts or policies of the student’s school or team.

An important practical point for student-athletes and their families to note is that the NCAA NIL policy, as well as the Texas law, allows for student-athletes to engage professional services providers, such as attorneys, agents, and accountants, to assist with any permissible NIL activities. In order to ensure compliance with the rules, it is likely best practice for schools, sponsors, and student-athletes to engage professionals to take a detailed review of both potential NIL contracts and the school or team’s contracts. 

The law also requires the athlete to disclose any proposed contract for the use of their NIL to their school. In addition to complying with the biggest piece of NIL regulation – ensuring that any NIL deals do not violate the “pay-for-play” rules – familiarity with both institutional contracts and NIL agreements is going to be a key component for all parties to a NIL deal to make sure they are staying within the confines of the rules.     

Given the importance of compliance with both NCAA and state rules, schools and student-athletes would be wise to engage professional advisors in connection with any NIL programs or deals. Student-athletes and their families would benefit from, and should consider, having an experienced attorney or other professional review any agreements that the athlete may sign before entering into any NIL deals. The NIL space is sure to further evolve and grow as more people want to get involved, and both NCAA and state regulations will likely follow. Carrington Coleman’s Sports Law Practice Group will continue to monitor developments and provide updates as the industry changes.

ENABLERS Act: Further Developments in Anti-Money Laundering Regulations Affecting Art and Antiquities Transactions

2 minute read

By: Andrea N. Perez

At the end of June, Congress took a big step toward passing anti-money laundering regulations that will profoundly affect the art and antiquities market. The bipartisan-proposed Establishing New Authorities for Businesses Laundering and Enabling Risks to Security Act (the “ENABLERS Act”) was approved to be included in the annual National Defense Authorization Act, which provides the budget for the Department of Defense. By backdooring the ENABLERS Act into the National Defense Authorization Act, Congress will likely enact it later this year as part of its approval of the Defense Authorization Act.

The creation of the ENABLERS Act is rooted in the Anti-Money Laundering Act of 2020 (the “AMLA”) that went into effect on January 1, 2021. AMLA provides massive updates to the 52-year-old Bank Secrecy Act and is the largest overhaul of money laundering regulations since the Patriot Act. It vastly expands the reach of the Bank Secrecy Act by applying to many more types of companies, persons, and intermediaries in hopes of cracking down on money laundering. For the first time in the United States, the list of parties subject to these regulations include art and antiquities dealers.

In November of 2021, Paula Trommel, Compliance and Sanctions Consultant for Christie’s and Deputy Director of Corinth Consulting in London, joined me to speak about the AMLA and provide our predictions on how this new act would impact the art and antiquities markets. But since the implementation of the AMLA, Congress has provided little guidance on the exact regulations to be imposed, leaving significant uncertainty among those in the art and antiquities markets. While the ENABLERS Act helps clear the fog a little, there continue to be more questions than answers.

If the ENABLERS Act passes, any person or company engaged in the trade and sale of works of art, antiquities, or collectibles – specifically including dealers, advisors, consultants, custodians, galleries, auction houses, and museums – will be deemed to be “financial institutions” and must comply with certain portions of the Bank Secrecy Act. This list of impacted parties in the art and antiquities markets is incredibly larger than originally proposed in the ALMA. Not only will international auction companies like Sotheby’s and Christie’s now be subject to the Bank Secrecy Act, but also small galleries that may only have one to two employees.

The ENABLERS Act will effectively require all art, antiquities, and collectibles dealers, advisors, consultants, custodians, galleries, auction houses, and museums to comply with four due diligence requirements described in more detail in Section 5318 of the United States Code: (1) report suspicious transactions, (2) establish an anti-money laundering program, (3) establish due diligence policies, procedures, and controls, and (4) identify and verify account holders (i.e., individual buyers and sellers). If the ENABLERS Act is passed, these compliance requirements will become effective on or after June 24, 2024, providing some time for those impacted to prepare.

