A Check-Up on Non-Competes: Indiana Legislature Passes Law to Facilitate Physician Mobility
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As we recently reported, Virginia recently joined Maine, Maryland, Massachusetts, New Hampshire, and Washington in passing a new law restricting the use of non-competes against low-wage earners (DC legislators made a similar attempt last year, but there has been no movement on those efforts). Now, Indiana has joined the growing number of states that have recently enacted legislation to restrict the permissible scope of non-compete agreements, although Indiana’s new non-compete law ignores the low-wage issue and instead focuses on a particular occupation: physicians.
Indiana is in good company—a number of states already have laws on the books limiting or otherwise imposing additional requirements on non-competes for health care providers, including Massachusetts, Connecticut, New Hampshire, Rhode Island, Wyoming, Arkansas, Nevada, and New Mexico. Although the new Indiana law was originally proposed in early January, it has the potential to impact the availability of physicians in the wake of the COVID-19 pandemic that has since arisen.
What does the law provide?
Smack dab in the middle of a lengthy “ACT to amend the Indiana Code concerning health” (HB 1004, or the “Act”) that was recently signed by Governor Eric Holcomb, the relevant provisions provide that effective July 1, 2020, physician non-compete agreements are unenforceable unless they contain all of the following:
- a provision requiring the employer to provide the physician with a copy of any notice that concerns the physician’s departure and was sent to a patient seen by the physician within the two-year period preceding the physician’s termination or the expiration of the physician’s contract (although any such notice shall redact patient names and contact information);
- a provision requiring the employer to, in good faith, provide the physician’s last known contact and location information to any patient who either requests the information or who was seen or treated by the physician during the two-year period preceding the physician’s termination or the expiration of the physician’s contract;
- a provision granting the physician access to, or copies of, any medical record associated with a patient described in sections (1) or (2) above, upon the patient’s consent;
- a provision granting the physician the option to purchase a complete release from the terms of an otherwise enforceable non-compete agreement at a “reasonable price”; and
- a provision prohibiting the employer from providing patient medical records to the physician in a format that is materially different from the format used to create or store the records in the ordinary course of business, unless a different format is mutually agreed upon.
Similar to the new law in Virginia, but unlike Washington’s new law, the Act applies only prospectively, specifically to physician non-compete agreements originally entered into on or after July 1, 2020. The Act has no effect on physician non-competes already in place prior to July 1, 2020.
Who and what is covered?
For purposes of the Act, “physician” is defined as “any person who holds the degree of doctor of medicine or doctor of osteopathy or its equivalent and who holds a valid unlimited license to practice medicine or osteopathic medicine in Indiana.” Indiana Code 25-22.5-1-1.1. However, while the Act is limited to non-compete agreements, and expressly provides that it does not affect the ability of parties to “negotiate any other term not specified” by the Act (such as, presumably, non-solicitation provisions), it is silent as to the definition of a non-compete agreement, unlike most other recent restrictive covenants legislation.
What’s a “reasonable price”?
The Act’s requirement that physician non-competes contain a buyout provision at a “reasonable price” is likely to be the subject of significant dispute, since the Act does not clarify what a reasonable price is, or how to calculate one. Considerations that could be involved in determining a reasonable price may include: the scope of non-compete restrictions, including duration, geographic reach, and the scope of activities proscribed; the physician’s years of experience; the volume of patients treated by the physician while working for the employer; and the availability of other physicians in close proximity with similar skills or specialties. Determination of whether a buyout price is reasonable may also depend on how the particular medical practice operates; physicians may be paid in any number of ways, such as capitation, fee-for-service, or relative value units. The structure of the individual physician’s compensation may materially affect what is deemed a “reasonable price” under the statute. Unfortunately, while a number of states also have laws directly related to medical professional non-competes as noted above, none appear to include a similar buyout provision, and thus provide no guidance on this issue. However, we expect that caselaw will eventually develop additional guidelines for the determination of what constitutes a “reasonable price.”
In addition, to the extent that the COVID-19 pandemic persists in Indiana beyond the effective date of the Act, it could have an impact on the calculation of a reasonable price for a physician to obtain a release. In other words, if the demand for health care professionals continues to soar in order to deal with the pandemic, physician availability and mobility would become increasingly important. In that scenario, what is deemed to be a reasonable buyout price may be lower than it would be under non-pandemic circumstances because of the urgent need for sufficient physicians to remain available for patient treatment. Indeed, we predict that some courts may be less willing to enforce non-competes in turbulent times like these, especially for frontline workers like physicians. This is especially true given the public policy favoring the ability of patients to follow their preferred health care provider (much like the policy in favor of clients being able to choose their preferred attorney or broker). Accordingly, the reasonable price for a release may be suppressed during health crises such as the one we are experiencing today.
The Act also provides that if the physician chooses not to exercise the buyout option, “then the option to purchase provision may not be used in any manner to restrict, bar, or otherwise limit the employer’s equitable remedies, including the employer’s enforcement of the physician noncompete agreement.” In other words, because the employer retains equitable remedies, if the physician opts out of the buyout, the employer may seek injunctive relief to enforce the agreement and prohibit the physician from participating in activities that allegedly violate the terms of the non-compete agreement. This provision anticipates, and ultimately prohibits, the potential argument by a physician that because a reasonable price can be offered for a complete release, a violation of the agreement cannot do irreparable harm to the employer.
What happens if an employer violates the new law?
The Act makes no mention of any penalties for employers who roll out or seek to enforce non-competes that fail to incorporate the required provisions. Thus, while such an agreement will be unenforceable, it does not appear that employers will be subject to civil penalties for such failures. The Act further provides no private right of action to a physician bound by a non-compliant agreement, although an individual could, of course, assert a declaratory judgment action to seek a determination that the agreement is unenforceable.
In the event that a non-compete does include the necessary provisions, but the employer fails to comply with them, a physician could of course assert a breach of contract claim and/or seek injunctive relief to mandate the employer to take the steps required by the new law, such as the notice requirement or access to patient records. However, it does not appear that employers will be subject to statutory damages or attorneys’ fees in connection with such a suit.
Employers who plan to enter into non-compete agreements with physicians on or after July 1, 2020, should ensure that the agreements comply with the provisions of the Act in order to be enforceable. Of course, those agreements should also be narrowly tailored and promote a legitimate business interest to comply with Indiana’s common law requirements for restrictive covenants generally. This is particularly so, given Indiana’s refusal to equitably reform overbroad agreements and limiting modification to the “blue pencil” doctrine (see here for a brief explanation of the blue pencil doctrine). Additionally, to avoid breach of contract claims, employers of physicians in the state of Indiana should implement measures to comply with the Act’s notice requirement to former patients in sections (1) and (2), which may prove burdensome absent streamlined procedures.