On June 20, Texas Governor Greg Abbott signed Senate Bill 1318 (Amendment) into law, amending Texas Business & Commerce Code Section 15.50(b), which is commonly thought of as the “Texas physician non-compete buyout statute.” Specifically, the statute previously required that any non-compete restricting a physician’s right to practice medicine must include a buyout right, permitting the physician to pay a certain buyout amount to avoid the non-compete restriction.
The statute has been a source of confusion for physician employers for years, specifically regarding how to calculate the buyout amount and whether the buyout requirement applies to transaction- or ownership-related non-competes (as opposed to only employment-related non-competes).
The Amendment, applicable to any contract entered into or renewed on or after September 1, 2025 (Effective Date), provides some clarification regarding the statute’s buyout requirement, while further limiting physician non-competes in Texas.
Link to Key Changes to Physician Non-Compete Agreements Key Changes to Physician Non-Compete Agreements
There are several key changes to physician non-compete agreements in Texas under the Amendment. As of the Effective Date, entities should be aware of the following:
- The non-compete buyout amount is capped at an amount equal to the physician’s annual compensation at the time of separation, ending the speculation as to how to calculate a “reasonable” buyout amount, as well as removing the need for an arbitrator to decide the appropriate amount as previously contemplated by the statute.
- The non-compete is capped at one year post-employment.
- The restricted territory is capped at a five mile radius around the physician’s primary location of practice at the time of separation.
- The non-compete is void if the physician is fired without “good cause,” which is defined as a “reasonable basis….directly related to the physician’s conduct,” including the physician’s conduct on the job or otherwise, and poor performance.
The Amendment makes clear that the statute does not apply to a non-compete restricting a physician from managing or directing medical services in an administrative capacity for a medical practice or other healthcare provider.
Link to New Non-Compete Rules for Other Healthcare Practitioners New Non-Compete Rules for Other Healthcare Practitioners
The Amendment also adds a new non-compete restriction related to “healthcare practitioners,” which includes dentists, nurses, and physician assistants. Specifically:
- Any non-compete entered into with a healthcare practitioner must include a buyout.
- The buyout amount is capped at an amount equal to the practitioner’s annual compensation at the time of separation.
- The non-compete is capped at one year post-employment.
- The restricted territory is capped at a five mile radius around the practitioner’s primary location of practice at the time of separation.
Unfortunately, it is still unclear whether the buyout provision (and the new restrictions set forth in the Amendment) applies in the context of transaction- or ownership-related non-competes. Notably, the statute ties the buyout amount to the physician’s and healthcare practitioner’s compensation at the end of employment/engagement. Similarly, the one-year tail period is tied to the end of employment/engagement. These provisions seem to imply that the legislature intended the Amendment (and original statute) to apply only in the employment context. On the other hand, the legislature clearly had the opportunity to clarify in the Amendment that the restrictions apply only to employment-related non-competes, but did not do so.
For now, employers in Texas must ensure compliance with the Amendment for any new hires on or after September 1, 2025. We also recommend that any non-compete agreement that is renewed on or after September 1 includes an amendment to narrow the non-compete to comply with the restrictions set forth in the Amendment. We will continue to monitor for any new guidance or development regarding the application of the Amendment to transaction- and ownership-related non-competes.
If you have any questions about how SB 1318 may impact your non-compete agreements or need assistance reviewing or drafting compliant contracts, please reach out to the author.