© 2011 Baker & Hostetler LLP

Issues Affecting The Enforceability of Restrictive Employment Covenants In

the Healthcare Industry

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MCLE Information

• MCLE/CLE credit available from:– CA, NY, IL and CO

• Credit is pending in:– NJ, TX and FL

• Contact Shannon Morgan to obtain reporting information smmorgan@bakerlaw.com

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Presenters

David A. Poser

Partner, Cleveland

dposner@bakerlaw.com

216.861.6113

Steven A. Eisenberg

Partner, Cleveland

seienberg@bakerlaw.com

216.861.7903

Joyce Ackerbaum Cox

Partner, Orlando

jacox@bakerlaw.com

407.649.4077

Tonya A. Jacobs

Partner, Houston

tjacobs@bakerlaw.com

713.646.1358

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Today’s Topics

• Are Restrictive Employment Covenants Necessary?

• Crafting Enforceable Restrictive Employment Covenants

• Nonsolicitation Restrictive Employment Covenants

• Specific State Laws Affecting Enforceability of Restrictive Employment Covenants In the Healthcare Industry

• “Nonrestrictive” Restrictive Employment Covenants

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Legitimate Business Interests

• Confidential Information and Trade Secrets (Business Processes):– Billing or Payment Methods– Pricing and Profit Margins– Marketing Strategies– Proprietary Software– Business Plans

• Patients/Customers/Goodwill– Applicable for physicians, home health care agencies, hospitals, other

health care providers and institutions developing relationships with patients

– Deals with protecting the relationships cultivated between the employer’s patients/customers and the employee

– Typically, patients are the “customers”– Who is the “face” of the employer? (physician, therapist, sales

representative)

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Legitimate Business Interests (cont.)

• Unique Skills of Personnel/Extraordinary Training– Oftentimes applicable for new physicians completing residency– Must be more than simple on-the-job training– Training is of a unique character and would give unfair advantage to

competitor– Usually involves a significant financial investment

• Referral Services– Unsettled area of the law

• Some jurisdictions that recognize referral sources as legitimate business interests are Kansas, New Jersey, Pennsylvania, and Florida (split)

– Absent a specific statute, typically seeking protection under umbrella of customer/goodwill protection

– Courts may look at what type of investment was incurred to develop the referral relationship and whether the departing employee had such contacts before coming to the employer

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Crafting Enforceable Restrictive Employment Covenants

• Consideration– Inception of Employment– After Commencement of Employment

• Reasonable Scope of Restrictive Employment Covenant– Temporal Duration of Restrictive Employment

Covenant– Geographical Scope of Restrictive Employment

Covenant– Public Policy Considerations

• Stark Law• Access to Healthcare/Physician Mobility

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Nonsolicitation Restrictive Employment Covenants

• Nonsolicitation of Employees, Vendors, Suppliers of Former Employer

• Nonsolicitation of Patients

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State Laws Affecting Enforceability of Restrictive Employment Covenants:

• Covenants Not to Compete Void Per Se

• Covenants Not to Compete with Physicians Void Per Se (but does not render other provisions of any such contract or agreement void).

• Specific Limitations on Covenants not to Compete with Physicians

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Noncompetition Agreements Void Per Se

• Cal. Bus. & Prof. Code § 166000 prohibits any contract “by which anyone is restrained from engaging in a lawful profession, trade or business” with limited exceptions (i.e., partnership agreement, sale of business).

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Noncompetition Agreements With Physicians Void, But Damages Relating to Competition Allowed

• Col. Rev. Stat. Ann 8-2-113 (provisions which require the payment of damages upon termination of the agreement may include damages relating to competition).

• Del. Code Ann. § 2707 (same).• Mass. Gen. Laws Ann. Chl. 112, § 12X

(does not render void or unenforceable the remaining provisions of any such contract or agreement).

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Limitations on Covenants Not to Compete with Physicians: Reasonableness under Tenn. Code

Ann § 63-1-148

• Duration of 2 years or less;

• Maximum geographic restriction the greater of: (a) 10-mile radius from the primary practice site; or (b) county of the primary practice site;

• No geographic restriction, but restricted from specific facilities where physician provided services during employment;

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Limitations on Covenants Not to Compete with Physicians: Tex. Bus. & Com. Code § 15.50

• Not deny physician access to list of patients seen within 1 year of termination of employment;

• Must provide access to medical records upon authorization of patient;

• Provide for a “buy-out” of the restrictive covenant for a reasonable price;

• Provides a “carve-out” for patients under post-operative care or for critical on-going treatment.

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Nonrestrictive Restrictive Covenants

• Payment of a “Royalty”

• “Carve-Out” for Patients Under Post-Operative Care or for Critical On-going Treatment

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