Hospitals that employ physicians have improved their odds of enforcing non-compete agreements that protect referral sources.
On September 14, 2017, the Florida Supreme Court in the cases of White v. Mederi Caretenders Visiting Services of Southeast Florida LLC et al., case number SC16-28, and Americare Home Therapy Inc. v. Hiles, case number 16-400, unanimously ruled that referral sources are legitimate business interests that may support enforcement of non-compete agreements. This decision is particularly important for home health care providers and physician practices that rely upon referral sources to send them patients.
Many business owners do not use non-compete agreements because they do not think that they are worth the paper they are written on. Others use non-competes for many different levels of employees, and believe that they are a contract and should be enforced in all instances. In fact, a majority of states will enforce non-compete agreements only if they are supported by legitimate business interests. The definition of a legitimate business interest has been litigated many times all over the country. In Florida, the lower courts were split on whether referral sources are legitimate business interests.
Not surprisingly, the Supreme Court ruling recognized that referral sources may be worthy of protection stemmed from the actions of marketing representatives for home health care companies. After all, home health care companies receive patients from referral sources such as physicians, hospitals and skilled nursing facilities. The Supreme Court reviewed two cases from the lower courts that were decided differently on virtually identical facts. In the first case under review, Elizabeth White, signed a one year non-compete agreement with Almost Family, Inc., and its Florida based subsidiary Mederi Visiting Services of Southeast Florida. The agreement was limited to the counties she serviced. Ms. White then went to work for a direct competitor, Omni Home Health. After Ms. White arrived at Omni, she began to call upon the very same referral sources that sent her patients while she was employed by Mederi. The lower appellate court upheld Ms. White’s non-compete, finding that referral sources were protected.
The second marketing representative, Ms. Carla Hiles, signed a one year non-compete agreement with her former employer, Americare Home Therapy, Inc. The non-compete covered fifty miles of any referral sources that Ms. Hiles solicited while employed by Americare. Ms. Hiles then went to work for Doctors Choice, a direct competitor of Americare, and began to solicit the same referral sources she had at Americare. The lower appellate court declined to uphold Ms. White’s non-compete, finding that referral sources are not protected. Both Ms. White and Ms. Hiles relied on referral sources, as opposed to patients or prospective patients, to bring in business for their home health care company employers, yet the lower courts disagreed on the enforceability of the non-competes.
The Florida statute governing non-compete agreements, section 542.335, specifies the following five categories of legitimate business interests that may support enforcement of a non-compete:
1. Trade secrets, as defined in s. 688.002(4).
2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets.
3. Substantial relationships with specific prospective or existing customers, patients, or clients.
4. Customer, patient, or client goodwill associated with:
a. An ongoing business or professional practice, by way of trade name, trademark, service mark, or “trade dress”;
b. A specific geographic location; or
c. A specific marketing or trade area.
5. Extraordinary or specialized training.
Referral sources are not one of the five. The Court held that the five listed legitimate business interests are not exclusive and that, referral sources may be protected depending on the facts and circumstances of a case, and the industry involved. In upholding both Ms. White’s and Ms. Hiles non-compete agreements, the Supreme Court recognized that referral sources are the lifeblood of the home health care business and worthy of protection. The Supreme Court understood that patients do not normally find home health care companies on their own, and marketing reps do not market to patients. Rather, marketing sales reps market to referral sources that can refer patients.
The Court did point out that, although known, existing and clearly identifiable referral sources may be protected, possible relationships with unidentified, prospective patients are not.
The White decision will have an impact outside of the home health care industry and outside of Florida. Employers will argue that referral sources should be protected in a wide variety of businesses. Lawyers in and outside of Florida will use the White case to support enforcement of non-competes in any industry that relies upon referral sources. As to physician practices, the court in White hinted that referral sources of specialty physicians may be protected. This makes perfect sense as many physicians, including specialty physicians employed by hospitals, rely heavily on referrals from other doctors.
Hospital’s employing physicians will use White when seeking to enforce non-competes. After all, many physicians working at hospitals get referrals from other hospital doctors. The referring hospital doctors may be worthy of protection when a doctor leaves the hospital.
Factors that courts will likely look at in determining the enforceability of non-competes against physicians employed by hospitals include: (i) the percentage of business obtained by specifically identifiable referral sources; (ii) whether the departing doctor is obtaining referrals from the same referral sources that referred patients to his or her former employee; (iii) whether the departing doctor worked for another group, and developed referral sources, before joining the hospital; (iv) decrease in business from specifically identifiable referral sources; and (v) time and geographic scope of restriction.
Hospitals may want to take a fresh look at non-competes they have with its doctors to ensure that referral sources are explicitly referenced. This can only help enforcement on non-competes.
Employers who rely on referral sources to obtain patients, such as home health care companies and physician practice groups, will now have an easier time enforcing non-competes.
Leonard K. Samuels, Esq. is a partner at Berger Singerman law firm who specializes in Employment Law and Commercial Litigation. He can be contacted at lsamuels@bergersingerman.com or (954) 525-9900.
By: Leonard Samuels, Berger Singerman
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