On May 4, 2023, Indiana Gov. Eric Holcomb signed into law Indiana’s Senate Enrolled Act 7 (SEA 7), which further restricts physician noncompete agreements between employers and physician employees and becomes effective July 1, 2023.
As discussed in further detail below, SEA 7 (i) makes primary care physician noncompete agreements unenforceable; (ii) makes existing noncompete agreements with other physician providers unenforceable, depending on the grounds leading to a physician’s departure; and (iii) establishes a formal process for negotiating a “reasonable” noncompete buyout.
Approximately three years ago, the Indiana legislature first addressed physician noncompetes when it passed House Enrolled Act 1004 (HEA 1004) creating new laws aimed at controlling rising healthcare costs, retaining physician talent, preserving continuity of care, and improving patient access to information. In accordance with HEA 1004 and effective since July 1, 2020, in order for a physician noncompete to be enforceable in Indiana such noncompete agreement must include the following:
A provision requiring the employer to provide a departing physician with a copy of any notice concerning such physician’s departure from the employer and sent to any patient seen or treated by the physician during the two-year period preceding the physician’s departure from the employer.
A provision requiring the employer to, in good faith, provide the physician’s last-known or current contact information to any patient requesting updated contact information for such physician if such patient was seen or treated by the physician during the two-year period preceding such physician’s departure from the employer.
A provision granting the physician with either access to or copies of any medical record associated with a patient receiving notice of a physician’s departure or requesting updated contact information for a departing physician as described above.
A provision granting a departing physician the option to purchase a complete and final release from the terms of an enforceable physician noncompete agreement at a reasonable price.
A provision prohibiting the employer from providing a patient’s medical records to a requesting physician in a format that materially differs from the format used to create or store the record during the ordinary course of business, unless otherwise agreed by the employer and departing physician (C. § 25-22.5-5.5-2).
SEA 7 includes the following three key updates to Indiana’s existing physician noncompete law.
Update 1: Primary Care Physician Noncompete Agreements Are Unenforceable.
As of July 1, 2023, Indiana law expressly prohibits employers and “primary care physicians” from entering into noncompete agreements. Under SEA 7, a primary care physician is defined as any physician working in one or more of the following medical specialties: family medicine, general pediatric medicine or internal medicine. Notably, the updated legislation excludes specialty physicians from the noncompete ban. A plain reading of the statute suggests that physician noncompete agreements with primary care physicians effective prior to July 1, 2023, will remain valid subject to a court’s determination of the reasonableness of such noncompete under applicable Indiana law.
Update 2: Existing Physician Noncompetes Are No Longer Enforceable Under Certain Circumstances.
SEA 7 makes otherwise enforceable physician noncompete agreements entered into after July 1, 2020, unenforceable under the following circumstances:
The employer terminates the physician’s employment without cause.
The physician terminates the physician’s employment for cause.
The physician’s employment contract has expired, and both the physician and employer have fulfilled their obligations under the contract.
While the enforceability of physician noncompetes entered into after July 1, 2020, hinges on the circumstances surrounding a physician’s departure from an employer, SEA 7 notably does not define the terms “without cause” or “for cause.” This leaves room for employees to dispute whether the reason for the termination of their employment was “without cause,” which in turn could render an otherwise enforceable noncompete unenforceable. Therefore, an employer’s failure to explicitly outline acts or omissions giving rise to a “for cause” termination for a physician increases the risk that the physician’s noncompete may be deemed unenforceable.
While many employers choose to terminate employees “without cause” even when grounds may exist to terminate such physicians “for cause,” employers may need to rethink whether defaulting to a “without cause” termination is in the employer’s best interest if such physician is a potential competitor in the employer’s existing market. Employers also may want to consider implementing stand-alone restrictive covenant agreements that broadly define the term “cause” to ensure enforceability of a noncompete provision even in situations where “cause” may not exist under a narrower construct found in most employment agreements. Employers who use fixed-term contracts also may want to consider replacing those agreement with “evergreen” contracts that automatically renew for one-year periods to preserve noncompete protections.
Update 3: Establishment of a Physician Noncompete Buy-Out Negotiation Process.
SEA 7 establishes a process for negotiating a “reasonable” buy-out purchase price of an enforceable physician noncompete agreement. Under SEA 7, if a physician elects to exercise this noncompete purchase option and duly notifies the employer of such, the employer is required to negotiate in “good faith” to determine a “reasonable” buy-out purchase price.
If the parties are unable to reach an agreement on a reasonable price, then either party may provide notice to the other party of its intent to resolve the dispute through mediation within the state of Indiana, and, specifically, in a city that is closest to the physician’s primary place of employment with a population of over 50,000 residents. Notice of intent to pursue mediation must be delivered within 35 days of the date the physician provided notice of an election to exercise the option to buy out the noncompete. Mediation must conclude no later than 45 days after the date the notice to pursue mediation was duly served. Finally, unless the parties agree otherwise, the cost of the mediator and any other direct costs must be divided equally among the parties engaged in such mediation.
Notably, the Indiana legislature did not provide guidance on determining a “reasonable” purchase price (e.g., a definition, a percentage of total compensation, a multiple of annual salary, or any other formula) or whether such “reasonable” purchase price can be agreed to at the time the parties enter into the noncompete to avoid mediation. If the parties are unable to agree on a reasonable price in the physician noncompete agreement or through successful mediation, the parties can look to Indiana courts for guidance.
Employers of physicians providing services in Indiana should audit existing physician noncompetes for compliance with SEA 7 and its predecessor, HEA 1004; understand which noncompetes will no longer be enforceable beginning in July; and adjust form noncompete language to be used for physicians hired as of July 1, 2023.
In summary, employers should remember the following key considerations when reviewing existing and future physician noncompete agreements:
Physician noncompete agreements effective prior to July 1, 2020, are governed by Indiana common law.
Physician noncompete agreements effective between July 1, 2020, and July 1, 2023, are governed by HEA 1004.
Physician noncompete agreements effective as of July 1, 2023, will be governed by SEA 7.
SEA 7 does not clearly define “for cause” or “without cause” terminations. Accordingly, employers should consider including a detailed list of acts or omissions constituting “cause” in each physician employment agreement.
Despite the Indiana legislature’s inclusion of requirements in connection with the noncompete buy-out process, it remains unclear what constitutes a “reasonable” buy-out price or whether the parties can agree to a “reasonable” price at the time of contracting for the noncompete. If mediation fails, healthcare employers will have to rely on arbitration or the Indiana courts for further guidance.
Although SEA 7 does not address nonsolicitation and nondisparagement provisions commonly included in the package of restrictions employers place on departing physicians, Indiana courts often treat such restrictions in a manner similar to noncompetes and may place similar restrictions on the enforceability of such provisions with respect to physician employees.
SEA 7 falls short of extending the noncompete ban beyond primary care physicians, permitting employers to continue enforcing noncompete agreement with specialty physicians. However, those restrictive covenants remain subject to the termination and expiration events that would make a noncompete entered into after July 1, 2020, unenforceable.
If you have any questions, please reach out to the authors.
The authors thank McGuireWoods summer associate Kasia S. Crain for assistance preparing this legal alert. She is not licensed to practice law.