Healthcare Non-Compete Compliance

Healthcare Non-Compete Agreements in California: What Physicians and Practices Must Know

Healthcare non-compete agreements in California occupy a unique intersection of employment law, healthcare regulation, and business protection. California has long been the most aggressive state in the nation in prohibiting non-compete agreements, and its statutory framework—anchored by Business and Professions Code (BPC) Section 16600—declares that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." For physicians, dentists, and other healthcare professionals, this prohibition carries particular significance: it means that restrictive covenants preventing a departing physician from practicing medicine are void and unenforceable as a matter of California public policy.

Recent legislative developments have substantially reinforced and expanded this prohibition. SB 699, effective January 1, 2024, added BPC Section 16600.5, which declares that any contract void under Section 16600 is unenforceable "regardless of where and when the contract was signed" and creates a private right of action for employees subjected to unenforceable non-competes. AB 1076, also effective January 1, 2024, added BPC Section 16600.1, requiring employers to notify current and former employees that their non-compete agreements are void. And SB 351, signed by Governor Newsom on October 6, 2025, and effective January 1, 2026, specifically targets restrictive covenants in contracts between private equity groups or hedge funds and physician or dental practices, rendering void non-compete and non-disparagement clauses in management and asset-purchase agreements involving these entities.

Bay Legal PC advises California medical corporations, group practices, management services organizations, and individual physicians on structuring employment agreements, partnership arrangements, and practice transitions that comply with California's evolving non-compete prohibitions. Understanding where the line falls between prohibited restrictive covenants and permissible business protections is essential for any healthcare business operating in this state.

Section 1: California's Foundational Non-Compete Prohibition

BPC §16600: The Broadest Non-Compete Ban in the Nation

California's prohibition on non-compete agreements is among the oldest and broadest in the country. BPC Section 16600, originally enacted in 1872, declares void "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind." Unlike most states, which evaluate non-compete agreements under a "reasonableness" standard—balancing the employer's legitimate business interests against the employee's right to work—California employs a near-absolute prohibition. The California Supreme Court confirmed this approach in Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, holding that Section 16600 invalidates any agreement that restrains a person from engaging in a lawful profession, regardless of how narrowly the restraint is drawn.

For healthcare professionals, the practical impact is clear: a physician employment agreement, partnership agreement, or independent contractor agreement that prohibits the physician from practicing medicine within a specified geographic area or for a specified period after departure is void and unenforceable. California courts have consistently struck down such provisions, even when the restrictive covenant is mutual, limited in scope, or tied to consideration such as a signing bonus or partnership buy-in. The Ninth Circuit, in Golden v. California Emergency Physicians Medical Group (2015), extended this analysis to contractual restraints on professional practice generally, not just traditional employer-employee non-competes.

The only statutory exceptions to Section 16600 are narrow. BPC Sections 16601 through 16602.5 permit non-compete agreements in connection with the sale of a business (where the seller sells the goodwill or all ownership interests), the dissolution of a partnership, or the dissolution or sale of a limited liability company interest. These exceptions apply to physicians, but only in genuine sale-of-business transactions—not as a device to circumvent the prohibition in employment or independent contractor relationships.

Section 2: SB 699, AB 1076, and the 2024 Strengthening of the Ban

BPC §16600.5 and §16600.1: Closing the Loopholes

Effective January 1, 2024, California enacted two companion statutes that dramatically strengthened the enforcement of Section 16600 in the healthcare and broader employment contexts. SB 699 added BPC Section 16600.5, which provides that any contract void under Chapter 1 of Part 2 of Division 7 (the non-compete chapter) "is unenforceable regardless of where and when the contract was signed." This provision has significant extraterritorial implications: a physician who signed a non-compete agreement in another state, governed by that state's law, may now invoke Section 16600.5 if the physician relocates to California or if the employer has any California connection.

Section 16600.5 also creates a private right of action. An employer that attempts to enforce a void non-compete agreement—whether through litigation, threats of litigation, or other coercive conduct—may be liable for damages, injunctive relief, and attorney's fees. This is a material change from the prior regime, where the primary remedy was a declaratory judgment that the agreement was void. The private right of action incentivizes physicians to challenge unenforceable restrictive covenants and imposes real financial consequences on employers and practice groups that continue to include or enforce them.

AB 1076, codified as BPC Section 16600.1, complements SB 699 by imposing affirmative notification obligations. By February 14, 2024, every employer was required to send individualized written notice—to both current and former employees who had signed non-compete agreements—informing them that the non-compete provisions are void under California law. The notice must be delivered to the employee's last known mailing address and email address. Failure to provide the required notice constitutes a violation of the Unfair Competition Law (BPC §17200 et seq.), exposing the employer to civil penalties of up to $2,500 per violation. Healthcare organizations that failed to send these notices should take immediate corrective action.

