The Indiana General Assembly recently passed Senate Enrolled Act 7 (“SEA 7”), which will further restrict the enforceability of non-compete agreements between health care employers and their physician employees. After Governor Holcomb’s expected signature, SEA 7 will go into effect on July 1, 2023. This is not the first time the Indiana legislature has passed restrictions on the enforceability of physician non-compete agreements. As we previously discussed in the Spring of 2020 (here and here), House Enrolled Act 1004 (“HEA 1004”) narrowed the enforceability of physician non-competes by adding a new chapter to the Indiana Code (I.C. § 25-22.5-5.5 et seq.).
SEA 7 contains three key restrictions on physician non-compete agreements. Those restrictions are as follows.
Prohibition on Primary Care Physicians’ Non-Competes
Beginning July 1, 2023, SEA 7 prohibits employers and primary care physicians from entering into non-compete agreements on a going forward basis; however, non-compete agreements with primary care physicians originally entered into before July 1, 2023 will remain enforceable. “Primary care physician” is defined as a physician practicing in either family medicine, general pediatric medicine, or internal medicine.
Unenforceability of Non-Competes in Certain Circumstances
Also beginning on July 1, 2023, additional enforceability restrictions will apply to physician non-compete agreements that were originally entered into on or after July 1, 2020. One interpretation is that for those agreements (i.e., non-compete agreements originally entered into on or after July 1, 2020), SEA 7 states that beginning on July 1, 2023, a physician non-compete will be unenforceable if:
- The employer terminates the physician’s employment without cause;
- The physician terminates the physician’s employment for cause; or
- The physician’s employment contract expires and the physician and employer have fulfilled the obligations of the contract.
This provision of SEA 7 applies to all physician non-compete agreements, not just agreements with primary care physicians. To further clarify, the HEA 1004 legislation from 2020 made it clear that the physician non-compete law (I.C. § 25-22.5-5.5 et seq.) did not apply to physician non-competes entered into prior to July 1, 2020. And since the SEA 7 legislation made no changes to the original July 1, 2020 threshold “requirement,” a plain reading of the new statutory restrictions in SEA 7 strongly suggests that the bullet-pointed restrictions above will only apply to physician non-competes originally entered on or after July 1, 2020. However, whether this portion of the new law can be retroactively enforced on agreements entered into before July 1, 2023 may be challenged on constitutional grounds.
Finally, SEA 7 does not define the term “cause,” which is likely to lead to disagreement between parties and potential future litigation.
Clarification on Non-Compete Buy-Outs and Mediation
Under HEA 1004, physician non-compete agreements are required to have a buy-out option for the physician. And now, SEA 7 provides additional requirements related to the buy-out process. For physician non-compete agreements originally entered into on or after July 1, 2023, if a physician elects to exercise the buy-out option and so notifies the employer of the physician’s intent, then the employer must negotiate in “good faith” with the physician to determine a reasonable purchase price.
If the employer and physician cannot agree on a reasonable purchase price, then one of the parties may serve a notice of intent to pursue mediation. This notice of intent to mediate must be served within 35 days from the date the physician provided the employer with the physician’s buy-out “election” notice. In addition, the mediation must be completed within 45 days from the notice of intent to pursue mediation.
In selecting the mediator, the parties must mutually agree upon a mediator. Further, unless the parties agree otherwise, the costs are to be equally shared between the parties, and mediation is to take place in a city i) with a population of at least 50,000 and ii) that is nearest the physician’s primary place of employment during the term of the physician’s employment agreement.
SEA 7 does not address what happens if the mediation is unsuccessful—leaving a potential for future litigation between the parties—though the assumption is that the parties would proceed to either arbitration or litigation.
Practical Takeaways
SEA 7 will significantly impact physician non-compete agreements and employer strategies related thereto. In preparing for SEA 7 compliance, employers should consider taking the following steps:
- Assess all current physician non-compete agreements to determine what, if any, conditions from SEA 7 will apply.
- Revise template physician employment agreements that will be entered into on or after July 1, 2023, to ensure non-compete provisions abide by the requirements in SEA 7.
- Consider clearly outlining in the revised templated agreements the reasons that will constitute “cause” termination under the agreement.
- Confer with legal counsel for advice and review of proposed changes.
Please join Hall Render attorneys for a webinar in the coming weeks, which will provide additional details regarding both the legal and practical considerations of SEA 7. More specifics will be forthcoming.
If you have any questions on issues discussed in or related to this post, please contact:
- Claire Bailey at (317) 429-3608 or cbailey@hallrender.com;
- Kevin Stella at (317) 977-1426 or kstella@hallrender.com;
- Dana Stutzman at (317) 977-1425 or dstutzman@hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
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