Key Takeaways
- Effective Sept. 1, physician noncompete agreements must contain a buyout provision that may not exceed the physician’s annual salary and wages as of the date of the physician’s separation of employment or end of the contractual relationship.
- Physician noncompete agreements entered into or renewed after Sept. 1 may not exceed one year and the geographic scope of the noncompete range may not exceed five miles from the location where the physician primarily practiced.
- This new law expands restrictions on noncompete agreements to those with “health care practitioners,” which includes licensed dentists, nurses and physician assistants.
- This new law voids all physician noncompete agreements in which the physician is involuntarily discharged from their contract or employment without good cause.
Unlike states that ban them entirely, Texas law permits physician noncompete agreements restricting when and where licensed physicians can practice medicine after departure from their employer so long as they meet specific statutory requirements. But adding to the trend of state-imposed restrictions on noncompetes, Texas Gov. Greg Abbott has signed Senate Bill (SB) 1318 into law, limiting the permissible scope of noncompete agreements with physicians and other health care practitioners.
SB 1318’s Key Changes to the Texas Business and Commerce Code’s Provisions on Covenants Not To Compete
SB 1318 amended Section 15.50 of the Texas Business and Commerce Code, which lays out the criteria for enforceable noncompetes in Texas, to impose the following additional restrictions on physician noncompete agreements entered into or renewed after Sept. 1:
Buyout Clause Requirement – Section 15.50(b)(2) requires that physician noncompete agreements provide for a “reasonable” buyout from the agreement by the physician that is potentially subject to approval by an arbitrator. SB 1318 sets a ceiling for the agreement’s buyout provision at the physician’s total annual salary and wages as of the termination of the physician’s contract or employment.
One-Year Time Limit – Currently, Section 15.50 imposes no statutory limit on how long a physician or health care practitioner noncompete agreement can last. SB 1318 now expressly restricts physician noncompete agreements to a period of no longer than one year following the date the contract or employment is terminated.
Geographic Limitation of Five Miles – Similarly, Section 15.50 contains no current statutory limit on the geographic scope of physician noncompete agreements. SB 1318 limits geographic restrictions in physician noncompetes to no more than five miles from the location where the physician primarily practiced.
Clearly Outlined Written Terms – SB 1318 adds a requirement that physician noncompete agreements “clearly and conspicuously” set forth their terms and conditions in writing.
Restrictions on Noncompete Agreements for “Health Care Practitioners” – Currently, Section 15.50 only imposes requirements on physician noncompete agreements. SB 1318 adds Section 15.501, establishing the same requirements and temporal and geographic limitations for noncompete agreements with “health care practitioners,” including licensed dentists, nurses and physician assistants.
Physician’s Termination Must Be for Good Cause – Finally, SB 1318 adds Section 15.50(d), rendering void and prohibiting the enforcement of noncompete agreements against any physician who is involuntarily discharged without “good cause,” which the act defines as “a reasonable basis for the discharge … that is directly related to” the physician’s on- and off-the-job conduct, job performance, and contract or employment record.
Next Steps and the Impact of This Legislation
These new restrictions on noncompete agreements and their applicability to more health care practitioners will go into effect Sept. 1. Importantly, however, these mandates would only apply to noncompete agreements entered into or renewed on or after Sept. 1.
But that does not mean that the impacts of SB 1318 on the health care industry will be solely prospective. Moving forward, determinations on the enforceability of noncompete agreements entered into prior to Sept. 1 may no longer be premised entirely on what is reasonable, as currently required under Section 15.50. Instead, courts and arbitrators may use the restrictions in SB 1318 as their North Star in determining whether existing physician noncompete agreements’ buyout provisions and temporal and geographic scopes are reasonable and enforceable.
For example, a physician noncompete agreement entered into or renewed before Sept. 1 with a geographic scope of 10 miles may have been found to be reasonable given the market in which the physician practiced. However, health care employers should proceed with caution when enforcing the same agreement’s 10-mile geographic restriction in the future. And the reasonableness of this 10-mile restriction will be of no importance with post-Sept. 1 physician noncompete agreements, which now must be limited to a geographic scope of five miles from their primary practice location.
Employers in the health care industry should consider how these new restrictions on physician and health care practitioner noncompete agreements will impact future business and hiring decisions.
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