Indiana Supreme Court Issues New Ruling on Physician Noncompetition Agreements

On March 11, 2008, the Indiana Supreme Court issued its first comprehensive ruling on physician noncompetition agreements in more than 20 years.   The Court's new decision may significantly impact the enforceability of existing physician noncompetition agreements and change the way physician noncompetition agreements are drafted in the future. 

In Central Indiana Podiatry, P.C. v. Kenneth Krueger, et al., __ N.E.2d __, 2008 WL 642529 (March 11, 2008), the Indiana Supreme Court examined the enforceability of a noncompetition agreement between podiatrist Kenneth Krueger and his former employer Central Indiana Podiatry, P.C. (CIP).  Krueger's noncompetition agreement prohibited him from practicing podiatry for two years within a geographic area designated as a total of 43 counties in central Indiana.  During his employment with CIP, however, Krueger practiced in only three of those counties-Marion, Tippecanoe and Howard Counties.  Krueger argued, among other things, that his noncompetition agreement was void and unenforceable because physician noncompetition agreements are against public policy and his noncompetition agreement was overbroad and unreasonable.

Physician Noncompetition Agreements Are Not Per Se Void and Unenforceable

The American Medical Association has denounced noncompetition agreements with physicians and some states have banned them altogether.  But, the Indiana Supreme Court affirmed in Central Indiana Podiatry that physician noncompetition agreements are not per se void as a matter of public policy in Indiana.  The Indiana Supreme Court further noted, however, that the thorny public policy questions surrounding physician noncompetition agreements and "any decision to ban physician noncompetition agreements altogether should be left to the legislature."

Geographic Restriction Must Be Reasonable and Limited to the Area in Which the Physician Actually Practiced

The Central Indiana Podiatry case affirms that physician noncompetition agreements must be reasonable to be enforceable and offers much-needed guidance on the appropriate geographic scope of such agreements.  The Indiana Supreme Court acknowledged that CIP had a legitimate protectable interest in preserving its patient relationships.  However, the Court held that the geographic scope of Krueger's noncompetition agreement was "clearly overbroad" because it restricted Krueger from practicing podiatry in numerous Indiana counties other than those in which he actually practiced podiatry on CIP's behalf.   If a noncompetition agreement is justified by the employer's development of patient relationships, then to be reasonable, the noncompetition agreement "must be limited to the area in which the physician has had patient contact."

Parties Need to Reevaluate Their Noncompetition Agreements

The Central Indiana Podiatry case contains critical new guidance regarding physician noncompetition agreements-more than can be adequately addressed in the space of this article.  Most importantly, however, the case emphasizes the importance of careful drafting of physician noncompetition agreements.  Employers whose physician noncompetition agreements do not conform with the new guidelines may have difficulty enforcing those agreements and should take a hard look at their current and future physician noncompetition agreements to ensure that the agreements comply with the new law.