Refer to This: Referral Sources Can Be a Legitimate Business Interest for Non-Compete Purposes in FloridaCan 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.

Non-compete ContractMany companies have their employees execute non-compete clauses either in employment agreements or as separate documents. The justification for doing so is to protect the company from training workers who later leave and take their new talents and the company clients to a competitor or to protect certain trade secrets. Most states restrict the terms of non-compete agreements, limiting both the geographic scope of where the ex-employee can work and the time period of the restriction. Some lawyers make a good living either attempting to negate such agreements or moving to enforce them.

On October 25, President Obama issued a “State Call to Action on Non-Compete Agreements” that followed up on several federal studies claiming that non-competes affect over 30 million U.S. workers in a negative fashion. The White House called on state legislators and governors to engage in several strategies to reduce the use of non-competes:

  1. Completely ban non-compete clauses for “certain workers,” defined broadly to include workers under a certain wage threshold; public health and safety workers; workers who do not possess trade secrets; and “those who may suffer undue adverse impacts from non-competes”
  2. Improve the transparency of non-compete agreements. The document calls on banning non-competes unless they are proposed before a job offer or in connection with a raise or promotion. Essentially, the White House would like the states to do away with the practice of using continued employment as consideration for a non-compete.
  3. Incentivize employers to write enforceable contracts. The White House wants to do away with blue-penciling and encourage complete nullification of non-compete agreements that may only have a single unenforceable clause.

Obviously, this call to action does not have any force of law and will not affect existing statutes or case law within the states. However, it does indicate an effort, at the federal level, to categorize these types of agreements as unfair. The White House push should be a reminder to employers that they need to make sure that their non-competes comply with state law and that supervisors are properly enforcing the terms.

 

So You Have a 10-Page Single-Spaced Alabama Noncompete Agreement, Now What?Employees in Alabama, like in many other places, often are required to sign employment agreements, most of which contain future restrictions on certain activities. The menu items for these agreements usually include covenants not to compete,  not to solicit customers,  not to poach other employees, and  not to steal information (we call that committing a “data breach” now). Many of these agreements are written by really smart corporate lawyers and can be almost incomprehensible. Hopefully, this post will help in identifying the key language in these agreements while highlighting the new law on such agreements that just passed in Alabama.

As a quick update on this subject, The Alabama legislature in its recently-ended session passed a comprehensive revision of the state’s noncompete statute, and the act was signed into law by Governor Bentley on June 11, 2015. It is effective on January 1, 2016. While the new statute does not plow much new ground, it does modify existing law in several areas and raises a few questions as well as providing some answers.

The new statute, like its predecessor, section 8-1-1 of the Alabama Code, provides that “[e]very contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind otherwise than is provided in this section is to that extent void.” While this sounds like noncompetes in Alabama face an uphill battle, they really don’t. We cannot count how many times we have advised clients in Alabama that, actually, yes, that agreement that you have is enforceable here.

To be enforceable in Alabama, these agreements historically must have involved:

  1. a so-called protectable interest of the company
  2. a restriction of some sort that is related to that interest
  3. a restriction that is not too long or too broad geographically
  4. a restriction that does not impose an undue hardship on the employee

Alabama law specifically exempted professionals—like lawyers, doctors, and CPAs—from enforceability of noncompetes, and Alabama always had a quirk in the law that a noncompete had to be signed while the parties were in an employer-employee relationship. In other words, no enforceability if the agreement was signed before employment started, and no enforceability at all for independent contractors.

Regarding the first two elements of enforceability mentioned above, the Alabama legislature now has spelled out for the first time what constitutes a “protectable interest,” or aspect of a company’s business that makes it permissible to enforce a competitive restriction. In the employment context, these interests traditionally have included the employee’s access to the employer’s trade secrets or confidential business information, and the employee’s commercial relationships or contacts with customers, vendors or clients. The interests listed in the statute do not materially vary from what has been recognized previously under Alabama law. The statute provides that “[j]ob skills, in and of themselves, without more, are not protectable interests.” In view of that language, and pre-statute decisions, it seems likely that going forward an employee will need to have managerial, technical, executive or sales responsibilities, or specialized training or knowledge, to validly be subject to a post-employment covenant.

The principal change made by the statute regards element three and is the legislature’s use of presumptively reasonable time periods for certain types of agreements. Employer/employee noncompetition agreements are now presumed to be of a reasonable duration if they are two years or shorter. Covenants in connection with the sale of a commercial entity, by contrast, are presumptively reasonable if they are one year or shorter. Agreements not to solicit customers of a former employer have a presumptively reasonable duration of the longer of 18 months, or the time period over which the employer is paying consideration in exchange for the nonsolicitation promise. Notably, the statute retains the principle of “blue penciling,” meaning that courts will continue to have the ability to enforce only the reasonable aspects or limitations of an agreement that would otherwise be unduly long or overbroad geographically.

Regarding element four, one other important change is that the statute assigns to the party opposing enforcement of a noncompete the burden of proving that enforcement will work an undue hardship on him or her. Previously, lack of undue hardship was an element that plaintiff was required to plead and prove.

The statute leaves unaddressed several thorny issues that sometimes arise in these cases. For example:

  1. Exactly who is a “professional” under the new law (and thus can be immune from competitive restrictions)?
  2. Does it matter anymore whether an employment relationship was in place at the time the noncompete was entered into? And, does it matter whether the worker even was an employee at all as opposed to having been an independent contractor? These questions arise because the new statute replaces the word “employer” with “commercial entity” in several places.
  3. Can a successor employer enforce its predecessor’s contract?

In sum, while the statute sets forth some limited policy changes, that noncompete of yours very likely will continue to be enforceable to some degree in Alabama, whether “as is” or after the application of the old “blue pencil.” The unanswered questions, as usual, will be left to the lawyers and the courts.