Healthcare

Author: Joseph Pettygrove

The Bottom Line

Effective July 1, 2023: employers cannot enter into non-compete agreements with primary care physicians; employers cannot enforce non-competition restrictions against other kinds of physicians whose employment ends under certain circumstances; and employers and physicians who cannot agree on a “reasonable” price for the physician to “buy out” their non-compete obligations are subject to a mandatory mediation process.

The Background

Non-compete agreements restricting an employee’s ability to engage in various types of competitive activity after leaving an employer have received significant attention in recent years both across the country and at the state and federal level. As we reported back in January the U.S. Federal Trade Commission is planning a new regulation that would largely ban non-competes in most situations, though the development of that rule (and likely court challenges) will take some time to resolve.

Doctors have challenged their non-compete agreements as violating public policy in court cases on numerous occasions, stretching back to at least the early ‘80’s. However, while acknowledging the public policy concerns presented by contractual agreements limiting a medical professional’s ability to practice, the Indiana Supreme Court has repeatedly declined to announce an outright ban. Most recently, in Central Indiana Podiatry, P.C. v. Krueger, 882 N.E.2d. 723 (Ind. 2008), the Court noted the growing number of other jurisdictions that had banned physician non-competes but reiterated that such agreements are not categorically unenforceable under Indiana law. Rather, they will be upheld and enforced (or found unenforceable and struck down) based on the same principles that apply to any other non-compete: whether the restrictions imposed are reasonable under each case’s specific circumstances. Moreover, the Court made clear that any bans or limits on physician non-competes due to public policy concerns would need to come from the legislature, not the courts.

The Indiana General Assembly first took up the Court’s invitation in 2020, not by banning physician non-competes but by requiring them to contain certain physician and patient-friendly provisions. Specifically, the 2020 law mandates that physician non-competes: ensure the physician has certain access to patient records and to notices the employer sends to patients regarding the physician’s departure; commit the employer to providing the physician’s contact information in response to requests from certain patients; and contains a provision allowing the physician to “buy out” their non-compete obligations for a “reasonable” price. Notably, the law did not give any guidance as to what a reasonable price might be or what process parties (or a court) might go through to determine one.

The Newest Development

The 2023 General Assembly has gone even further with the passage of Senate Enrolled Act No. 7 (which Indiana Governor Eric Holcomb signed into law on May 4, 2023). SEA 7 amends the Indiana Code to provide – in addition to the required terms for physician non-competes instituted three years earlier – that:

1. Primary Care Physicians (defined as physicians practicing family, general pediatric, or internal medicine) cannot enter into non-competes with employers. Ind. Code § 25-22.5-5.5-1.5; 25-22.5-5.5-2.5(b).
2. Otherwise permissible non-competes for other types of physicians (i.e., non-primary care physicians) cannot be enforced if the employer terminates the physician’s employment without cause, the physician quits with cause, or “the physician’s employment contract has expired” and the parties “have fulfilled the obligations of the contract.” Ind. Code § 25-22.5-5.5-2(b).
3. Where physicians and employers cannot agree on a “reasonable” price for the physician to purchase a release from their non-compete, either party can require the other to participate in – and split the costs of – a mediation that “must take place” in the Indiana city with a population of at least 50,000 that is closest to the physician’s primary place of employment (while employed under the agreement containing the non-compete). Ind. Code § 25-22.5-5.5-2.6.

These new requirements apply only to non-competes “originally” entered into on or after July 1, 2023.

Unanswered Questions

Like many newly enacted laws, SEA 7 has created several questions that can only be answered by further legislative enactments or through judicial interpretation (i.e., litigation between physicians and their employers). A not necessarily exhaustive list of those unanswered questions includes:

• Can primary care physicians in a partnership with one another (i.e., where there is no traditional employer/employee relationship) enter non-competes after July 1, 2023? Can medical operations enforce non-competes against doctors they engage as independent contractors (assuming they have otherwise properly classified the doctor as a contractor rather than an employee)? Note: The Indiana Department of Workforce Development has taken the position in audits that being subject to a non-compete agreement by itself is sufficient to render a worker an “employee” for purposes of Indiana’s unemployment tax and benefit laws.
• What constitutes “cause” – either for an employer to terminate employment or a physician to quit employment – sufficient to render a non-compete unenforceable? Indiana does not have any general definition of “cause” in the employment context except with respect to its unemployment compensation system – is that the standard courts will incorporate into the non-compete context? Can the parties define cause for themselves as a matter of contract?
• What does it mean for an employment contract to have expired with all obligations fulfilled? If this language means non-competes are unenforceable as long as a physician has followed every requirement of their contract independent of their non-compete, why are the “cause” provisions of the law necessary?
• What happens if the parties are unable to reach agreement on a reasonable price for the release of the physician’s non-compete commitments after completing the statutory mediation process? Typically, mediators (as compared to arbitrators) cannot render binding decisions, so presumably the new mediation process in this statute functions similar to an administrative exhaustion requirement in that the parties must fulfill it but then take any ongoing dispute to court.

In light of the passage of SEA 7, Indiana physicians – or those who employ or engage them – should consult with knowledgeable employment law counsel before negotiating (or renegotiating) any agreements containing non-competition covenants.