The Texas Supreme Court has granted review of a Fort Worth Court of Appeals decision declining to apply the Covenant Not to Compete Act to a contract provision requiring a licensee to pay a residual fee to a licensor after switching to a licensor’s competitor’s product.
BioTE Medical, LLC v. John Carrozzella, MD, and JCMD Medical Services, Inc. (No. 23-0724; granted January 31, 2025) arose from a contract dispute between BioTE Medical, an entity with the right to license the intellectual property rights to hormone replacement therapy developed and owned by BioTE Holding, LLC, and JCMD, Dr. Carrozzella’s medical practice, a licensee. As part of a series of licensing agreement, BioTE and JCMD entered in a services agreement requiring JCMD to pay a fee if it “use[d] [an] alternative or competing pellet-based bio-identical hormone therapy or treatment following termination of the Agreement.” The purpose of the fee was compensate BioTE “for the post-termination ‘continued positive benefit … (the ‘Residual Benefit’) of JCMD’s prior ‘affiliation with [BioTE Medical], the provision of Services, use of [BioTE Medical’s] Intellectual Property, and the use of the [BioTE] Therapy/Method.” JCMD subsequently switched to a competitor’s product, terminated the agreement, and notified BioTE that if “considered the residual benefit clause to be unenforceable.” Needless to say, JCMD did not pay the residual-benefit fee.
BioTE sued JCMD for breach of contract and other claims. JCMD moved for partial traditional summary judgment on the basis that the residual-benefit clause was unenforceable as a “covenant not to compete that did not satisfy the statutory requirements for noncompetes” and violated public policy. Without stating any reasons for its decision, the trial court granted JCMD’s motion. BioTE appealed.
In an opinion by Chief Justice Sudderth, the court of appeals reversed and remanded. BioTE asserted that the residual-benefit clause did not constitute a noncompete. Observing that neither the Covenants Not to Compete Act (Ch. 15, Business & Commerce Code) nor SCOTX has defined a covenant not to compete, the court had to construe the term de novo according to the plain, ordinary meaning. First, the court determined that the residual-benefit clause did not “fit the mold” of noncompetes in prior cases, since it lacked “a limit on the restrained party’s ability to—as the name implies—compete.” After analyzing a long line of authority (the footnotes in the opinion are impressive, indeed), the court concluded that “every Texas Supreme Court case applying the Covenants Not to Compete Act has involved a contract provision that restrained one party from competing with the other—not just from buying or using the other’s competitor’s product or service.” The residual-benefit clause, rather, does not restrict JCMD’s ability to compete with BioTE because JCMD doesn’t sell or buy the same goods or service in the same market. Consequently, the clause doesn’t constitute a noncompete and is not subject to the Act.
Turning to the public policy question, JCMD argued that Texas public policy frowns on contracts that restrain professional services and that the residual-benefit clause does that by “impact[ibng] the quality and price of the medical care that JCMD can provide.” The court declined to take this bait, stating that “the Legislature has spoken on this policy issue, and we are not at liberty to override a legislative policy determination” (citation omitted). While JCMD may be correct that public policy “disfavors unreasonable restraints on trade,” it also “strongly favors freedom of contract.” JCMD’s assertion that the residual-benefits clause “is, in essence, a bad deal for medical providers and their patients” did not overcome the separation of powers. As the court put it, “[a]bsent evidence of an identified statutory violation, neither we nor the trial court may override the Legislature’s balance of policy interests by invalidating the terms of the parties’ arms-length contract on uncodified public policy grounds.” The court thus reversed and remanded to the trial court for further proceedings.
Something clearly got SCOTX’s attention, whether the court of appeals’ analysis of the Covenant Not to Compete Act or its discussion of the public policy question, or both. In any event, the Court has scheduled oral arguments on March 18.
