Covenants not to compete entered into with physicians, dentists, vocational nurses, and physician assistants on or after September 1, 2025, must meet additional, stricter standards in order to be enforceable. Texas Senate Bill 1318, which was recently passed by the Texas legislature and signed into law by Governor Abbott, amends Texas Business and Commerce Code § 15.50, the statute governing physician non-competes, and adds new section 15.501 to impose similar requirements for noncompete clauses entered into by dentists, vocational nurses, and physician assistants.
1. When do these new requirements become effective?
SB 1318 becomes effective on September 1, 2025, and applies to covenants not to compete that are entered into or renewed on or after that date. A covenant not to compete that was entered into or renewed before that date does not have to comply with SB 1318’s new requirements, and will continue to be governed by the law in effect prior SB 1318’s passage.
2. What are the new requirements for physician non-competes?
SB 1318 imposes the following additional requirements for a covenant not to compete relating to the practice of medicine against a physician licensed by the Texas Medical Board:
- The non-compete must provide for a buyout in amount not greater than the physician’s total annual salary and wages at the time of termination of the contract or employment. Before SB 1318, physician non-competes were required to provide for a buyout at a “reasonable price,” or as determined by an arbitrator.
- The non-compete must also:
- expire no later than the one-year anniversary of the date the contract or employment was terminated;
- limit the geographical area subject to the non-compete to no more than five miles from the location where the physician primarily practiced before the contract or employment terminated; and
- have terms and conditions clearly and conspicuously stated in writing.
Note that the requirements stated above apply to non-competes relating to the practice of medicine. This does not include managing or directing medical services in an administrative capacity for a medical practice or other health care provider.
In addition to the requirements above, SB 1318 provides that a covenant not to compete relating to the practice of medicine is void and unenforceable if the physician was involuntarily discharged from the contract or employment without good cause. “Good cause” is further defined to mean 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.
3. What are the new requirements for non-competes with health care practitioners?
SB 1318 adds additional requirements for a covenant not to compete entered into with a “health care practitioner” relating to the practice of dentistry or nursing, or practice as a physician assistant. “Heath care practitioners” include (a) a person licensed by the State Board of Dental Examiners to practice dentistry in Texas; (b) a person licensed under Chapter 301 of the Texas Occupations Code to engage in professional or vocational nursing; or (c) a physician assistant licensed under Chapter 204 of the Texas Occupations Code.
SB 1318 provides that such non-competes entered into with health care practitioners are not enforceable unless the non-compete:
- Provides for a buyout in amount not greater than the health care practitioner’s total annual salary and wages at the time of termination of the contract or employment;
- Expires no later than the one-year anniversary of the date the contract or employment was terminated;
- Limits the geographical area subject to the non-compete to no more than five miles from the location where the health care practitioner primarily practiced before the contract or employment terminated; and
- Has terms and conditions clearly and conspicuously stated in writing.
4. What should healthcare employers do in light of the new requirements under SB 1318?
Healthcare employers should generally consult with their employment counsel to ensure compliance with SB 1318 going forward. Among other things, healthcare employers should review their employment agreement forms and non-compete agreement forms to ensure compliance with SB 1318. Furthermore, given the invalidation of physician non-competes on a termination without “good cause,” it is critical for employers to appropriately document reasons for termination of a physician, to evidence any “good cause” supporting the termination decision.
