A NEW TWIST TO AN OLD QUESTION ABOUT NON-COMPETES

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The purpose of non-compete agreements, paradoxically, is to allow competition (there is a right to work and compete), all while preventing unfair competition by protecting employers’ Legitimate Business Interests.  It follows logically then that they are only enforceable against certain employees and under certain circumstances.  Smart businesses employ expert counsel to draft them in a way most likely to be enforced.

Nor are all “non-competes” true non-competition agreements preventing employees from working in their former employers’ industry and in their market.  Many are instead better described as non-solicitation agreements.  They prevent an employee from poaching their former employer’s clients.

Non-solicitation agreements of that nature have been widely enforced.  The relationship between a company and its clients is recognized by statute as a Legitimate Business Interest to be protected.

Non-solicitation agreements prohibiting former employees from targeting their employer’s referral sources are a different question.  Most courts had refused to enforce them.  Unlike clients, referral sources are not expressly listed in the statute.  But other judges noted that the statutory list is not exhaustive, and they treated non-solicitation of referral sources as capable of being enforced under the right circumstances.

The Florida Supreme Court provided some clarity in a case involving at-home healthcare, but it also left some questions for another day.

Home healthcare is an industry that begged for a final answer to the referral-source question.  Indeed, the nurses, physical therapists, and other providers in the industry need referrals from physicians to treat their patients.  Often, they must obtain one as a matter of law.

The Florida Supreme Court consolidated two cases where marketing representatives, whose job it was to cultivate referral sources for their employers, quit and solicited those sources for their new bosses.  They were subject to non-solicitation agreements, which they admitted breaching.  Their only defense was that referral sources should not be a Legitimate Business Interest, making the non-solicitations unenforceable.

The Justices rejected this position.  They held that referral sources could constitute a Legitimate Business Interest supporting a valid, binding non-solicitation agreement.  They wrote this could especially be the case when the employer is dependent on referrals.  As such, referral sources were a Legitimate Business Interest for employers in the at-home healthcare industry.

This decision narrows the questions left open, but does not close them off entirely.  Will the ruling apply to a company that depends on referrals as a matter of its business model, not as a result of laws or regulations? How dependent on referrals would such a business have to be? Will the adequacy of referral sources as a Legitimate Business Interest be decided industry by industry, case by case, or a mix of both?

Even so, referral-based businesses now have a little more flexibility, and their attorneys have new guidance from the Court.  Companies with skilled counsel will have non-solicitations most likely to be enforced under the Supreme Court’s new standards.

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