Though these specifics shed light on the reporting requirements intended to combat money laundering in art, antiquities, and collectibles transactions, there are still crucial issues that remain unresolved. Like the AMLA, the ENABLERS Act fails to define what dollar value of art, antiquities, or collectibles transactions will be subject to disclosure to the federal government as well as what constitutes “art, antiquities, or a collectible.” It is frustrating that these vital financial protections are not only unclear, but also thus far unimplemented. That said, we remain hopeful that the progress will continue, and we will soon have robust and well-defined regulations in place to ensure appropriate transparency in the marketplace.

NCAA’s Interim Name, Image, and Likeness Policy – Guidance for Third-Party Involvement

3 minute read

By: Jason M. Katz

The NCAA’s suspension of its name, image, and likeness rules in 2021 created new opportunities for college athletes.   The gist of the shift in this decision by the NCCA is that college athletes may now profit from their name, image, and likeness.  However, one of the biggest issues since the loosening of the NIL policy is the lack of guidance from the NCAA other than stating that its interim policy issued in June 2021 would remain in place until federal legislation or new NCAA rules were adopted.  The NCAA recently released some guidance that schools, third‑parties, prospective student-athletes, and student-athletes need to understand – most importantly that third-parties may be defined as boosters.  Given this implication, both prospective and current student-athletes that are choosing a school or entering the transfer portal need to be wary in dealing with NIL agreements when interacting with schools and potential transfer destinations.

One of the current trends is the formation of collectives by individuals associated with specific schools to arrange and broker NIL opportunities for athletes at that school.  “Collectives” is the term now used to describe pools of boosters, fans, and donors that are raising funds to provide student-athletes with NIL deals across the country.  These collectives are typically school-specific, and some are even sport and/or position-specific, and they vary in levels of sophistication, amount of funds, and services provided. There are over 70 different collectives and many others of all shapes and sizes are being established throughout the country in the wake of NIL.

The NCAA guidance does not specifically refer to collectives by name, but it is clear that the NCAA is sending a message loud and clear to third-parties that fall under the NCAA’s definition of a booster: it is improper for a third-party booster to induce prospective and/or current student-athletes to enroll in a school in exchange for a NIL deal, and each NIL agreement must be based on an independent, case-by-case analysis of the value that each athlete brings to an NIL agreement.  Specifically, a third-party group that qualifies as a booster may not:

  • Engage in recruiting conversations with a prospective student-athlete;
  • Communicate with a prospective student-athlete for a recruiting purpose or to encourage the enrollment at a particular institution;
  • Guarantee a name, image, and likeness deal or promise contingent on initial or continuing enrollment at a particular institution;
  • Work with institutional coaches and staff to arrange meetings with prospective student-athletes; or
  • Offer prospective student-athletes compensation or incentives for enrollment decisions (e.g., signing a letter of intent or transferring), athletic performance (e.g., points scored, minutes played, winning a contest), achievement (e.g., starting position, award winner), or membership on a team.

The NCAA guidance also refers to certain existing specific Division I Legislation: NCAA bylaw 11.1.3 (representing individuals in marketing athletics ability/reputation), NCAA bylaw 13.10 (publicity), NCAA bylaw 12.1.2.1 (permissive recruiters), NCAA bylaw 13.02.14 (definition of recruiting), and NCAA bylaw 13.2.1 (offers and inducements).  The NCAA guidance signals that it expects current NCAA bylaws related to recruiting and pay-for-play to be followed.  Any institution, booster, or player that violates these existing NCAA rules could face NCAA infractions.  Based on the recent NCAA guidance, the story is just beginning to be written on NIL issues.  The NCAA guidance reflects the NCAA’s intention to crack down on any third-party booster and/or school that violates recruiting and pay-for-play rules that are currently in place.  Given the very public demands of high-profile players around the country and open discussion of collectives and affluent boosters associated with certain schools, there will certainly be an adjustment period for all involved to make sure the rules that are in place are followed.  One thing is clear – if a school or organization affiliated with a school, induces players to come to enroll in that school using promised compensation and NIL deals, there will be penalties handed down by the NCAA.

Given the NCAA guidance, an open question is: how, if at all, can a third-party such as a collective enter into NIL with athletes without implying an expectation that the student-athlete attends the school associated with the collective?