Lack of Protectable Interest in Patient Base Dooms Medical Employer’s Restrictive Covenant Case

Contributed by Jeff Glass

Employers who use restrictive covenants to protect their client base should take heed of the Illinois Appellate Court for the First District’s decision in Gastroenterology Consultants of the North Shore, S.C. v. Meiselman, M.D., et al.

In 1996, defendant Dr. Meiselman formed the plaintiff corporation with three other doctors. All agreed to non-competes that prohibited them for three years from soliciting the clinic’s patients within a 15 mile radius. Meiselman left in 2010 to join a nearby practice.  The clinic sued him and his new employer, seeking a preliminary injunction. 

The trial court denied the injunction on the grounds that plaintiff failed to establish a protectable interest Meiselman’s patients. 

On appeal, the court applied the test from the Illinois Supreme Court’s opinion in Reliable Fire Equipment v. Arrendondo.  Pursuant to Reliable Fire, a restrictive covenant is enforceable if: (1) it is no greater than necessary to protect the employer’s legitimate interest; (2) it does not unduly burden the employee; and (3) it does not injure the public. The court noted that the analysis is “unstructured” and requires consideration of the totality of the circumstances. 

The facts showed that, prior to forming the corporation, the defendant practiced for a decade in the area. After forming the clinic, he continued treating these patients.  He personally billed them, not the clinic.  The clinic did not help him with advertising or marketing. His compensation depended on his independent practice.  

Based on these facts, the appellate court held that the trial court did not abuse its discretion in holding that the plaintiff lacked a legitimate interest in the patient base and therefore was not likely to prevail on the merits.

Meiselman demonstrates that, even if restrictions are reasonable, the employer needs to show good reasons why it has an interest in the departed employee’s customer relationships. 

We recommend that employers review their agreements and revise them if necessary to have the employee acknowledge that:

  • he or she is being paid to develop customers and leads;
  • the employer is providing support for those efforts; and 
  • the employee understands that the relationships belong to the employer

In addition, document any marketing expenses, tech support, or other “back of the house” efforts that help the employee build his or her book of business.  Should the contract wind up in court, these measures will help establish that the customers belong to the company, too. 

On the other hand, if employees develop clients exclusively through their own efforts, bring a client base to the company, or are compensated on an “eat what you kill” system, Meiselman underscores the difficulty of establishing a protectable interest in that situation.  In that case, employers should consider alternate protections, such as a buy-out requirement, which compensates the employer without barring the employee from working with his or her customers.