Section 3: SB 351 and Private Equity Restrictions

SB 351 (Effective January 1, 2026): Targeting Non-Competes in PE-Backed Healthcare

SB 351, signed into law on October 6, 2025, represents the latest and most targeted legislative action affecting non-compete agreements in California healthcare. While SB 699 and AB 1076 applied broadly across all industries, SB 351 specifically addresses restrictive covenants in contracts between private equity groups or hedge funds and physician or dental practices. The statute renders void any non-compete clause in a contract where a private equity group or hedge fund (or any entity controlled by one) contracts with a California physician or dental practice to manage the practice or to purchase the practice's real estate or other assets.

Under SB 351, such contracts may not include clauses that prevent any provider in the practice from competing with the practice upon the provider's termination or resignation. The statute also prohibits non-disparagement clauses that would bar a physician or dentist from commenting publicly on the practice's quality of care, utilization of care, ethical or professional challenges, or revenue-increasing strategies employed by the private equity group or hedge fund. The Attorney General is authorized to seek injunctive relief and other equitable remedies, and may recover attorney's fees and costs for any violation.

SB 351 preserves two narrow exceptions. First, the statute does not invalidate a non-compete agreement connected with a genuine sale of a business that is otherwise enforceable under California law (i.e., the BPC §16601 sale-of-business exception), provided the agreement does not operate as an employee non-compete. Second, the statute permits confidentiality clauses protecting material nonpublic information about the private equity group or hedge fund, so long as those clauses do not prevent legally required disclosures or the public commentary protections described above. Practices backed by private equity or managed through MSO/DSO structures should review all existing agreements for compliance before the January 1, 2026, effective date.

Section 4: Structuring Compliant Agreements After the New Laws

What Healthcare Practices Can Still Do to Protect Their Business Interests

The prohibition on non-compete agreements does not leave California healthcare practices without tools to protect legitimate business interests. Understanding the boundary between prohibited restraints and permissible protections is essential for any medical corporation, group practice, or MSO structuring physician relationships.

Confidentiality and non-disclosure agreements remain enforceable, provided they are narrowly tailored to protect genuinely confidential information—trade secrets, proprietary business methods, financial data, and strategic plans—and do not function as de facto non-competes. However, the California Court of Appeal's decision in Brown v. TGS Management Co., LLC (2020) cautioned that a confidentiality agreement is unlawful if it operates as a de facto non-compete by effectively preventing the departing employee from working in the same field. Non-solicitation agreements present a more nuanced picture. California courts, including AMN Healthcare Inc. v. Aya Healthcare Services Inc. (2018), have held that customer (patient) non-solicitation agreements may be void under Section 16600 as unlawful restraints of trade. Employee non-solicitation agreements face similar scrutiny.

For physician departures, practices should focus on transition planning rather than restrictive covenants. This includes establishing clear patient notification protocols (consistent with Medical Board of California guidelines and HIPAA), negotiating reasonable transition periods, and documenting the transfer of patient relationships in a manner that respects patient choice. Sale-of-business non-competes remain available under BPC §16601 when a physician-owner sells the goodwill of the practice or all ownership interests—but these must be genuine sales, not disguised employment restrictions. Bay Legal drafts and reviews physician employment agreements, partnership agreements, and practice sale documents to ensure compliance with California's non-compete framework while maximizing permissible business protections.

Steps / HowTo Section:

How to Audit and Restructure Your Practice's Restrictive Covenants

1. Inventory all existing agreements. Compile every physician employment agreement, independent contractor agreement, partnership agreement, shareholder agreement, and MSO/management agreement currently in effect. Identify all provisions that restrict competition, solicitation, or disparagement after the termination of the relationship.

1. Classify each restrictive covenant. Determine whether each provision constitutes a prohibited non-compete (void under BPC §16600), a non-solicitation clause (likely void under recent case law), a non-disparagement clause (void if covered by SB 351), or a permissible confidentiality/NDA provision.

1. Confirm compliance with SB 699 notification requirements. Verify that written notices were sent by February 14, 2024, to all current and former employees who signed non-compete agreements, informing them that the provisions are void. If notices were not sent, prepare and send corrective notices immediately, as the failure constitutes a continuing UCL violation.

1. Review SB 351 applicability. If any private equity group, hedge fund, or entity controlled by either is involved in the practice—whether through ownership, management, or asset purchase—review all contracts for prohibited non-compete and non-disparagement clauses. Remove or revise noncompliant provisions before the January 1, 2026, effective date.

1. Restructure physician departure provisions. Replace void non-compete clauses with enforceable alternatives: narrowly tailored confidentiality agreements, physician transition protocols, patient notification procedures, and—where applicable—sale-of-business non-competes under BPC §16601.

1. Draft compliant new agreements. For all new physician hires, partners, and contractor relationships, draft agreements that omit non-compete clauses entirely and rely on permissible protections. Ensure that any sale-of-business provisions are structured to satisfy the statutory exception and are not disguised employment restrictions.

1. Implement ongoing compliance monitoring. Establish a regular review cycle for all physician and provider agreements. As California non-compete law continues to evolve—through legislation, court decisions, and regulatory guidance—practices must update their agreements proactively.

