Can Restrictive Covenants Include Referral Sources?

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1 Can Restrictive Covenants Include Referral Sources? By Brett Goldblatt June 15, 2016 Gone are the days where employees spend their entire career with the same company. Now, employees regularly migrate from company to company, oftentimes within the same industry. In today s world of transient employees, the need for an employer to protect its business interests is greater than ever before. One way that employers protect their business interests is by requiring employees to enter into restrictive covenants that prohibit them from taking certain actions after their employment ends. Restrictive covenants can be used to protect company trade secrets, clients and even goodwill associated with a company. So long as the restrictive covenants are reasonable in time and geographic scope, they are considered lawful restrictions on competition. One area, however, to which the application of restrictive covenants is uncertain, is referral sources. A referral source can supply a steady stream of customers, and consequently revenue, to a business. Given the importance of referral sources to the financial success of a business, they are naturally worth protecting. Nevertheless, it is important for employers to understand that the law in Florida is presently unclear as to whether a restrictive covenant that bars a former employee from contacting referral sources cultivated during the

2 former employee s employment is enforceable. Indeed, there is a conflict among the Florida district courts of appeal with regard to this issue, particularly, in the health services industry. This article summarizes the leading opinions in this area of the law and briefly explains the statutory requirements for enforcing a restrictive covenant. The enforcement of restrictive covenants is governed in large part by Florida Statutes Section The statute provides that a valid and enforceable restrictive covenant must be justified by a legitimate business interest. Fla. Stat The statute does not specifically define legitimate business interests, but it provides a list that includes, but is not limited to, five specific items that qualify as legitimate business interests. Hiles v. Americare Home Therapy Inc., 183 So. 3d 449, 454 (Fla. 5th DCA 2015) citing Fla. Stat (1)(b). Although referral sources are not specifically listed in the statute, the list is not meant to be exhaustive. Thus, it is possible for courts to recognize other business interests as legitimate, and capable of being the subject of enforceable restrictive covenants, even if those interests are not mentioned in the statute. In Florida Hematology & Oncology v. Tummala, 927 So. 2d 135 (Fla. 5th DCA 2006), the Fifth District was tasked with deciding whether referral sources constitute a legitimate business interest. In that case, a medical practice filed suit against its former employee, Dr. Tummala, to enforce a restrictive covenant in his employment contract. Id. at 137. The covenant prohibited Tummala from practicing medicine within a 15-mile radius of any office of the medical practice for the two-year period following the end of his employment. Id. Nevertheless, after Dr. Tummala s employment was terminated, he opened an office within the confines of the prohibited zone. Id. The medical practice claimed that as a result of Dr. Tummula s actions, it suffered a significant drop in new patients being referred from other local physicians. Id. The practice further claimed that referring physicians constituted a legitimate business interest subject to protection from interference by former employees. Id. at 138. In support of its position, the medical practice argued that it received a

3 significant share of new patients from referring physicians, it expended resources cultivating referral relationships, and it was a requirement of Tummala s employment to develop referral relationships for the benefit of the practice. Id. While the Fifth District found the medical practice s argument compelling, it ruled that referring physicians do not constitute a legitimate business interest. Id. at The Fifth District based its decision on the plain language of section Section lists as a legitimate business interest [s]ubstantial relationships with specific prospective or existing customers, patients or clients. Fla. Stat (1)(b)3. Courts have interpreted this language to mean that in order to qualify as a legitimate business interest, a relationship with a prospective patient must be, in addition to substantial, one with a particular, identifiable, individual. Tummala, 927 So. 2d at 138 citing University of Florida, Board of Trustees v. Sanal, 837 So. 2d 512, 516 (Fla. 1st DCA 2003). The Fifth District explained, however, that referring physicians supply a stream of unidentified prospective patients with whom medical providers have no prior relationship rather than specific and identifiable prospective patients. Id. at 139. Accordingly, the Fifth District concluded [w]e see no way to recognize referring physicians as a legitimate business interest and still give effect to the plain language of the statute. Id. Years later, in Infinity Home Care LLC v. Amedisys Holding LLC, 180 So. 3d 1060 (Fla. 4th DCA 2015), the Fourth District Court of Appeal was faced with deciding whether referral sources constitute a legitimate business interest. In that case, an in-home health care provider filed suit against its former employee and the former employee s new employer to enforce restrictive covenants that prohibited the former employee from soliciting business from the in-home health care provider s referral sources. Id. at After an evidentiary hearing, the trial court found that referral sources did constitute a legitimate business interest, and it enjoined the former employee from contacting the health care provider s referral sources for one year. Id. at The Fourth District affirmed the trial court s decision, and stated: We do not agree that the statute should be so narrowly construed as to exclude referral sources as a legitimate business interest... Section clearly states that the legitimate business interests listed in the statute are not

