Tag 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.

Ho, Ho, Ho, It’s Restrictive Covenant Season!

Contributed by Jeff Glass, December 28, 2018

Early in the New Year we often see employees switching jobs, which can trigger disputes over restrictive covenants in their employment agreements. As 2018 draws to a close, here are some things to keep in mind to protect your company, its customers, and its information against unfair competition from departing employees:

Assume the worst. We tend to assume people will comply with their contractual obligations. Employers should not assume a departing employee will comply with a restrictive covenant. Some employees forget they even have an employment agreement. Some think the employer won’t enforce the agreement especially if it has not enforced similar agreements in the past.  Some think restrictive covenants are not enforceable. So don’t assume departing employees will comply with their obligations.  

The exit interview is critical. Provide the employee with a copy of the contract during the exit interview, review any post-employment obligations, and explain that the company intends to enforce its rights under the agreement.  Ask each departing employee to return all digital and paper copies of company information. Have them sign a statement that all such information has been returned or destroyed. 

Preserve the laptop. If the employee has a company-issued laptop computer, do not “wipe” the device or put it back into service right away. The employee’s computer may hold a treasure-trove of useful information should litigation result. 

Pay out what you owe. If the employee has earned a bonus based on 2018 performance that would normally be paid out under your policies and procedures, pay it – even if you suspect unfair competition. Otherwise, the employee may argue that the company waived its right to enforce the restrictive covenants by failing to perform its own contractual obligations. 

Send out a cease and desist letter.  As soon as you suspect improper conduct, have legal counsel send a letter demanding that the former employee cease and desist from any improper conduct and preserve all relevant information. Consider sending the new employer a copy of the contract. Sometimes, this is enough to stop the behavior in its tracks.   

Review your restrictive covenants. Does your contract comply with the Federal Defend Trade Secrets Act and applicable state law? Does your contract allow you to recover attorney’s fees in the event of a breach? Are the restrictions no greater than necessary to protect your company? Does it contain an “auto-extender” clause that extends the period of restriction in the event of a breach? Do other provisions need to be updated?

If you don’t have a restrictive covenant agreement, you still have options. In most states employers can require an existing employee to sign a restrictive covenant as a condition of continued employment if adequate consideration is provided. Even companies that elect to operate without restrictive covenants may enjoy some level of protection through state or federal trade secret statutes and fiduciary duty obligations inherent in the employment relationship.    

So enjoy the holidays but remember, come the New Year, it is “restrictive covenant season!”

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.