Category Archives: Restrictive Covenant

State Bill Would Limit Restrictive Covenants With Physicians

Contributed By Jeffrey Glass, May 11, 2021

Historically, a majority of states have allowed employers to use restrictive covenants with physicians—and only a handful of states (among them: Delaware, Massachusetts, and Rhode island) have prohibited that practice in whole or in part. However, as discussed in recent blogs, the current trend is for state legislatures to pass new laws that regulate and limit non-compete agreements, often as they relate to lower wage employees or employees below certain income thresholds.

Now, in what may be a harbinger of future legislative efforts to regulate restrictive covenants in the health care industry, the State of Louisiana is considering a bill that would specifically limit restrictive covenants for physicians.

The legislation at issue, Louisiana House Bill No. 483, would completely ban any type of contract that restricts the practice of medicine by “primary care physicians,” a term the bill defines as including doctors practicing family medicine, general internal medicine, general psychiatry, general pediatrics, obstetrics, and gynecology. It would also ban such agreements for any physician employed by the state, such as a state university hospital.

The legislation also sets limits on contracts that restrict the practice of medicine by “physician specialists,” which includes any physician not included in the definition of “primary care physician.” For “physician specialists,” a restrictive agreement would become unenforceable when the physician has put in three years of service to the employer. Practitioners sometimes call this type of arrangement a “burn off” restriction. Such restrictions are viewed as a way to allow the employer to realize the value of its investment in the employee over time, while allowing the employee to eventually be free of the post-employment restrictions.

The bill also sets limits for buy-out clauses for physician specialists. These are clauses where the physician or the new employer can pay money to the former employer to release the physician from the restrictions. The bill caps buy-out payments at the physician’s annual salary for the first year of the restriction, and provides that payments for any additional years are reduced on a pro rata basis.

Finally, the bill sets certain new rules for both “primary care physicians” and “physician specialists,” i.e., all physicians. The bill provides that, where any physician is terminated without cause by the employer, the restrictive covenant is unenforceable. It further provides that no restrictive covenant may restrict a physician from practicing within a “restricted geographic area” for a period of more than two years. “Restricted geographic area” is defined as the parish of the physician’s primary office location and up to two contiguous parishes. “Parishes” are Louisiana local government districts similar to counties.

This legislation would significantly change Louisiana law as it applies to physicians. Currently, Louisiana, like the majority of states, allows such restrictions to be used with physicians provided certain conditions are met. The new legislation would completely ban such agreements for primary care physicians and set significant limits on the use of such agreements with physician specialists.

We will keep readers apprised of further developments with the Louisiana legislation, as well as legislation in other states related to restrictive covenants in the health care industry.

Ruling Provides Guidance on Restrictive Covenants

Contributed by Suzanne Newcomb, October 16, 2019

man is signing non compete agreement

Long used to prevent former employees from gaining an unfair competitive advantage, covenants not to compete are increasingly under attack. California, North Dakota and Oklahoma essentially ban employee non-competes and recent legislation in Illinois, Maine, Maryland, Massachusetts, New Hampshire, Oregon, and Washington prevents their use with lower wage employees (the definition of which varies by state). Some laws go further, in Massachusetts, for example, a non-compete cannot be enforced against an employee terminated without cause and, in many cases, the employer must pay 50% of the former employee’s salary for the duration of the covenant.

In September, a federal court in Indiana struck down a non-compete as overly broad, but in an interesting twist, ordered the employee to cease work for a competitor because of his breach of the parties’ confidentiality agreement. Like the majority of states, Indiana “disfavors” employee non-competes and will enforce them only when they are supported by adequate consideration and the restrictions imposed are “reasonable” in scope, time and geographic reach and are no greater than is necessary to protect the employer’s legitimate interests.

The covenant in the Indiana case was deemed prohibitively broad in scope because it prevented the employee from working for a competitor “in any manner.” The decision cautions employers to limit non-compete restrictions to competitive positions analogous to the work the employee actually performs. However, because the employee downloaded thousands of documents immediately before departing and shared at least some confidential information with his new employer, the court issued a preliminary injunction prohibiting the employee from continuing in his new role. His “pre-departure harvesting” of his former employer’s confidential information warranted the injunction, the court concluded, because it created an “ongoing threat of potential or actual misappropriation” of his former employer’s confidential information or trade secrets.

Restrictive covenants are tricky and one size does not fit all. So what steps can organizations take to protect themselves from unfair competition in today’s highly competitive environment?

1. Location matters. Restrictive covenants are a matter of state law. Each agreement must meet the specific requirements of the jurisdiction where that employee’s employment relationship is based. Include choice of law and forum selection clauses to streamline disputes.

2. Don’t over reach. Some positions warrant a true non-compete and for others an agreement not to solicit customers will suffice. Patent and copyright assignments are critical for some segments of the workforce but for many, the only real concern is ensuring a departing employee does not make use of confidential information or steal trade secrets. Focus on what you need to protect and tailor the agreement to meet those needs.

3. Safeguard confidential information. A company’s failure to adequately protect confidential information in its day to day operations can undercut the best confidentiality agreement.

