Amongst the many bills that were passed this legislative session, SB 1318 (the “Bill”) amends now covenants not to compete are applied to physicians, nurses, dentists and physician assistants (“Covered Healthcare Practitioners” or “CHPs”). The Bill expands the type of healthcare professionals that are subject to the new law by adding nurses, dentists and physician assistants. The Bill places new restrictions on the allowable duration and geographic scope of non-competes with CHPs. In addition, the Bill caps buyout provisions in an agreement and prohibits enforcement of non-competes where a physician is terminated without good cause. The law is effective on September 1, 2025 and the Bill will be codified in Texas Business Commerce Code § 15.50.
Prior to the passage of the Bill, to gauge a physician non-compete is based on a reasonable standard. This standard is applied to the geographical restriction, duration and scope assessed on an individual case level and subject to broad interpretations. One notable feature in Texas non-competes for physicians were mandated buyout provisions, allowing a physician to lift the restriction by paying the employer to waive the effects of the non-compete. However, buyout provisions were fluid without restrictions on the buyout amount as long as it was reasonable given the individual situation.
Changes Due to the Bill:
- The applicability to a broader array of CHPs – the Bill applies to physicians, dentists, nurses, and physician’s assistants. Prior to the Bill, only physicians were the only healthcare professionals at issue under the statute.
- Geographical Limitations – a five mile radius from the location where the CHP primarily practice before the termination is the maximum geographic scope of any non-compete with a CHP. Prior to the Bill, Previously, geographic limitations simply had to be reasonable, which was subject to a multiple factors as it relates to the scope of the physician’s work.
- Duration Limitations – one year after the termination of the CHP is the maximum length of any non-compete for a CHP. Similarly to the geographical limitations, the prior standard simply had to be reasonable on an individual basis.
- Buyout Provision Limitations – a buyout provision is still required under the Bill, but any buyout option with a CHP cannot exceed one calendar year of the CHP’s prior total salary and wages. Prior to the Bill, the buyout price only had to be reasonable or determined by an arbitrator.
- Writing Requirement – non-compete terms with CHP must now be clearly and conspicuously stated in writing to be enforceable.
- Good Cause Requirement – physician non-compete agreements are now void and unenforceable, if the physician is involuntarily discharged without good cause. This new standard only applies to physicians, not the other newly defined CHPs. Good cause is defined as “a reasonable basis for discharge of a physician from the contract or employment that is directly related to the physician’s conduct, including the physician’s conduct on the job or otherwise, job performance, and contract or employment record.”
Exceptions To The Bill:
Employers should understand the limitations promulgated in the Bill only apply to CHPs practicing medicine or operating in a clinical capacity. The Bill provides that “practice of medicine does not include managing or directing medical services in an administrative capacity for a medical practice.” As such, physicians employed or operate in an executive, administrative, or other management position, such as a board member, advisory committee member or medical director, are not covered by the Bill. CHPs employed or working in an administrative or non-clinical role is governed by the reasonableness standard, which is the standard used for most other covenants not to compete in Texas. This means non-competes for CHPs functioning in an administrative role must be reasonable in geography, time and scope that protects an employer’s legitimate business interests.
Next Steps for Employers:
- Discuss and understand internally that on September 1, 2025 non-competes for CHPs who are practicing medicine or operating in a clinical capacity who entered into or renewed on or after September 1, 2025 is subject to the new standards outlined in the Bill. Non-compete agreements for physicians executed before September 1, 2025 are subject to the pre-existing law in Texas. Employers should be aware of agreements that auto-renew because existing agreements that auto-renew after September 1, 2025 is subject to the new law.
- Clarify Good Cause Standard for Termination – employers should update their agreements to clarify what constitutes good cause for termination.
- Future Agreements for Compliance – employers should update their future non-compete forms to comply with the Bill. Specifically, to include buyout clauses with the appropriate limitations and appropriately amend the restrictions for geography, duration and scope.
- Consider Modifying the Scope of Restrained Activity – the Bill’s limitations apply only to non-competes relating to the practice of medicine or clinical functions (e.g. nursing care). Employers should review to confirm the non-competes only restricts clinical activities because administrative and non-clinical activities do not apply under the new standard.
The new standard poses significant changes to the Texas healthcare industry. But with adequate preparation and diligence, employers can ensure that all non-compete agreements with the newly defined CHPs comply with the new law by September 1, 2025.
Ritter Spencer Cheng, PLLC (“RSC”) regularly advises clients on healthcare related matters in Texas and throughout the country. The RSC healthcare team will continue to monitor any changes outlined in S.B. 1318. Our clients benefit from informed strategic advice, while being counseled on the regulatory burdens associated with healthcare transactions. For questions, reach out to Richard Y. Cheng, Esq., CHC at rcheng@ritterspencercheng.com.
