In recent years, many physicians transferred from independent practice to employment with health systems.[1] With that employment came noncompete clauses (non-competes). As healthcare systems started consolidating into larger organizations, those non-competes have become increasingly restrictive and disadvantageous for physicians and their patients.[2] Federal government and some Louisiana lawmakers noticed the harmful aspect of non-competes and suggested possible solutions. The Federal Trade Commission (FTC) proposed a new rule that would prevent employers from entering into non-compete clauses with workers and require employers to rescind existing non-compete clauses.[3] On the state level, Louisiana House Bill No. 1037 (2022) introduced a statutory prohibition of non-competes in employment contracts with persons holding professional licenses.[4] However, the fate of the FTC rule is uncertain and the Louisiana House Bill failed at the preliminary stage of legislative process. It is unknown if the Bill will be refiled for the 2024 legislative session.
Notwithstanding those uncertainties, Louisiana physicians are not powerless when it comes to enforcement of existing non-competes in their employment contracts. In fact, because Louisiana strongly disfavors non-competition agreements, current law gives employees several defenses against overbroad non-competes. Indeed, under Louisiana Revised Statute § 23:921(A) noncompete agreements are deemed null and void, except under limited circumstances delineated by the statue. So, even if an employee entered into a non-compete agreement with his or her employer, such agreement is null and void, unless it strictly complies with the following statutory requirements: (1) a two-year maximum duration (temporal restriction), (2) a list of the areas in which the former employee is restrained (geographic restriction), and (3) the existence of competition between the former employee and employer (restriction on scope of activities).[5]
TEMPORAL RESTRICTION
This requirement is the most straightforward. Fist, the non-compete must have a time limitation. Second, if this limitation is longer than two years from the date of termination of the employment, the non-compete is null.
GEOGRAPHIC RESTRICTION
Under this restriction, for the non-compete to be valid, it must contain two components: territorial and competitive. Under the first component, the agreement must list a specified parish or parishes, municipality or municipalities, or parts thereof where competition is prohibited. If the non-compete does not list any parishes or municipalities, but instead defines the restricted territory by reference to the employer’s business locations, for example by saying that the former employee is prohibited from competing “within a 50-mile radius of any of the employers’ locations,” it is invalid. [6]
As to the competitive element, the employee may be prohibited from competing with the former employer in the restricted parishes or municipalities “so long as the employer carries on a like business therein.” Simply said, if a parish or municipality is on the “restricted” list, but the employer does not carry a business there, the court will not enforce the non-compete in this area. Of course, the meaning of “carrying on a like business” is far from straightforward and subject of several court opinions, but generally, the employer cannot enforce the non-compete in the geographical area where it has no business activity.
RESTRICTION ON SCOPE OF ACTIVITIES
A non-compete will be valid only if it obligates the employee “to refrain from carrying on or engaging in a business similar to that of the employer.” La. R.S. 23:921(C). Under this provision, an employer is only entitled to prohibit ex-employees from competing with the employer’s actual business and “not some overblown contractual definition of business designed to cover the proverbial waterfront and keep ex-employees from being able to make a living in any segment of the ex-employer’s industry.”[7] Therefore, how the non-compete describes the prohibited activities and the employer’s “business” is critical. An overly broad definition of the employer’s business renders that provision (and thus the whole agreement) unenforceable. A good example of an overbroad – and therefore invalid – description of prohibited activities comes from Paradigm Health Sys., L.L.C. v. Faust, 2016-1276 (La. App. 1 Cir. 04/12/17), 218 So. 3d 1068. In this case, Dr. Faust (licensed and qualified in the fields of anesthesia and interventional pain management) was hired by Paradigm to provide interventional pain management services. He signed a non-compete preventing him from “[engaging] in the practice of medicine or [rendering] any medical services to any business similar to those services provided by [Paradigm].”[8] Louisiana First Circuit of Appeal considered that neither the non-compete itself, nor any other provision in the employment contract, defined Paradigm’s business or the services it provided. Written this way, the non-compete was overly broad. It attempted to prohibit Dr. Faust not from “carrying on or engaging in a business similar to that of the employer” but from practicing any medicine, such as in anesthesiology, as a hospitalist, an emergency room physician, a general practitioner or even from performing health insurance physical examinations. Because of that, the court determined that the whole non-compete was invalid and unenforceable.
KEY TAKEAWAYS
The proposed legislative solutions on federal and state levels might invalidate non-competes for physicians who are employees, but it is not possible to predict if and when those proposals will become law. However, many Louisiana employees who signed non-competes do not need to wait for legislative action to invalidate their agreements. Since Louisiana disfavors restraints on business, those non-competes that do not comply with the strict requirements of La. R.S. 23:921 are null and void.
There are other significant issues relating to restrictive clauses in physician’s employment agreements, including the enforceability of non-solicitation agreements and their impact on patient’s right to continuity of medical care; arbitration of non-competes under Louisiana law and the Federal Arbitration Act; as well as increasing anti-trust concerns triggered by non-competes. We will address these issues in future posts.
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2 J. Jeffrey Marshall, et al., Restrictive Covenants and Noncompete Clauses for Physicians, (Oct. 27, 2023, 4:27 PM), https://www.jacc.org/doi/full/10.1016/j.jacadv.2023.100547.
4 Under the proposed amendment, “no employer shall require, request, or attempt to enforce an agreement that includes a noncompete provision for […] any person who holds a professional license and meets at meets either of the following: (A) obtained the professional license prior to employment with the employer; (B) obtained the professional license independent of the employment duties with the employer; (C) paid any expenses related to obtaining his professional license.” 2022 Bill Text LA H.B. 1037.
5 Advanced Med. Rehab, L.L.C. v. Manton, 21-315 (La. App. 5 Cir. 02/23/22); 362 So. 3d 703, 710.
6 Zanella’s Wax Bar, LLC v. Trudy’s Wax Bar, LLC, 291 So. 3d 693, 698 (La. App. 1 Cir. 2019).
7 Paradigm Health System, L.L.C. v. Faust, 2016-1276, p. 7 (La. App. 1 Cir. 4/12/17), 218 So.3d 1068, 1073 (citing Vartech Systems, 2005-2499 at p. 12, 951 So.2d at 259, n. 15).
8 Paradigm Health Sys., L.L.C. v. Faust, 2016-1276 (La. App. 1 Cir. 04/12/17); 218 So. 3d 1068, 1075.