More about Physician Noncompete Agreements

Picture of a stethoscopeWe recently posted an article discussing Senate Bill 417, which revised Indiana’s statute on noncompete agreements between physicians and their employers, Indiana Code 25-22.5-5.5. A physician in northern Indiana may be the first to attempt to use the statute.  The case is Lankford v. Lutheran Medical Group, filed in Allen County Commercial Court.

Dr. David Lankford was employed by Lutheran Medical Group, LLC to work at Lutheran Hospital in Fort Wayne as a pediatric intensivist treating patients in its pediatric intensive care unit. In addition to pediatric intensivists, Lutheran employed neonatologists to treat patients in the neonatal intensive care unit and pediatric hospitalists to treat patients elsewhere in the hospital.

According to Dr. Lankford’s complaint, in October 2022, Lutheran eliminated the jobs of the hospitalists and required the intensivists to assume their responsibilities, in addition to their previous responsibilities in the pediatric intensive care unit. In December, Dr. Lankford notified Lutheran that he believed the increase in his responsibilities constituted a breach of his employment contract. He resigned in January 2023.

After Dr. Lankford accepted employment elsewhere, Lutheran notified him and his new employer that he was in violation of the noncompete clause in his contract with Lutheran. Dr. Lankford then sued, seeking declaratory judgment that the noncompete clause was unenforceable and an injunction prohibiting Lutheran from attempting to enforce it. One of Dr. Lankford’s two legal theories is that the revised statute discussed in our earlier article renders the noncompete agreement unenforceable.

Recall that the revised statute has two separate provisions. One provision, which applies only to general practitioners (internists, family practitioners, and general pediatricians), renders void any noncompete agreement signed after July 1, 2023. The second, which applies to all other physician noncompete agreements – those with physicians other than general practitioners and agreements in effect before July 1, 2023 – rendered them unenforceable under certain conditions, one of which is after the physician resigns for “cause.”

The first provision is irrelevant to Dr. Lankford’s situation, but his complaint alleges that the second provision renders his noncompete agreement unenforceable because he resigned for cause.

Unfortunately, Senate Bill 417 has several vague, undefined terms that are critical to its application. One question is what constitutes “cause” for a physician to resign. The term almost certainly includes a material breach by the employer, and it could include other conditions, particularly other conditions that, under the terms of the contract, give rise to the physician’s right to resign.

If Dr. Lankford is correct that Lutheran breached his employment agreement, he should also be correct that the statute renders his noncompete agreement unenforceable. Moreover, it appears that the noncompete is unenforceable, even in the absence of Lutheran’s breach, if the court finds “cause” for his resignation. On the other hand, if the court finds no cause for Dr. Lankford to resign, the noncompete should be enforceable.

Even so, this case may not tell us very much about how the statute will ultimately play out because, in all likelihood, the result under Indiana Code 25-22.5-5.5 is the same as it would have been before Senate Bill 417 took effect.

In addition to the statute, Dr. Lankford presented another, independent reason he thinks his noncompete agreement is unenforceable, i.e., the first-to-breach doctrine. Under that doctrine, a noncompete agreement is unenforceable if the employer materially breaches the agreement before any breach by the employee. Therefore, Dr. Lankford’s noncompete agreement should be unenforceable if the court finds that Lutheran did, indeed, materially breach the employment agreement. If not, the first-to-breach doctrine will not help Dr. Lankford.

There could be a narrow set of circumstances under which Indiana Code 25-22.5-5.5 would provide Dr. Lankford relief from his noncompete agreement when the first-to-breach doctrine does not, i.e., if the court finds that Lutheran did not breach the employment agreement, but that Dr. Lankford nonetheless had cause to resign.  Of course, that is true only if “cause” does, indeed, encompass more than the employer’s material breach, which remains to be seen.

We’ll keep an eye on this case and provide a later update if there are any remarkable developments.

If you have questions about a physician noncompete agreement, or any other noncompete agreement, please feel free to contact our office and ask to speak with one of our business law attorneys.

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