While two House Bills, HB 561 and HB 483, addressing the use of noncompetes in physician contracts make their way through Louisiana’s legislative process and gain media attention, health care industry stakeholders have questions on what this means for existing noncompetes and the future use of noncompetes in physician contracts. This document seeks to answer some of these common questions.
1. What are HB 561 and HB 483 proposing?
HB 561 prohibits post-employment noncompetes on state-employed physicians. This bill’s scope is limited. It will only impact physicians employed by governmental entities, such as Louisiana State University.
HB483 is broader in scope. It contains these key provisions:
- Noncompetes as applied to primary care physicians and state-employed physicians shall be unenforceable. “Primary care physicians” are defined under the bill as physicians practicing family medicine, general internal medicine, general psychiatry, general pediatrics, obstetrics and gynecology.
- With respect to “physician specialists,” which remain undefined, the bill provides that:
a. When a physician specialist has provided three years of service as an employee or under contract to the entity that contracted for the noncompete, the noncompete shall be unenforceable.
- Notably, the bill’s language does not specify whether it must be a continuous three-year period to “burn-off” the noncompete.
b. The maximum amount that can be paid by a physician under a “buyout” provision (i.e. a provision that releases the physician from the noncompete for a fee) is an amount equal to one year of the physician’s salary, reduced yearly in pro-rata amounts over a three-year period, such that on the third-year anniversary of physician’s employment, the buyout amount is $0.
- Notably, the bill refers to “salary.” This implies that the limitation only applies to the noncompetes of employed physicians and not to independent contractor physicians.
- The bill also provides the following provisions, which apply to any physician that is not a primary care physician or state-employed physician:
a. Noncompetes will not be enforceable against a physician terminated without cause by his or her employer.
b. Noncompetes cannot restrict a physician from practicing within a “restricted geographic area” for a period of more than two years. “Restricted geographic area” is defined as the parish of the physician’s primary office location and up to two contiguous parishes.
- Notably, this language is limited to a narrow set of circumstances. For example, the three-parish limit does not seem to apply where the restrictive covenant’s geographic scope includes non-contiguous parishes.
2. How is this different from current law and industry practice?
La RS 23:921 governs how noncompetes can be enforced in Louisiana. Although the state has a strong public policy against the use of noncompetes, if a noncompete strictly follows the requirements of the statute, it will be enforced, even against physicians.
The proposed bill differs from present law by excluding certain physicians from the enforceability of noncompetes, namely “primary care physicians” as defined under the bill and state-employed physicians. For all other physicians, HB 483 places new requirements for enforceable noncompetes. These requirements further reduce the presently allowable geographic scope and duration of a noncompete when applied to physicians.
The bill also speaks to a common trend in physician noncompetes: the use of “buyouts,” which release the physician from the noncompete in exchange for payment, often equal to one year of the physician’s salary. These buyouts are arguably a form of liquidated damages of questionable validity and at odds with the typical injunctive relief sought to enforce a noncompete. And they may become more common if laws are passed permitting their use in physician contracts.
Since health care entities differ on the use of noncompetes, and when in use, on the restrictiveness of such covenants, there is no single industry standard to compare to HB 483. Often, physicians agree to a noncompete without fully understanding the extent of rights forfeited, because the varied industry spectrum on restrictiveness makes it difficult to know what is “normal,” or even lawful, for a noncompete. The asymmetry of information has made the use of onerous noncompetes effective even where enforceability is questionable. In this respect, HB 483 establishes a clearer picture on the question of enforceability of a physician noncompete.
3. If HB 483 is passed, will it apply retroactively?
The bill is silent on retroactive application. We expect that those looking to enforce a noncompete will take the position that the law does not apply retroactively, while those looking to be released will advocate for its retroactive application, or will at least look to the bill to inform a more favorable definition of a reasonable noncompete when negotiating a partial or full release. Providers unwilling to re-negotiate excessively onerous noncompetes in effect before any passed legislation may have to contend with a negative public perception of noncompetes.
