Hannesson I. Murphy: Prognosis for physician non-competes in Indiana: poor

Is the traditional employer-employee non-compete covenant dying? During the last year, non-competes have been the subject of a prospective ban by the Federal Trade Commission and increasing skepticism by many states, including Indiana, which recently imposed severe restrictions on enforcing the covenant with physicians.

Whatever one thinks about the covenant, which has been a feature of employment agreements since the Middle Ages, its future appears bleak.

The Federal Trade Commission’s Final Rule and state-level bans

On May 7, 2024, the Federal Trade Commission (FTC) published a Final Rule which – if it goes into effect as planned – effectively will ban future employer-employee non-competition covenants. Barring court intervention, the rule is scheduled to go into effect on Sept. 4, 2024. Key provisions are as follows:

After the effective date, it will be considered unfair competition to enter into a non-compete, to propose that a worker enter into a non-compete, to tell a worker they are subject to a non-compete, or to enforce such a provision.

All employers with workers who may be subject to a non-compete have to notify the workers, by the effective date, that their non-compete will not be enforced.

The FTC rule applies to “workers,” which includes not only employees but also independent contractors and interns.

There is a grandfather clause of sorts allowing continued prosecution of non-competes if the matters are filed before the effective date, and to enforce covenants against senior executives (policy-making individuals who earn more than $151,164 in the preceding year) if the covenants were entered into before the effective date.

The rule does not affect non-solicitation or non-disclosure covenants, provided the terms do not prevent an individual from working or operating a business.

The FTC rule does not apply to covenants that are predicated on the bona fide sale of a business entity, or an individual’s ownership interest in either a business entity or of all or substantially all of the business entity’s operating assets.

As expected, the FTC rule almost immediately drew a legal challenge, and the first decision concerning the FTC rule was issued in early July. On July 3, 2024, the United States District Court for the Northern District of Texas in the case of Ryan LLC v. Chamber of Commerce of the United States of America, et al. issued an order staying the effective date of the non-compete rule and blocking enforcement of the rule. Significantly, however, the court limited the decision to the named parties and refused to enter a nationwide injunction.

As a result, the decision has no formal bearing on anyone other than the litigants in that case and does not stay enforcement of the rule generally. Accordingly, employers should not assume that they no longer need to worry about the Sept. 4, 2024, deadline just because of this one decision. While other challenges may result in a nationwide stay, employers – for the moment – still need to plan to comply with the terms of the FTC Final Rule.

Indiana’s physician non-compete statute

Historically, Indiana will enforce a non-compete if the employer can show that it has a legitimate interest to be protected by the restraint, and the restrictions are reasonable as to time, activities, and geographic area. However, the state also has demonstrated much more skepticism about enforcing the covenant than its neighbors – which is exemplified by its approach to non-competes for physicians.

In the last decade, over a dozen states (all outside the Midwest) have adopted bans or strict limitations on physician employment non-competes. Indiana joined that group with the adoption of a physician non-compete statute, which became effective July 1, 2020.

The restrictions imposed by this iteration of the statute were mainly procedural, establishing various criteria that a covenant would need to satisfy:

• Requiring the employer to provide the physician a copy of any notice concerning the physician’s departure that was sent to any patient seen or treated by the physician during the two-year period preceding the end of the physician’s employment or contract.

• Requiring the employer to provide the physician’s last known or current contact and location information to any patient who was seen or treated by the physician during the two-year period preceding the end of the physician’s employment or contract who requests it.

• Providing the physician with access to, or copies of, any medical record associated with patients that request contact/location information.

• Providing the physician with the option to purchase a complete and final release from the terms of the enforceable non-compete at a reasonable price.

• Prohibiting the employer from providing patient medical records in a format that materially differs from the format used to originally create or store the medical records.

However, the Indiana legislature greatly expanded the statute and, effective July 1, 2023, non-competes for “primary care physicians” – those engaged in family medicine, general pediatric medicine or internal medicine – are banned. This ban was a compromise measure. Originally, banning all physician non-competes was on the table. The idea behind the ban is that non-competes will force doctors to move out of the community, resulting in a reduction of the number of qualified physicians, the disruption of physician-patient relationships, and increased health care costs.

The legislature also imposed additional restraints on non-competes for doctors who are not primary care physicians. Those covenants became unenforceable on or after July 1, 2023, if (a) the employer terminates the physician’s employment without cause, (b) the physician resigns for cause or (c) the physician’s contract has expired and both parties have fulfilled their obligations. Thus, after July 1, 2023, the only way a physician non-compete can be enforced is if the doctor is not a primary care physician; the employer fires the physician for cause or the physician quits for cause; and the physician remains within their term of employment.

Beyond the procedural requirements, the statutory revision also corrected an oversight in the original version by establishing a mechanism for the physician and the employer to arrive at a “reasonable” price for release from the non-compete. As revised, the employer now is required to negotiate in good faith over a reasonable purchase price. If the parties are unable to come to terms, the revision also establishes a detailed mediation process to resolve the issue.

Conclusion

Indiana courts have not addressed the 2023 version of the statute, and some nuances – such as what is meant by “cause” or the “expiration” of a contract – remain open to interpretation. However, what is clear is that Indiana employers who intend to use restrictive covenants for physicians need to be careful to navigate the requirements of the Indiana Physician Non-Compete Statute while simultaneously keeping abreast of regulatory decisions at the federal level.

Even if the covenant passes muster under the Indiana statute, it still may be undone if the FTC’s Final Rule goes into effect. Affected employers should review their covenants and come up with a plan to address how best to protect their businesses if the covenants are unenforceable. Correspondingly, affected physicians similarly should review their covenants to assess their own options. The traditional employer-employee non-compete itself has been hospitalized and its prognosis is not good. Employers and physicians should plan accordingly. •

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Hannesson I. Murphy is a partner at Barnes & Thornburg. Opinions expressed are those of the author.