Don Weinbren Discusses Recent Updates in the Enforceability of Florida Restrictive Covenants in Orlando Medical News
What’s New in the Use of Restrictive Covenants by Florida Medical Practices and Healthcare Businesses?
It is expensive to own and operate a medical practice or healthcare business – the costs of electronic health records technology, medical and office equipment, and building and maintaining business relationships is significant. Physicians and healthcare business owners justifiably want to protect their investments. One protective method is to prohibit a departing owner or employee from competing or soliciting and accepting business from existing patients and referral sources through non-competition and non-solicitation/non-acceptance agreements (collectively, “restrictive covenants“). So, what is new in the enforceability of Florida restrictive covenants?
The discussions below on Florida law updates apply the general rule, stated in §542.335, Fla. Stat., that a restrictive covenant, which is in writing and signed by both parties, can be enforced to protect one or more proven “legitimate business interests,” as long as the restriction is “reasonable in time, area, and line of business.” For this purpose, “legitimate business interests” include, among other things, trade secrets and substantial relationships with specific prospective or existing customers, patients, or clients.
New §542.336, Florida Statutes
The 2019 Florida Legislature passed, and the Governor signed, CS HB 843, section 10 of which added new §542.336, Fla. Stat. Effective July 3, 2019, a restrictive covenant entered into with a licensed physician who practices a specialty in a county where one entity employs or contracts with all physicians who practice that specialty in that county is not supported by a legitimate business interest, and thus is void and unenforceable. Furthermore, the restrictive covenant remains void and unenforceable until three years after a second entity employs or contracts with one or more physicians to practice that specialty in that county.
Although the application of §542.336 is limited to counties in which only one entity employs all of the physicians in a specialty, the impact of §542.336 could be much broader, and questions remain unanswered. For example, what happens if Group A operates in County 1 and County 2 with specialists who practice in both Counties, and Group A employs all of the specialists only in County 1, but Group B also employs physicians in the same specialty in County 2? While not free from doubt, it appears that Group A might be able to enforce a restrictive covenant to prohibit competition by a departing physician, but only in County 2; the restrictive covenant would be null and void in County 1. However, if there is no legitimate business interest, then could a court be persuaded also to ignore the restrictive covenant in County 2?
Also, it is not clear whether §542.336 applies only to contracts entered into after its effective date, or whether it applies to existing contracts for which enforcement is sought after the effective date. There is an acknowledgment of this issue in a “Bill Analysis and Fiscal Impact Statement” published by the staff of a Senate Committee with respect to a similar predecessor bill (S 882), but the analysis neither states the Committee’s intent in this regard nor reaches a conclusion. Ultimately, the courts will decide.
Referral Sources as Legitimate Business Interests
Section 542.335 is silent on whether referral sources constitute a “legitimate business interest” on which a restrictive covenant can be enforced. For a number of years, the Florida District Courts of Appeal were split on this question, with the Fourth District ruling that referral sources are a legitimate business interest (see, Infinity Home Care, L.L.C. v. Amedisys Holding, LLC, 180 So.3d 1060 (Fla. 4th DCA 2015) and the Fifth District ruling that referral sources are not included because a referral source provides unidentified prospective patients, which are not a legitimate business interest (see, Florida Hematology & Oncology v. Tummala, 927 So.2d 135 (Fla. 5th DCA 2006). The Florida Supreme Court finally resolved the conflict in White v. Mederi Caretenders Visiting Services of Southeast Florida, LLC, 226 So.3d 774 (Fla. 2017), at least in the specific factual circumstances raised in the case.
In White, which was a consolidation of two separate cases (one from the Fourth District and one from the Fifth District), former marketing employees of two home health agencies (“HHAs”), neither of whom had worked as marketers in the HHA industry prior to their employment and brought no relationships with existing referral sources to the HHAs, solicited the referral sources of the HHAs on behalf of their new employers. Each HHA sought to enforce a written restrictive covenant signed by its former employee to prohibit solicitation of its referral sources.
The Court ruled that §542.335 does not preclude referral sources from being legitimate business interests. In rejecting the reasoning in Tummala, the Court stated “[a]ttempting to protect identifiable referral sources is distinct from claiming an interest in an unidentified patient base.” The Court also noted that referral sources are an HHA’s “most important business asset,” and thus, based upon appropriate facts, can be protected under §542.335.
The Court then went further, providing guidance to the lower Florida courts on how to apply the White ruling, stating “the determination of whether an activity qualifies as a protected legitimate business interest under the statute is inherently a factual inquiry, which is heavily industry – and context-specific.” It also stated that a specialist physician’s referral sources could constitute a legitimate business interest, if the facts support that conclusion.
White clarified the issue of referral sources, but not all questions have been answered. For example, it is not clear that a practice could prohibit a withdrawing specialist from soliciting or accepting business from referral sources with whom the physician had relationships prior to joining the group. The answer likely will depend upon the facts of each case.
There occasionally are federal attempts to limit the use of restrictive covenants. For example, Senator Marco Rubio introduced a bill on January 15, 2019, the “Freedom to Compete Act,” S. 124, 116th Congress. The bill currently has no co-sponsors, and its likelihood of passage is unknown. If passed, it would add new Section 8 to the Fair Labor Standards Act of 1938 (the “FLSA”) to prohibit any employer from enforcing an existing or imposing a new “non-compete agreement” on any employee who does not qualify for the FLSA’s minimum wage and overtime exemption for bona fide executive, professional and outside sales employees. In his introductory press statement, Senator Rubio noted “agreements that arbitrarily restrict entry-level, low-wage workers from pursuing better employment opportunities are egregious.”
The scope of the bill is limited to non-exempt employees, so it would not prohibit restrictive covenants with most licensed health care or marketing personnel. Also, it only specifically prohibits “non-compete agreements,” and it recognizes an employer’s right to protect trade secrets. Thus, it might not prohibit non-solicitation and non-acceptance covenants (which do not actually prohibit employment).