
In Florida, non-competition and other restrictive covenant agreements are enforceable to the extent they are tailored to protect a legitimate business interest. On September 14, 2017, the Florida Supreme Court held that a company’s relationships with business referral sources may constitute a protectable business interest – White v. Mederi Caretenders Visiting Services of Southeast Fla., No. SC16-28, and Americare Home Therapy, Inc. v. Hiles, No. SC16-400. Importantly, the Court stressed that its decision is highly fact-specific and depends on the role of referrals in particular industries and companies in question.
In a majority of business situations, the solicitation of new business involves direct communication between business representatives and their potential customers or clients. However, in certain industries, businesses are largely or even exclusively reliant on third party referrals. Home health care (“HCC”) providers, for instance, obtain new patients by way of referrals from those patients’ treating physicians.
Instead of competing over patients, HHC providers generally dedicate the bulk of their business development efforts toward the development of relationships with patient referral sources. However, as noted in the recent Florida Supreme Court decision, HHC providers and other types of businesses have historically run into trouble enforcing non-compete and non-solicitation agreements that restrict competition over referral sources, as opposed to actual customers, clients or patients.
Restrictive covenant agreements in Florida are governed by Florida Statute Section 542.335, which provides that restraints on competition are enforceable to the extent that they protect a “legitimate business interest.” The statute goes on to provide a non-inclusive list of “legitimate business interests,” one of which is described as “substantial relationships with specific prospective or existing customers, patients, or clients.”
Notably, the Florida non-compete statute does not list referral relationships as a legitimate business interest. Further, conferring protected status to such referral relationships might seem to conflict with the statute’s express protection of relationships with “specific prospective or existing customers, patients, or clients.” In this regard, referral sources, by their very nature, are relied upon for customers, patients or clients whose identities are not yet known.
Despite acknowledging the above concerns, the Florida Supreme Court ultimately held that such factors do not preclude the designation of referral sources as protectable legitimate business interests. First, the Court pointed out that the statutory list of legitimate business interests is expressly non-inclusive. Second, the Court concluded that “[a]ttempting to protect identifiable referral sources is distinct from claiming an interest in an unidentified patient base.”
Central to the Court’s holding was the unique nature of the HHC business model. As the Court explained, HHCs “are dependent upon referrals to obtain patients as HHCs do not directly solicit patients. In fact, a physician signing a treatment order can be a condition precedent to receiving home health services, similar to a prescription… Therefore, for an HHC to obtain a specific prospective or existing patient…, it must first develop a referral source to supply the patient.” In other words, referral relationships are “crucial business interests” for an HHC, and, therefore, are consistent with “the legitimate business interests listed in the statute.”
Importantly, the Court was careful to emphasize that the determination of protected status for referral relationships is “heavily industry- and context-specific.” Therefore, employers should proceed cautiously before attempting to restrict former employees from competing for referral sources. For example, employers should consider the manner in which they rely on referral sources for business opportunities; the degree to which they rely on those referral sources; the contractual or other relationship with the referral sources themselves; and the investments made to develop and retain referral relationships. As always, please contact the member of Jackson Lewis’ Non-Competes Practice Group for further assistance in assessing these issues relating to referral relationships.
In a recent decision examining Kansas non-compete law, the United States District Court for the District of Kansas partially granted a company’s motion to enjoin its former employee’s violations of the non-compete and customer non-solicitation provisions of his employment agreement. The decision, in the matter of
Once again, Nevada has re-written the landscape the law regarding enforcement of post-employment non-competition agreements. Please see the article posted on our website, written by
Nebraska’s legal history on the enforceability of non-compete agreements is usually a surprise for employers who view Nebraska as pro-business. Nebraska courts routinely invalidate employee non-compete agreements that venture beyond restricting the employee from doing business with and soliciting customers with whom that employee did business and had personal contact. If there is a non-compete component to the agreement, or if the non-solicitation applies to all customers, Nebraska courts typically invalidate the entire agreement. Companies using a one-size-fits-all agreement for their Nebraska employees are routinely victimized by this surprise. The reaction is typically a scramble to litigate in a venue outside the Cornhusker state.
A May 11, 2017 decision by Judge Chang, in the Northern District of Illinois, found misappropriation alleged under the Defend Trade Secrets Act (DTSA) and the Illinois Trade Secrets Act (ITSA), in a case where the employee downloaded files while still employed. Denying the Defendant’s Motion to Dismiss a Third Amended Complaint, the Court examined the key pleading elements of: (1) trade secret, (2) misappropriation, and (3) acquisition or use, as defined under both the Illinois Trade Secrets Act and the Defend Trade Secrets Act. To survive a motion to dismiss under the ITSA and DTSA, a plaintiff must get over all three of these hurdles.
Although most employers are very familiar with the usual discovery process of litigation, they may not be as familiar with the Texas Rules of Civil Procedure’s Rule 202, which concerns pre-suit depositions. Rule 202 can be used, for example, by an employer who wants to learn more about a former employee’s activities before commencing a non-compete or trade secrets lawsuit. Texas employers should be familiar with the availability of Rule 202 depositions, as well as with how to oppose an inadequately supported 202 petition, and how to use it effectively when needed.
Employers sometimes worry whether seeking to enforce their non-competes in some circumstances but not others might preclude enforcement altogether in the future. Not so, says one court. Applying Ohio law, the United States District Court for the Western District of Tennessee, in GCA Services v. ParCou, held in a discovery ruling that information regarding an employer’s selective enforcement of its non-competition agreements is irrelevant to the issue of whether such agreements are enforceable.
The assault on non-compete agreements has continued in a significant way, as outlined in our web article,