Florida 5th DCA Says Referral Relationships Not Protectable

A recent case out of Florida’s Fifth District Court of Appeals raises important raises important issues related to physician non-compete agreements. Let’s take a look:

Before addressing the specifics of this case, some context is necessary: Agreements not to compete are restraints of trade. In any non-compete case, there are two lenses: restraint of trade and contract. The restraint of trade lens comes first. The court must evaluate whether or not the restraint is reasonable (time and territory) and reasonably necessary to protect a legitimate business interest. If the restraint is reasonable, then the case becomes a breach of contract case. But if the restraint is not reasonable, then the contract does not matter— it is an illegal restraint of trade and unenforceable.

Because they are restraints of trade and raise antitrust concerns, many states disfavor non-compete agreements. On one end of the spectrum are states like California and Oklahoma where employee non-compete agreements are unenforceable. In the middle, there are dozens of states where non-compete agreements are enforceable, but subject to a litany of requirements and defenses. Take North Carolina. If a non-compete agreement does not contain a reasonable time limit and geographic scope, the court can refuse enforcement outright. In dozens of states, courts consider the well-being of the employee and their ability to earn a living. Likewise, in dozens of states, courts strongly weigh public policy and public interest considerations.

But not in Florida. Florida courts, particularly state courts, often are hostile to arguments regarding public interest and public policy. This is not necessarily a product of the plain language of the statute. Rather, it is the product of the Florida courts misinterpretation and misapplication of the relevant statute, F.S. 542.335. You don’t have to take my word for it. One of the principal architects of the statute is on the record saying the same thing. Enter physician non-compete agreements.

The American Medical Association strongly opposes physician non-compete agreements because such agreements can interfere with the doctor patient relationship. Not surprisingly, a number of states have outlawed physician non-competes. But not Florida. Florida courts routinely and aggressively enforce broad physician non-compete agreements. These agreements are used to prevent a doctor from departing the practice and taking existing patients with him. But it goes beyond that. Hospitals and medical practices also use non-compete agreements to prevent competition for future patients. These restrictions pertain to referral sources. Hospitals and other practitioners routinely refer patients to various specialists. When I tore my ACL playing rugby, whatever doctor I saw referred me to a knee specialist at Georgetown. That’s how it works. Now consider restrictions related to referral sources against that backdrop. Proponents of physician non-compete agreements often seek to bar the departing physician from accepting any patients from referral sources for the restricted term.

In my view, that is absurd. Restrictions related to referral sources do not serve any legitimate business interest. They are naked restraints on competition targeted at preventing competition for future market share. But in Florida, the issue is the subject of a split among the District Courts of Appeal. Florida’s Fifth District Court of Appeals has repeatedly held that referral relationships are not a legitimate business interest and cannot be protected with a non-compete agreement. This is not surprising because the 5th DCA has long been known for its very reasonable, thoughtful application of the relevant statute F.S. 542.335. This brings us to the case at bar.

The case comes out of the home healthcare arena but the principles at play are the same and immediately will be applied in physician non-compete cases. Americare Home Therapy provides a variety of in-home patient care services. In November 2011, Carla Hiles began working for Americare as a home health liaison. As a condition of her employment, she signed a non-compete and non-solicitation agreement. In October 2014, Hiles left Americare and began working for a rival called Doctors’ Choice. Prior to making her move to Doctors’ Choice, Hiles sent various documents and materials from Americare’s business computers to her personal email account.

Americare sued and sought and obtain a temporary injunction. The injunction barred Hiles, in relevant part, from interfering with any of Americare’s relationships including patients and referral sources and from competing with Americare in any fashion. Hiles appealed.

In a very significant order, the 5th DCA affirmed in part, reversed in part and made it clear that it is fed up with overbroad non-compete agreements.   First, the court held that restrictive covenants could not be used to protect referral sources.   The court reaffirmed its holding from Florida Hematology & Oncology v. Tummala, 927 So.2d 135 (Fla. 5th DCA 2006). The essence of that holding: The statute only protects substantial relationships with specific, identifiable existing or prospective patients. Referral sources supply a stream of unidentified prospective patients with whom the plaintiff had no prior relationship. As such, referral sources do not constitute a legitimate business interest under 542.335.

But the court did not stop there: It held matter-of-factly that the injunction was not reasonably necessary to protect Americare’s business information. Although Hiles emailed herself certain of Americare’s information, the court held that Hiles could not use that information to unfairly compete with Americare and, as such, that an injunction was not necessary.

Next, the court turned to the provision in the injunction that barred Hiles from competing with Americare in any fashion. The court struck that provision of the injunction in its entirety because it was not necessary to protect a legitimate business interest.

In the end, the court left in tact an injunction that barred Hiles from (1) accessing Americare’s information (2) using or disclosing that information (3) destroying any of Americare’s business records (4) destroying any documents or evidence (5) and interfering with Americare’s relationships with its patients, business partners or employees. As modified, the injunction does not prohibit Hiles from working for a competitor or doing business with referral sources. It just bars her from using any of Americare’s confidential information and interfering with certain their existing business relationships.

The Takeaways:

• District Split: The issue of referral relationships is headed to the Florida Supreme Court in the near future. Stay tuned.

• The 5th DCA: This is the second time in the past two months that the 5th DCA has handed down a decision where it emphatically made the following point: Plaintiffs must establish that the restrictions at issue are reasonably necessary to protect a legitimate business interest. This may seem like a basic concept, but it’s a concept that most Florida trial courts fail to grasp. In the Florida trial courts, it usually works as follows: The judge just checks off some boxes. If the plaintiff claims to have confidential information, customer relationships or an investment in training, that’s it. All the plaintiff needs is the unsubstantiated assertion that one of these interests is at issue, and they get an injunction. Not only do they get an injunction, but they get an injunction that enforces the terms of the non-compete agreement as written. The 5th DCA is sending a clear signal to the trial courts in its district. It shouldn’t be check off some boxes and the court will enforce the non-compete as written. Instead, the court should rigorously evaluate the claimed legitimate business interests at issue. Then, if such interests exist, issue an injunction tailored to protecting those interests (not an injunction based on the terms of the non-compete). The other recent case was one of our own. See Evans v. Generic Sol. Eng’g, LLC, 178 So. 3d 114 (Fla. 5th DCA 2015).

• Jurisdictional Chess: Perhaps more than in any other state, there are significant variations among the Florida appellate courts with respect to non-compete issues. This leads to a number of practical considerations. I’ll put it this way: I’d rather be defending a non-compete case somewhere in the 5th DCA than in any other part of the state. This raises issues regarding forum selection clauses, race to the courthouse and all that jazz.

• CLE: All trial court judges in the state of Florida should be required to attend a CLE specifically on restrictive covenants and the application of F.S. 542.335.

• The Bad Actor Problem: Hiles did something stupid. She stole documents from Americare. In many cases like this, a judge shakes his or her head about people not respecting the sanctity of contract. And if someone did something bad or unethical, the judge wants to punish them for it. Yes, Hiles stole documents. That’s bad. That’s stupid. But if the documents she stole do not constitute valuable, confidential information worthy of protection, then that factor should be irrelevant to the court’s analysis.

The case is Hiles v. Americare Home Therapy, 2015 WL 9491847 (Fla. 5th DCA Dec. 31, 2015).

Jonathan Pollard is the principal of Pollard PLLC, a Fort Lauderdale-based litigation boutique focused on competition law.  The firm and its attorneys have extensive experience litigating non-compete, trade secret and antitrust matters.  Their office can be reached at 954-332-2380.