Referral Sources Protected by Restrictive Covenants in Florida? Recent Case Decides

Tuesday, June 21, 2016
By George F. Indest III, J.D., M.P.A., LL.M., Board Certified by The Florida Bar in Health Law

Physician employees and other health care professionals who sign employment contracts are often confronted with restrictive covenants or covenants-not-to-compete.  Many states prohibit such clauses in contracts;  however, Florida has a law that specifically permits them.  In the case of physicians, given that patients may have a legal right to choose their own doctors, enforcement by an employer or former employer may be difficult, if challenged by the employee or former employee.  Recent cases in Florida, especially in Central Florida, seem to have given employers a better ability to defend themselves against enforcement.


Setting Restrictive Covenants in Place.


One way that many Florida employers protect their business interests is by requiring employees to enter into restrictive covenants.  These are put into place to prohibit the employer from taking certain actions that may damage the employer's business after their employment ends. Restrictive covenants can be used to protect company trade secrets, clients and even goodwill associated with a company. As long as the restrictive covenants are reasonable in time and geographic scope, they are considered lawful restrictions on competition, pursuant to Florida law.


Can a Referral Relationship be a Protected Business Interest in a Restrictive Covenant?

There is one grey area, however, to which the application of restrictive covenants is uncertain.  This is referral sources. A referral source can supply a steady stream of customers (or patients in the medical context), and consequently, revenue, to a business. Given the importance of referral sources to the financial success of a business, protecting them is a priority.

Despite this, 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 active referral sources amassed during the former employee’s employment is actually enforceable. In Florida, there is a conflict among the Florida district courts of appeal with regard to this issue, particularly, in the health care industry.


Defining Legitimate Business Interests.

The enforcement of restrictive covenants is governed in large part by Section 542.335, Florida Statutes. This law provides that a valid and enforceable restrictive covenant must be justified by a “legitimate business interest.”

In the case of Florida Hematology & Oncology v. Tummala, 927 So. 2d 135 (Fla. 5th DCA 2006), the Fifth District Court of Appeal in Florida was tasked with deciding whether referral sources constitute a legitimate business interest. In the case mentioned above, a medical practice filed suit against its former employee, Dr. Tummala, to enforce a restrictive covenant in his employment contract. The covenant prohibited the doctor from practicing medicine within a 15-mile radius of any office of the medical practice for the two-year period following the termination of his employment contract. Despite this, after his employment ended, he violated the rule in the covenant by opening his own practice inside the specified radius.

In this particular case, The Court of Appeal explained, 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.  Therefore, 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.”  Click here to read the court documents on this case.

However, in a more recent case, Hiles v. Americare Home Therapy Inc., 183 So. 3d 449 (Fla. 5th DCA 2015), the same Florida Court of Appeal, again confronted the issue of whether referral sources warrant protection through a restrictive covenant. In the Hiles case, Americare, a home health 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 was terminated.  Following an evidentiary hearing, the trial court granted Americare’s request for a temporary injunction and prohibited Hiles from interfering with Americare’s referral sources.

The Court of Appeal, however, reversed the trial court’s ruling in conformance with the prior case involving Dr. Tummala.  Click here to read the court documents on this case.


Where the Courts Place Their Focus Really Matters.


Ultimately, the decisions of 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.

Unfortunately, until the issue is resolved by the Supreme Court or the Florida legislature, businesses that rely on covenants not to compete to protect their valuable referral relationships could be in danger. Employers as well as employees should remain knowledgeable and follow this matter closely, as future developments could have far-reaching implications, not just in the health care industry, but across other industries as well.

To learn more on Restrictive Covenants in Florida, click here.


Contact a Health Care Attorney Experienced in Negotiating and Evaluating Physician and Health Professional’s Business Transactions.


At the Health Law Firm we provide legal services for all health care providers and professionals. This includes physicians, nurses, dentists, nurse practitioners, psychologists, psychiatrists, mental health counselors, durable medical equipment suppliers (DME), medical students and interns, hospitals, ambulatory surgical centers, pain management clinics, nursing homes, and other health care providers.

The services we provide include reviewing and negotiating contracts, preparing contracts, helping employers and employees enforce contracts, advice on setting aside or voiding contracts, litigation of contracts (in start or federal court), business transactions, professional license defense, opinion letters, representation in investigations, fair hearing defense, representation in peer review and clinical privileges hearings, litigation of restrictive covenant (covenants not to compete), Medicare and Medicaid audits, commercial litigation, and administrative hearings.
 
To contact The Health Law Firm, please call (407) 331-6620 or (850) 439-1001 and visit our website at www.TheHealthLawFirm.com.


Sources:

Goldblatt, Brett. “Can Restrictive Covenants Include Referral Sources?” Law360. (June 15, 2016). Web.

Carlson, Charles. “Business is Business.” The Florida Bar Journal. (March 2008). Web.


About the Author: George F. Indest III, J.D., M.P.A., LL.M., is Board Certified by The Florida Bar in Health Law. He is the President and Managing Partner of The Health Law Firm, which has a national practice. Its main office is in the Orlando, Florida, area. www.TheHealthLawFirm.com The Health Law Firm, 1101 Douglas Ave., Altamonte Springs, FL 32714, Phone: (407) 331-6620.


KeyWords: Restrictive Covenants, Referral Sources, referral relationship covered under restrictive covenant, legitimate business interest, health care professional business transactions, protecting business interests, legal counsel on restrictive covenants, health care defense attorney, representation in complex litigation cases, legal representation in restrictive covenant litigation cases, nonsolicitation disputes, shareholder disputes, physician employment agreements, The Health Law Firm

The Health Law Firm” is a registered fictitious business name of George F. Indest III, P.A. – The Health Law Firm, a Florida professional service corporation, since 1999.
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6/21/2016

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