In February 2017, in Edwards v. Urosite Partners, 2017 WL 1192109, No. M2016–01161–COA–R3–CV (Tenn. Ct. App. March 30, 2017), the Tennessee Court of Appeals ruled that a partnership had the right to redeem the shares of a former partner who violated the terms of his Separation Agreement and Partnership Agreement.
Facts
The plaintiff, Dr. Robert Edwards, was a former partner in Urology Associates, P.C. (“UA”). Dr. Edwards and the other partners at UA were also all partners in Urosite, L.P., which was formed for the purpose of purchasing, owning, managing, and operating the real and personal property located at Urology Associates’ primary location.
The Partnership Agreement for Urosite required continued employment with UA. Should one of the Urosite partners terminate their employment with UA for any reason other than death, disability, or retirement from the practice of medicine, Urosite would have the right to redeem the exiting partner’s shares.
In December 2013, Dr. Edwards left the employment of UA. On January 10, 2014, Dr. Edwards executed a Separation Agreement with UA and Urosite, which provided that Urosite would not exercise its right to redeem his shares if he would limit his new practice to Giles and Hickman Counties. In other words, UA agreed that it would not redeem Dr. Edwards’ shares despite his departure so long as he would agree to restrict his practice to those two counties.
In the spring of 2014, the Veterans Administration requested that Dr. Edwards provide medical care to veterans in Rutherford and Davidson Counties. Dr. Edwards complied with this request. On March 31, 2015 (nearly a year later), Urosite informed Dr. Edwards that it was exercising its rights in accordance with the Partnership Agreement and Separation Agreement.
Dr. Edwards objected and filed a complaint for declaratory relief requesting the court to declare that Urosite had no right to redeem his shares because his work for the VA was not a material breach of the agreement; that the attempt to redeem his shares was untimely even if it did; and that the Separation Agreement’s geographically restrictive clause constituted an unenforceable restriction on his practice of medicine that violated public policy.
The trial court ruled against Dr. Edwards on all counts, and he appealed. The Court of Appeals affirmed the trial court’s decision in all respects.
Key Takeaways:
- “If” and “When” Signal Conditions, Not Covenants—For Conditions “Materiality” of a Breach is Immaterial (pardon the pun)
First, the Court decided that under the plain language of the Separation Agreement, the geographic restriction to Giles and Hickman Counties was a condition precedent, not a covenant. The Court ruled that the use of “if and when” in the Separation Agreement’s clause regarding Dr. Edwards practicing outside of Giles and Hickman Counties meant the parties intended this to be a condition.
Further, the Court ruled that when “enforcing the consequences of fulfilled conditions, a court does not consider materiality unless there are extraordinary circumstances of unfairness or injustice which demand equitable relief.” Therefore, the Court did not need to engage in the calculus of whether Dr. Edwards performing services for the VA constituted a material breach.
- If the Plain Language of an Agreement Does Not Set a Temporal Limitation on Exercising a Right, a Court Will Not Enforce One
The Court next weighed Dr. Edwards’s argument that Urosite’s exercise of its rights was untimely. The Court reviewed the plain language of the Agreement and noted that there is no temporal limitation on when Urosite can redeem an exiting partner’s shares. While Tennessee courts can ensure that restrictive covenants, such as non-competition and non-solicitation provisions have reasonable temporal restrictions, Tennessee law generally does not allow a Court to insert a term into the agreements where there was not one originally even if the contract as agreed to later becomes burdensome or unwise. So, here, the Court did not put a deadline on Urosite’s ability to redeem Dr. Edwards’ shares.
- Urosite’s Right to Redeem Dr. Edwards’ Shares Was Not an Unenforceable Restraint on Competition.
Finally, the Court decided that Urosite’s right to redeem Dr. Edwards’s shares conditioned on his practice outside of Giles and Hickman Counties was not an unenforceable restraint on competition.
Under Tennessee law, there is strong public interest (and case law) preventing restrictive covenants against physicians and other medical providers. This interest allows patients to exercise their fundamental right of selecting the physician they believe is best able to treat them, and restrictive covenants can interfere with that right. The Court determined, however, that the Separation Agreement’s geographical condition was not a restrictive covenant as it did not actually impede Dr. Edwards’s right to practice. Instead it merely provided Urosite the opportunity to redeem his interest in the partnership should he elect to practice outside of Giles and Hickman Counties. Therefore, the Separation Agreement did not constitute a restrictive covenant that violated public policy. This provides a way that physician groups can restrict a physician’s ability to practice in geographic areas without violating the terms of Tenn. Code Ann. 63-1-148, which defines the limits on physician non-competition agreements.