4. Be upfront about restrictive covenants. Waiting until after an employee accepts a position undercuts the consideration component and, in some jurisdictions, can invalidate an otherwise enforceable agreement. Ask prospective employees about ongoing contractual obligations before hiring them. Remind departing employees of ongoing contractual obligations.

5. Stay current. Review your forms periodically. The law is constantly evolving in this area.

Another Federal District Court Declines To Apply Bright Line Two-Year Standard for Restrictive Covenant Consideration

Contributed by Jeff Glass

Emplyee cleaning out deskReaders of this blog know there is an intense debate in the courts over the application of Fifield v. Premier Dealer Servs., Inc., 993 N.E.2d 938, 943 (Ill.App 1st Dist. 2013). Fifield announced that restrictive covenants supported solely by an at-will employment relationship were invalid for lack of adequate consideration if the employee did not remain employed for two years after signing the contract. This applies even if the employee voluntarily terminated. The Illinois Supreme Court did not accept review of Fifield, so it is controlling law in Illinois. However, it has been controversial. While some courts have applied the two-year standard, many others have held that a more flexible approach is called for.

By opinion dated March 10, 2016, U.S. District Court Judge Robert W. Gettleman, of the Northern District of Illinois, declined to rule that a non-solicitation agreement was invalid because the former employee had not worked for the plaintiff employer for two years.

The case, R.J. O’brien & Associates, LLC v. Williamson, 2016 WL 930628, was an action by the plaintiff, a futures brokerage and clearing firm, against a former member of its  trading desk operation. The defendant was hired in April 2012. He signed contracts with a one year non-solicitation clause as to customers and employees.

The defendant resigned in April 2013 and joined a competitor, Wells Fargo. He solicited his co-workers to join him before he left, and continued after he left.  One of the executives he recruited joined him at Wells Fargo a few months after he started.

The plaintiff sued to enforce the contracts. Notably, it only sought damages and did not seek injunctive relief. The defendant moved for summary judgment based on Fifield, arguing that the two year requirement was not met so the covenants failed for lack of consideration. He also argued that there was no evidence that he had solicited plaintiff’s employees. The court denied the motion for summary judgment noting that while some courts have strictly applied Fifield’s two year standard, at least three federal courts in Illinois have rejected the bright line approach in favor of a more flexible approach. The court also stated that there was support in the Illinois case law for distinguishing between cases where the employee was terminated and where the employee resigned. Finally, the court stated that the consideration issue was less important where, as in the case at bar, the plaintiff only sought damages and did not seek equitable relief. Based on these factors, the court held that consideration was adequate.

O’brien is part of a trend, at least in the Northern District of Illinois, to reject the bright line interpretation of Fifield and instead, employ a fact-specific approach which is more favorable to employers and more supportive of the enforcement of restrictive covenants.  We will keep you apprised as further decisions address this topic.

New Case Underscores Need for Employers to Act Promptly To Enforce Restrictive Covenants

Contributed by Jeff Glass

Readers of this blog know that we counsel our employer clients to immediately investigate the facts as soon as an employee who is subject to a restrictive covenant engages in conduct that might violate it. This is because the right to obtain an emergency injunction blocking any prohibited conduct can depend on the promptness of the employer’s efforts at enforcement.

This point was underscored by a recent unpublished decision of the Illinois Appellate Court for the First District (Cook County). Although this is an Illinois case, the lesson applies to employers in any state.

Defendant Meyer was senior vice president for the plaintiff bank. He signed an employment agreement that contained a six month non-compete agreement and a non-disclosure covenant. The plaintiff’s request for a temporary restraining order was based on e-mails that were located in its files and which showed possible breaches occurring almost four months earlier when the employee left. The court cited this delay in bringing suit as one of the reasons it was affirming the trial court’s denial of the motion for a temporary restraining order.

investigate documentsThe lesson is that, when an employee leaves, the employer should immediately take certain steps to investigate. These include taking the employee’s work station out of circulation and reviewing it to determine whether the employee has sent documents to a home e-mail account, contacted customers, or downloaded protectable information. The employee should be provided with a copy of his or her contract because often employees either forget they have one or doubt that it will be enforced. If breach is suspected, a written cease & desist/information preservation notice should be sent to the employee and possibly the new employer. Finally, if any evidence of breach is uncovered, employers should be aware that failing to take prompt action could result in the courts denial of emergency injunctive relief.

Check back for more updates on the law related to enforcing restrictive covenants.

Enforcing Restrictive Covenants – the Impact of Fifield v. Premier Dealer Services, Inc.

Contributed by Julie A. Proscia

An employer’s ability to enforce post-employment restrictive covenants (for example, a restriction on a former employee’s ability to compete against the employer after the employee’s employment ends) has been and continues to be a much litigated topic.  The incessant litigation has, however, resulted in the creation of a few “standards” that employers should be aware of in drafting and enforcing restrictive covenants.  An Illinois Appellate Court’s decision in Fifield v. Premier Dealer Services, Inc. serves as a reminder of the developing standards and drives home the point that “continued employment” can be adequate consideration for a restrictive covenant, but that employment better last at least two years!

