By: Chad J. Sullivan and Lucero Tennis Kieffer
The Indiana General Assembly passed Senate Bill (SB) 7 on April 24, 2023, and it now heads to Governor Holcomb’s desk for signature. If signed into law, SB 7 would (i) ban noncompete agreements between a primary care physician and employer, (ii) render a noncompete agreement unenforceable upon certain events and (iii) specify a process by which a physician or employer may pursue mediation to determine a reasonable price to purchase a release from a noncompete agreement. While SB 7 would not take effect until July 1, 2023, some provisions, however, will apply to agreements entered into prior to that date. Below is a summary of the key provisions of SB7.
Outright Ban of Noncompete Agreements with a Primary Care Physician
SB 7 provides that a primary care physician and employer cannot enter into a noncompete agreement after June 30, 2023 (i.e., the new law does not void agreements entered into before July 1, 2023). A “primary care physician” is defined as a physician practicing in one or more of the following: (1) family medicine; (2) general pediatric medicine; or (3) internal medicine.
Rendering Existing Noncompete Agreements Unenforceable
Beginning July 1, 2023, a physician noncompete agreement may become unenforceable if one of the following occurs: (1) the employer terminates the physician without cause, (2) the physician terminates for cause, or (3) the employment contract has expired and the physician and employer have “fulfilled the obligations of the contract.” This section of the bill would apply to all physician agreements even those entered into prior to July 1, 2023. For example, if a physician and employer entered into an employment agreement that contains noncompete restrictions on January 1, 2022 and the employer terminates the physician without cause on July 5, 2023, then the noncompete provisions in the employment agreement would be rendered unenforceable.
However, SB 7 does not define “for cause” or “without cause.” Therefore, employers should review their current agreements to ensure they adequately define “for cause” and to determine whether their agreements contain a “without cause” provision. SB 7 also provides that a noncompete agreement is unenforceable if the contract has expired and the parties have “fulfilled the obligations of the contract.” Thus, the expiration of the agreement’s term could render a noncompete unenforceable if the agreement does not contain an automatic-renewal provision.
Mediation to Determine a Reasonable Buyout Price
In 2020, Indiana passed a law requiring physician noncompete agreements entered into on or after July 1, 2020 to contain, among other things, buy-out clauses. Specifically, the law provided a physician with “the option to purchase a complete and final release” from his/her noncompete “at a reasonable price.” However, the law did not provide any guidance on what “a reasonable price” meant or how to calculate such a price.
In what appears to be an attempt to provide the physician with greater control and protection on this issue, SB 7 provides for a mediation process at the election of either the physician or employer if the parties cannot reach agreement on what is a reasonable price. This mediation process applies to agreements entered into after July 1, 2023. The mediation is non-binding and must be conducted with a mediator that the parties agree.