4. I am a physician that has been presented a contract that contains a noncompete. What should I negotiate?
Some of the points we raise in negotiations in favor of the physician are contained in HB 483. For example, we commonly recommend a “burn-off” period for the noncompete, so that after a certain number of years of service, the physician is released from the noncompete. This number can be negotiated to allow the other contracting party to realize a return on its investment in the physician.
Another negotiating point we tend to recommend includes setting a buyout amount equal to the fair market value of the consideration for the noncompete, rather than an amount equal to one year’s salary.
Physicians can also ask to be released from the noncompete if they terminate the agreement for cause (i.e. for breach by the other contracting party) or if the other contracting party terminates the agreement without cause. If HB 483 is passed, the latter would apply by force of law.
Depending on the contractual terms and the physician’s needs, it’s important to tailor negotiating points to be reasonable for the other party, while still protecting the physician’s interest. Before executing an agreement with a noncompete provision, we recommend consulting with counsel so you know of the extent of your forfeited rights.
5. I am a health care entity with standard physician contracts that contain a noncompete. If HB 483 is passed, do I have to amend all my contracts?
Best practice would be to review the organization’s standard physician contracts to assess enforceability of the noncompete provision. Many contracts contain provisions that include ways to sever or reform noncompete or nonsolicitation clauses as needed for the provisions to be enforceable. However, if your organization wants maximum confidence in the enforceability of its noncompetes, then amendments may be required. Although each organization is different, there are ways to facilitate efficient changes.
6. If HB 483 is not passed, the existing standard noncompete provisions in our provider contracts should be enforceable, right?
You can expect continued challenges to noncompetes in the form of contractual disputes or negotiations. If your organization’s noncompetes have not been reviewed in quite some time, or if your organization has a broad boilerplate noncompete, you may want to consider updating or reforming your physician contract templates, so you can be more confident about your organization’s ability to enforce its noncompetes.
Periodic review of noncompetes is recommended, as there may be specific issues that arise as your organization grows that are not addressed in your current standard contracts. For example, if your organization has partnered with an affiliate entity, you may want to expand the scope of the noncompete to include that entity in a manner that anticipates enforcement challenges. Or, if your organization has undergone a merger or other change of ownership transaction, you may want to revisit assigned contracts to ensure that the surviving entity has an enforceable right under any restrictive covenants in those contracts.
Even if your agreements are up to date, you can still benefit from having experienced counsel review your existing noncompetes, since there are provisions that can be included or revised in contracts to enhance your organization’s ability to enforce the noncompete as intended.
7. I am a health care entity that relies on noncompetes to retain talent and protect my investment. How can use noncompetes defensibly in a way that is fair?
The answer to this question overlaps with our response to question number 4. Some other provisions we have recommended to health care entities as a reasonable compromise with the physician include the addition of carve-outs. This way, the health care entity can customize the noncompete’s protections, while still giving the physician some flexibility in his or her activities.
8. What is a fair noncompete?
Opinions differ on what is a “fair” noncompete. But the fact remains that even if the proposed bills are passed, physician noncompetes will remain in use in Louisiana. Consider approaching a negotiation assuming that both parties to the transaction have legitimate interests to protect and are on equal footing to negotiate. From this perspective, it is possible to achieve terms equitable to both parties, and often, the parties will arrive at terms similar to those discussed in this article.
9. I am a physician with a noncompete in my contract, but I want to consider new opportunities. What should I do?
Contact counsel to evaluate risks, identify options and develop a strategy to move forward. A partial or full release from your noncompete can be negotiated, or if need be, adjudicated. Counsel can help you find the most cost-effective way to achieve your goal and manage risk.
10. Are these bills going to pass?
While we don’t have a crystal ball, we are just as interested in this issue as our clients are and will be monitoring key developments. To stay informed in real time, visit the Louisiana Legislature’s website for updates and the House website for live recordings. These bills are expected to be discussed on the House Commerce Committee floor this Monday, May 3, so stay tuned.