Fifield involves a plaintiff who was employed by Great American Insurance Company (“Great American”) and was assigned to work exclusively for a Great American subsidiary.  The subsidiary was sold to the defendant, Premier Dealer Services, Inc. (“Premier”), and Great American informed the plaintiff that his employment would end on October 31, 2009.  However, in late October, Premier offered the plaintiff a position contingent on his agreeing to an “Employee Confidentiality and Inventions Agreement” (“agreement”) that included a two-year post-employment non-solicitation and non-compete restriction.  The plaintiff was able to negotiate a provision into the agreement that stated the non-solicitation and non-compete would not apply if the plaintiff was terminated without cause during the first year of his agreement.

The plaintiff started working for Premier on November 1, 2009, and resigned three months later on February 1, 2010.  He then went to work for a competitor and filed a declaratory judgment action seeking to have a court find that certain provisions, including the non-solicitation and non-competition provisions, are unenforceable for lack of consideration (i.e. the plaintiff is not getting “enough” in exchange for his agreement to not compete or solicit).  The trial court found in favor of the plaintiff on the non-solicitation and non-competition issue, and Premier appealed.  The Illinois Appellate Court adopted the trial court’s reasoning and affirmed the trial court’s decision.

Both Premier and the plaintiff made a number of arguments in support of their respective positions.  Premier’s primary argument was that the plaintiff was not employed at the time he signed the agreement, and, therefore, his “new employment” was adequate consideration.  This argument, however, was rejected by the court because the transition from Great American to Premier was essentially seamless (this was a significant blow to Premier’s case).  The Appellate Court also rejected Premier’s argument that the “one-year termination without cause” provision was adequate consideration.

The Appellate Court agreed with the plaintiff that he really never stopped working, so the purported “new employment” alone could not be adequate consideration.  The court recognized that Illinois courts’ have repeatedly held two years of employment to be adequate consideration to support a post-employment restrictive covenant.  The plaintiff was only employed for approximately three months.  The fact that the plaintiff resigned on his own accord had no impact on the conclusion that two years of continued employment is the “standard” for adequate consideration in post-employment restrictive covenant situations.  

In light of this “standard,” if a non-compete or non-solicit is critical to your business, you might consider offering “consideration” other than non-guaranteed, continuing employment for a current employee.  If guaranteed employment is not an option (such as through an employment agreement), cash or a bonus program can always be considered.

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.

Another Restrictive Covenant Upheld By Applying the Reliable Fire Analysis

Contributed by Jeff Glass

Another restrictive covenant has been upheld by applying the Reliable Fire decision. On July 17, 2012, the Illinois Appellate Court for the Fourth District issued its opinion in Zabaneh Franchises, LLC v. Walker, 2012 Ill.App. Lexis 579.  This is the second published  decision of an Illinois Appellate Court in the wake of Reliable Fire Equipment Co. v. Arrendondo, 2011 Ill. 111871 (December 2011). For our analysis of the first decision on the subject, the Insureone decision, please see our firm’s prior blog post.

In Zabaneh, the defendant was a tax preparer who worked for H&R Block. Every tax season, she signed an employment agreement that included a restrictive covenant barring her for two years from doing any tax preparation work for clients she had serviced while with H&R Block. Plaintiff Zabaneh acquired the H&R Block franchise including the rights under the employment agreement. In the trial court, the plaintiff filed a motion for temporary restraining order (TRO). The trial court denied the motion for TRO and also dismissed the complaint on the grounds that the restrictive covenant was a “contract of adhesion,” i.e., one which the plaintiff was required to sign as a condition of her employment and whose terms she had no opportunity to negotiate.

On appeal the appellate court, applying the Reliable Fire analysis, held that the enforceability of the restrictive covenant should be determined under a “three dimensional rule of reason” which requires analysis of (1) whether the restriction is no greater than required to protect the employer’s legitimate business interest; (2) whether it imposes undue hardship on the employee; and (3) whether it injures the public.  All underlying facts and particular circumstances are to be considered in balancing these factors.

Applying this analysis, the court reversed the trial court and found that the two-year prohibition on competition, which was limited to clients of the company whom the defendant herself had serviced, was a reasonable restriction which did not unduly burden the employee. The court further held that the lack of a geographic scope was not problematic. The court also held that the one year restriction on hiring plaintiff’s employees was reasonable. The court then remanded the case to the trial court for a hearing on whether the plaintiff was entitled to injunctive relief. 

The Zabaneh Franchises decision, when considered with the First District’s decision in InsureOne, is a favorable development for employer-side clientele.  It further clarifies that Reliable Fire requires courts to conduct a broad fact-based inquiry into the totality of the circumstances before ruling on the enforceability of a restrictive covenant. As a practical matter, this gives the employer more “ammunition” to use, and also makes it more difficult for an employee to obtain a quick legal ruling that a restrictive covenant cannot be enforced.

Please continue to check this blog for further developments in the law of restrictive covenants and unfair competition.