4 exclusive. This allows the court to examine the particular business plans, strategies and relationships of a company in determining whether they qualify as a business interest worthy of protection. Relationships with specific referral sources, which are not mentioned in the statute, are not the same as relationships with unidentified prospective patients. Here, it is undisputed that the relationships Amedisys is trying to protect are its referral sources. As the record shows, these doctors and clinics with whom it has developed substantial relationships are the lifeblood of its home health care business. The industry carefully cultivates these relationships over time and heavily depends upon them as a source of business. These referral relationships appear to us to be a legitimate business interest as contemplated by section , Florida Statutes. Id. at (emphasis added). Thus, the Fourth District declined to adopt the reasoning of the court in Tummala. Instead, it drew a distinction between the prospective patients that referral sources ultimately supply, which cannot be recognized as legitimate business interests based on the plain language of the statute, and the referral sources themselves. Most recently, in Hiles v. Americare Home Therapy Inc., 183 So. 3d 449 (Fla. 5th DCA 2015), the Fifth District again confronted the issue of whether referral sources warrant protection through a restrictive covenant. In that case, Americare, an in-home health care provider, filed suit against its former employee, Hiles, to enforce a restrictive covenant that barred her from soliciting Americare s referral sources for one year after her employment ended. Id. at Americare claimed that Hiles violated the restrictive covenant when she ed information regarding Americare s referral sources to her personal account just days before she resigned and started working for a direct competitor. Id. Following an evidentiary hearing, the trial court granted Americare s request for a temporary injunction and enjoined Hiles from interfering with Americare s referral sources. Id. at 452. The Fifth District, however, reversed the trial court s ruling in conformance with Tummala, and stated:

5 to accept referral sources here as a statutorily protected legitimate business interest would completely circumvent the statutory-directive that prospective patients are not to be recognized as a legitimate business interest. Americare s clients or customers are the patients that it treats. The referral sources merely act as a conduit to supply these unidentified prospective patients to the home health care agencies, one of which is Americare. Accordingly, the trial court erred in holding that the referral sources were a legitimate business interest. Id. at 454 (emphasis added). The Fifth District recognized that there was a direct conflict between its decision in Hiles and Tummala on the one hand and Infinity Home Care on the other hand, and it certified the conflict to the Florida Supreme Court. Ultimately, whether referral sources are recognized as a legitimate business interest depends largely on where courts place their focus. Courts that focus on what referral sources supply i.e., a stream of unidentified prospective clients have concluded that referral sources are not a legitimate business interest. On the other hand, courts that focus on the referral sources themselves and the substantial resources that companies devote to cultivating referral relationships have concluded that referral sources can constitute a legitimate business interest. It remains to be seen which analysis and conclusion will prevail. Nevertheless, employers as well as employees should follow this matter closely, as future developments in this area of law could have farreaching implications, not just in the health care industry, but across many industries. Brett Goldblatt is an associate in Richman Greer's West Palm Beach, Florida office.