Can relationships with referral sources give rise to a legitimate business interest sufficient to enforce a non-compete? The answer is yes, at least in Florida.
A Little Helpful Background
Generally speaking, non-compete agreements (that prevent a former employee from working for your competitor) are not enforceable unless they protect an employer’s “legitimate business interest.” Non-competes that merely serve to prevent ordinary competition are generally not enforceable because they are simply a restraint on trade. Rather, there has to be something that would give the former employee an unfair advantage in future competition with the employer. This “something more” is oftentimes referred to as a legitimate business interest.
An employer seeking to enforce a non-compete with a former employee must convince the court that it is seeking to protect a legitimate business interest (not just trying to keep the employee from competing). In other words, if there is a legitimate business interest at stake, the court might enforce the non-compete; if there is no legitimate business interest, then the court likely will not. Note that non-compete law is entirely state specific—so check your state statute and caselaw.
What Happened in Florida Last Week (Other than the Hurricane)
Now, back to Florida. Last week, the Supreme Court of Florida ruled that a home healthcare company’s referral sources can be a legitimate business interest. There were two separate cases, both involving a marketing representative for a home healthcare company. Both marketing reps’ job duties primarily consisted of cultivating relationships with referral sources (usually healthcare providers), so those referral sources would refer patients (i.e., paying customers) to the home healthcare companies.
Both of the marketing reps signed non-competes prohibiting them in one way or another from soliciting referral sources for competing home healthcare companies. During their respective employments, the marketing reps developed relationships with referral sources, presumably using their employer’s funds to do so. Subsequently, both of the marketing reps resigned their employment, went to work for competitors, and solicited the referral sources that they had worked with during their prior employment. The former employers said this behavior violated their non-competes (with one even alleging that the employee “absconded” with the referral source list).
The original employers suffered a loss in new patient referrals and revenue, and they filed suit. Florida’s lower courts split on this issue. One court dismissed the case finding that referral sources did not constitute a legitimate business interest. The other court entered a temporary injunction in the employer’s favor, with an implicit finding that referral sources did constitute a legitimate business interest.
The Supreme Court of Florida construed Florida’s non-compete statute and held that it did not exclude referral sources from being a potential legitimate business interest. The court further held that home health service referral sources can be a protected legitimate business interest under Florida’s non-compete statute because they are a home health company’s “most important business asset.” In its unanimous opinion, the court wrote:
“Moreover, it seems obvious that allowing an employee to work for a short period, receive pay to cultivate referral sources using a [home health company’s] resources, and then remove advantageous information to a direct competitor to solicit those same referrals – all of which was precluded by a non-compete contract that the employee signed – would not only condone but actually encourage unfair competition.”
The issue of whether referral sources are legitimate business interests may be hotly contested under many states’ non-compete laws. The Florida high court was quick to caution, however, that its ruling was industry-specific and depended on the facts and circumstances of each non-compete case.
Employers should be cautious not to interpret this decision as a ruling that all relationships with referral sources can give rise to a legitimate business interest sufficient to enforce a non-compete. As lawyers are fond to say, it all depends.