Healthcare employers in Texas face new requirements for noncompetition agreements following the passage of Senate Bill 1318. The Texas Legislature passed this legislation on May 28. On June 20, Gov. Greg Abbott signed the bill into law.
The legislation modifies existing requirements for physician noncompetes under Section 15.50 of the Texas Business & Commerce Code and creates a new Section 15.501, which extends certain noncompete restrictions to dentists, nurses and physician assistants for the first time.
Key Takeaways
- Effective date: Applies to noncompetes entered into or renewed on or after Sept. 1.
- New coverage: Dentists, nurses and physician assistants are now subject to certain noncompete restrictions.
- Buyout cap: All noncompete buyouts are capped at annual salary and wages.
- Geographic limit: Maximum five-mile radius restriction.
- Duration limit: Maximum one-year noncompete period.
- “Good cause” voidance: Physician noncompetes are “void and unenforceable” if the physician is involuntarily discharged without good cause.
When Does SB 1318 Take Effect?
The law takes effect Sept. 1 and applies only to noncompete agreements “entered into or renewed” on or after that date. Noncompete agreements entered into or renewed before Sept. 1 are governed by the law in effect on the date the covenant was entered into or renewed. The statute does not define what constitutes a “renewal.”
What Does SB 1318 Change for Physicians?
SB 1318 makes several significant modifications to existing Texas law in Section 15.50 of the Texas Business & Commerce Code regarding physician noncompete agreements:
- New buyout cap and geographic limits: The law now requires all physician noncompetes to include a buyout provision capped at the physician’s total annual salary and wages at the time of termination. Previously, the law allowed buyouts at a “reasonable price” or at an amount determined through arbitration. The geographic scope is also now strictly limited to no more than a five-mile radius from the location where the physician primarily practiced before termination.
- New duration cap: The duration of physician noncompetes is now capped at one year from the date of contract or employment termination. The previous law did not specify a maximum duration.
- New automatic voidance provision: SB 1318 establishes a provision that renders noncompete agreements “void and unenforceable” if a physician is involuntarily discharged from contract or employment “without good cause.” This is an entirely new requirement. The statute defines “good cause” as “a reasonable basis for discharge of a physician from 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.”
- New writing requirement: The “terms and conditions” of a physician noncompete must now be “clearly and conspicuously stated in writing.” The previous law contained no such writing requirement.
- Administrative role exception: SB 1318 adds a new provision in Section 15.50(b-1), stating that “managing or directing medical services in an administrative capacity for a medical practice or other health care provider” does not qualify as the “practice of medicine” for purposes of triggering the physician noncompete requirements in Section 15.50(b) of the Texas Business & Commerce Code. These administrative activities still remain subject to the broader noncompete requirements that apply to all employees under Section 15.50(a).
The existing exception in Section 15.50(c) exempting a physician’s “business ownership interest” in hospitals or ambulatory surgical centers from the noncompete requirements in Section 15.50(b) is unchanged.
- Unchanged requirements: SB 1318 maintains the existing requirements for patient access provisions, including access to patient lists and medical records, and continues to prohibit restrictions on providing continuing care during acute illnesses.
Who Is Covered Under the New § 15.501?
Senate Bill 1318 creates Section 15.501 to Texas Business & Commerce Code, which extends certain noncompete restrictions to non-physician “health care practitioners” for the first time in Texas. Healthcare practitioners include:
- Dentists licensed by the State Board of Dental Examiners
- Professional and vocational nurses licensed under Chapter 301 of the Texas Occupations Code
- Physician assistants licensed under Chapter 204 of the Texas Occupations Code
SB 1318 Noncompete Requirements for Other Practitioners: Noncompetes for these healthcare practitioners are now subject to some of the same core restrictions placed on physician noncompetes, including:
- Buyout options capped at their annual salary and wages at termination
- One-year maximum duration limit
- Five-mile geographic restriction
- Terms that must be clearly and conspicuously stated in writing
Previously, Texas law contained no specific restrictions on non-compete agreements for dentists, nurses, or physician assistants.
Preemption of Other Law (§ 15.52)
- Expanded preemption: SB 1318 amends Section 15.52 to make the criteria in both Sections 15.50 and 15.501 exclusive, displacing any common law or equitable bases for enforcing healthcare noncompetes. The procedures and remedies in Section 15.51 also remain exclusive.
- Cross-reference updates: Various sections of the law have been updated to reference both the existing Section 15.50 and the new Section 15.501, ensuring the new healthcare practitioner restrictions are integrated into Texas’s overall non-compete framework.
Conclusion
Senate Bill 1318, effective Sept. 1, amends § 15.50 and adds § 15.501 to impose buyout caps, geographic and duration limits, voidance rules and writing requirements on noncompetes for physicians and selected healthcare practitioners.
With the passage of this legislation, both employers and practitioners should review contracts and prepare for compliance with the new requirements. And while the changes in Senate Bill 1318 do not apply retroactively, agreements entered into or renewed after Sept. 1 will be subject to these changes.
Texas healthcare employers have time to adjust contracts, but they should act now.
Brian G. Patterson is a labor and employment partner in the Houston office of Bracewell LLP. His practice encompasses non-competition agreements, wage and hour disputes, Occupational Safety and Health Administration (OSHA) enforcement actions, whistleblower issues, executive employment contracts, and employment discrimination.
Brett W. Rector is a healthcare partner in the Dallas office of Bracewell LLP. His litigation practice focuses on healthcare and commercial disputes. He represents all types of healthcare providers, including for-profit and not-for-profit hospital systems, medical device manufacturers, air ambulance companies, pharmaceutical companies and physician groups.