Bay Legal PC advises California medical corporations, physician group practices, management services organizations, dental service organizations, and individual physicians on all aspects of healthcare non-compete compliance. Our services include auditing existing restrictive covenants across employment, partnership, and management agreements; drafting compliant physician employment and independent contractor agreements; structuring physician departure and transition plans; advising on SB 699 and AB 1076 notification obligations; analyzing SB 351 applicability for private equity-backed and MSO-managed practices; and representing physicians and practices in disputes arising from the enforcement of void non-compete agreements. Our practice is focused on California law and California-licensed healthcare entities.

Q: Are all physician non-compete agreements void in California?

A: Yes, with a very narrow exception. BPC Section 16600 voids any contract that restrains a person from engaging in a lawful profession. This includes non-compete clauses in physician employment agreements, partnership agreements, independent contractor agreements, and shareholder agreements. The only exception is a non-compete agreement executed in connection with the genuine sale of a business under BPC §16601—where the physician-owner sells the goodwill of the practice or all ownership interests. Even this exception is narrowly construed and does not apply to agreements that function as de facto employment non-competes.

Q: Can a California medical practice include a patient non-solicitation clause in a physician's employment agreement?

A: This is an area of significant legal risk. California appellate courts, including the Fourth District's decision in AMN Healthcare Inc. v. Aya Healthcare Services Inc. (2018), have held that non-solicitation agreements may constitute unlawful restraints of trade under BPC §16600. While some federal courts have left open the possibility that narrow, carefully drafted non-solicitation clauses might survive scrutiny, the trend in California jurisprudence strongly disfavors them. Practices that rely on patient non-solicitation clauses should be aware that enforcement is uncertain and that a court may declare the clause void. The safer approach is to focus on patient notification protocols and transition planning that respects patient choice.

Q: What penalties apply if a practice tries to enforce a void non-compete against a physician?

A: Under BPC §16600.5 (SB 699), a physician subjected to enforcement of a void non-compete agreement may bring a private lawsuit seeking damages, injunctive relief, and recovery of attorney's fees. The employer or practice may also face claims under the Unfair Competition Law (BPC §17200). If the practice failed to provide the required written notice under BPC §16600.1 (AB 1076) informing the physician that the non-compete is void, civil penalties of up to $2,500 per violation may apply. For practices involving private equity or hedge fund entities, SB 351 additionally authorizes the Attorney General to seek injunctive relief, equitable remedies, and attorney's fees.

Q: Does SB 351 affect all medical practices or only those with private equity involvement?

A: SB 351's non-compete and non-disparagement restrictions apply specifically to contracts where a private equity group, hedge fund, or an entity controlled by either is involved with a physician or dental practice—whether through management, investment, or asset purchase. The statute does not apply to hospitals, hospital systems, public agencies, or physician-owned practices without private equity or hedge fund involvement. However, all California medical practices remain subject to the broader non-compete prohibition under BPC §16600 and the enforcement provisions of SB 699 and AB 1076, regardless of ownership structure.

Q: How should a medical practice handle a departing physician's patient relationships?

A: California law prohibits restricting where a departing physician may practice, so the focus should be on a structured transition that respects patient choice. The Medical Board of California expects practices to provide patients with reasonable notice of the physician's departure and an opportunity to choose their provider. Practices should develop a written transition protocol that includes patient notification timelines, procedures for transferring medical records (consistent with HIPAA and California Health and Safety Code requirements), and a reasonable period during which the departing physician can communicate with patients about continuity of care. Bay Legal drafts these transition protocols to comply with California law while protecting the practice's operational interests.

Q: Can a physician who signed a non-compete in another state be bound by it after moving to California?

A: Generally, no. BPC §16600.5 (SB 699) provides that any non-compete agreement void under California law is unenforceable "regardless of where and when the contract was signed." This means that a physician who signed an enforceable non-compete in, say, Texas or Florida, and who subsequently relocates to California or seeks to practice in California, may invoke Section 16600.5 to void the agreement. While courts are still developing the boundaries of this extraterritorial application—as illustrated by the Ninth Circuit's decision in Hermalyn v. DraftKings (addressing the interstate reach of SB 699)—the statutory language strongly favors the physician. Practices recruiting physicians from other states should advise candidates that any prior non-competes are likely unenforceable in California.

Q: Are non-disparagement clauses still permissible in physician agreements?

A: It depends on the context. For practices involving private equity or hedge fund entities, SB 351 specifically voids non-disparagement clauses that would prevent a physician from commenting on quality of care, utilization, ethical or professional challenges, or the revenue strategies of the private equity group or hedge fund. Outside the SB 351 context, non-disparagement clauses are generally permissible in California, provided they do not function as a restraint on the physician's ability to engage in a lawful profession. However, any non-disparagement clause should be carefully drafted to avoid overreach, as an overly broad clause could be challenged as a de facto non-compete or as a restraint on protected speech.

Internal Links

• Medical Business & Healthcare Law
• Contract Law / Non-Compete & NDA
• Contract Law
• Buying or Selling a Medical Practice
• Healthcare Buy-Sell Agreements

External Links

• California Legislative Information
• Medical Board of California