Physician Noncompete Agreements in Indiana

A few months ago, we wrote an article about a bill in the Indiana General Assembly, Senate Bill 7, that would essentially ban noncompete agreements[1] between medical doctors and their employers. The General Assembly enacted the bill and Governor Holcomb signed it, but only after considerable revision. The ban was narrowed, but remaining covenants not to compete will be enforceable less often.

Summary

After July 1, 2023:

New noncompete agreements between employers and family practitioners, general pediatricians, or internists will be prohibited.

Noncompete agreements between medical doctors and their employers may not be enforced after the end of the physician’s employment if (i) the doctor terminates the employment with cause; (ii) the employer terminates the employment without cause; or (iii) the employment agreement expires after the obligations of both the doctor and the employer have been fulfilled.

The Law Before July 1, 2023

In 2020, the General Assembly created Indiana Code § 25-22.5-5-2, which requires all noncompete agreements between physicians and their employers to contain certain provisions. The contract must require the physician’s employer to:

Provide the physician with a copy of notices sent to the patients treated by the physician during the last two years of the physician’s employment, with the patient’s identifying information redacted.
Upon request, provide the physician’s contact information to a patient treated by the physician within the last two years of the physician’s employment.
Upon receipt of the patient’s consent, provide the physician with access to or copies of the medical records of a patient the physician treated within the last two years of his or her employment. Unless the physician and former employer agree otherwise, the employer must furnish the records in the format used to create the records in the routine or ordinary course of business; paper or PDF copies are acceptable.
Permit the physician to buy a release from the noncompete agreement for a reasonable price.

That section of the statute remains unchanged except that a new section provides a procedure for arriving at an agreement on a reasonable buyout price, beginning with negotiation and proceeding to mandatory mediation if negotiation fails.

Senate Bill 7 Bans Noncompete Agreements with Primary Care Physicians

Primary care physicians (defined as physicians practicing in family medicine, general pediatric medicine, and internal medicine), lost little, if anything, in the revisions to Senate Bill 7 after it was first introduced. Generally, employers and primary care physicians may not enter into covenants not to compete after July 1, 2023. However, some uncertainty remains.

The precise language of the statute is:

Sec. 2.5. (a) This section does not apply to a physician noncompete agreement originally entered into before July 1, 2023.

(b) Notwithstanding any other law, a primary care physician and an employer may not enter into a noncompete agreement.

At least three things are clear enough:

A primary care physician who is currently employed under a noncompete agreement signed before July 1, 2023, remains subject to the restrictive covenant as long as that agreement remains in effect.
An employment agreement between an employer and a new employee, signed after July 1, 2023, may not contain a noncompete provision.
A noncompete agreement signed in violation of the statute is void.

On the other hand, the effect of the prohibition on employee noncompete agreements for primary care physicians in some situations is open to debate, primarily because of the phrase “originally entered into.” Consider the following situations.

An employer and a new employee sign a contract with a noncompete clause before July 1, but the employee does not begin work until after July 1. On the face of the statute, the noncompete agreement is unaffected by the new prohibition, but courts might not apply it so literally and hold that restrictive covenant is invalid unless the physician began employment before July 1.
An employment contract existing before July 1, 2023, contains a covenant not to compete and an evergreen clause that automatically renews the contract every year unless one party notifies the other, in advance, that the contract will not renew. Does the noncompete clause continue in effect because it was originally entered into before July 1, 2023, or is it void?
An existing employment contract that expires after July 1 contains a noncompete agreement, and the parties agree to continue the relationship by signing another employment contract with an identical noncompete agreement. Is that valid as a noncompete agreement “originally entered into” before July 1, 2023, or is it void? Is this scenario any different from the second one?

Perhaps future amendments to the statute or appellate court decisions will answer those questions. In any event, because these examples relate to the transition from the old statute to the new amendment, the chances of those questions arising will decrease over time.

Even valid noncompete agreements are sometimes unenforceable.

Although the new amendments continue to permit many physician noncompete agreements, they prohibit the enforcement of those contracts if any of the following conditions exists:

The employer terminates the physician’s employment without cause.
The physician terminates his or her employment for cause.
The physician’s employment contract expires after both the employee and employer have fulfilled their obligations.

The statute does not define “cause,” but the term almost certainly includes breach by the other party and maybe other situations.

The first two conditions, and to a lesser extent the third, are related to the first-to-breach doctrine. In this context, that doctrine means that an employer’s breach of an employment agreement discharges the employee from a noncompete clause. Depending on the ultimate meaning of “cause,” Senate Bill 7 may go beyond the first-to-breach doctrine by giving physicians relief from a noncompete agreement in some situations outside the scope of the doctrine.

The third condition is potentially problematic. The general idea appears to be that a noncompete agreement may not extend beyond the end of employment if the employment terminates for no fault of the physician. An exception to allow enforcement of a noncompete agreement makes sense if, for example, the physician resigns before the employment agreement expires. Senate Bill 7 appears to contain another exception, one that permits an employer to keep a noncompete agreement in place after the employment contract expires, for example by withholding the physician’s last paycheck. That is probably a drafting mistake, and maybe the General Assembly will correct it in a future session.

In the meantime, the first-to-breach doctrine can discharge a doctor from noncompete obligations even if the statute does not. Regardless of the legal analysis, it seems unlikely that Indiana courts would allow an employer to use its own breach to hold a physician to a noncompete agreement that would be otherwise be unenforceable. Even so, physicians who have noncompete agreements may be well advised to terminate the employment contracts if given cause by the employer, rather than letting them.

Some Physician Noncompete Agreements are Unaffected.

Indiana Code § 25-22.5-5-2 and Senate Bill 7 do not affect all physician noncompete agreements, only those between employees and employers.

Contracts for the sale of businesses often enter into agreements that prohibit the seller from competing with the business after the sale. The same is true of the sale of medical practices. Neither the prior law nor Senate Bill 7 affect those covenants.

Similarly, Indiana Code § 25-22.5-5-2 and Senate Bill 7 do not appear to affect physicians who work as independent contractors rather than employees.

[1] Noncompete agreements are also called covenants not to compete. This article uses those two terms interchangeably. They are a common type of a broader class of contracts called agreements in restraint of trade or restrictive covenants. The law disfavors them, and courts construe them strictly. If they are not written properly, for example if they are too broad in geographic scope, courts will hold them invalid.