Florida Litigation Update: Certified Conflict Regarding Enforcement of Restrictive Covenants in Employment Agreements
Tuesday, August 25th, 2015
The Florida Fourth District Court of Appeal, in Infinity Home Care, L.L.C. v. Amedisys Holding, LLC, Case No. 4D14-3872, 40 Fla. L. Weekly D19229a (Fla. 4th DCA Aug. 19, 2015), available here, has clouded an already uncertain arena with its recent interpretation of restrictive covenants found in employment agreements-a business issue that, as the Chief Justice of the Florida Supreme Court acknowledges, “is critical not only to medical doctors but to those in all walks of life, because [it] applies to all types of restrictive convents” across a wide range of commercial dealings and relationships.
Generally, under Florida law, restrictive covenants that restrain one’s right to work in a certain field will be upheld if the proscription is reasonable in time, scope, geography, and necessary to protect the legitimate business interests of the employer. Infinity Homes analyzed the recurring debate over the scope of the term, “legitimate business interests,” as codified in section 542.335, Florida Statutes, available here. Section 542.335 defines a legitimate business interest to include trade secrets; valuable confidential business or professional information; substantial relationships with specific prospective or existing customers, patients, or clients; customer, patient, or client goodwill; and extraordinary or specialized training. Fla. Stat. § 542.335(1)(b). The statute also expressly notes that protection of restrictive covenants “is not limited to” the foregoing examples of legitimate business interests.
In practice, restrictive covenants are used in all types of commercial agreements, including by firms and businesses who contractually require their employees and/or agents not to, among other things: divert business; disclose trade secrets or confidential information; or compete against the firm or business within a defined period and/or geographic location. These “non-compete” and “non-solicitation” agreements are crucial to a company’s success by ensuring continuity with business relations.
Infinity Home addressed the non-compete and non-solicitation provisions of an employment agreement between a provider of home health care services and a former employee who was primarily responsible for handling the company’s relationships with case managers at health care facilities that referred their patients to the company. When the employee was hired, the employee signed a “Protective Covenants Agreement,” which precluded the employee from competing against the company within the same county in which the company operated for a period of one year after the employee’s termination, and from soliciting any business from the company for a period of one year after termination. The company was particularly interested in protecting its referral sources.
Immediately following the employee’s termination, the employee in Infinity Homes went to work for a direct competitor and began soliciting referral sources that had previously referred business to the company. The company sued both the former employee, for breach of the restrictive covenants in the employment agreement, and the competitor, for tortious interference with the company’s business relationships.
In relevant part, the Fourth District in Infinity Home considered whether referral sources for home health services constitute a legitimate business interest entitled to protection under section 542.335. The trial court ruled in favor of the company, enforcing the restrictive covenants in the employment agreement and granting a temporary injunction in the company’s favor. On appeal, the Fourth District in Infinity Home affirmed, upholding the enforceability of the restrictive covenants for the business interests at issue in that case.
While at first blush it may appear to be a rather straightforward decision, the Fourth District was confronted with separate decisions from other Districts reaching diametrically opposite conclusions on the identical issue: the Third District, in Southernmost Foot & Ankle Specialists, P.A. v. Torregrosa, 891 So. 2d 591 (Fla. 3d DCA 2004), available here; and the Fifth District, in Florida Hematology & Oncology v. Tummala, 927 So. 2d 135 (Fla. 5th DCA 2006), available here.
In Tummala, the Fifth District acknowledged that the company (a group of medical specialists) seeking enforcement of a non-compete provision in an employment agreement (with a doctor who was formally employed in the specialty group) made a “compelling argument” that the referral relationships in that case should be recognized as a protectable, legitimate business interest. However, the Fifth District felt constrained by the express language of section 542.335, concluding that a legitimate business interest relating to medical patients includes only those “specific prospective or existing” patients with whom the party has a “substantial relationship.” Tummala, 927 So. 2d at 138-39 (quoting Fla. Stat. § 542.335(1)(b)3., and citing University of Florida, Board of Trustees v. Sanal, 837 So. 2d 512 (Fla. 1st DCA 2003), available here). Because referring physicians supply only a stream of “unidentified prospective” patients with whom the company seeking to enforce the restrictive covenant has no “prior relationship,” the Fifth District in Tummala concluded that the employment agreement in that case could not be enforced under a plain reading of the statute.
In direct contrast, in a case involving similar contractually-based business interests between a medical specialty group and a former doctor within the group, the Third District’s Torregrosa opinion concluded that non-compete and non-solicitation provisions in an employment contract could be enforced, finding those restrictive covenants were reasonably necessary to protect the company’s “legitimate business interests in its patient base, referral doctors, specific prospective and existing patients, and patient goodwill.”
Having the benefit of the reasoning from each of the two sister District Courts on the same issue, the Fourth District in Infinity Home agreed with the Third District, finding that section 542.335 should not be so narrowly construed as to exclude “referral sources” as a legitimate business interest. Rather, the Fourth District observed:
Th[e statute] allows the court to examine the particular business plans, strategies, and relationships of a company in determining whether they qualify as a business interest worthy of protection. Relationships with specific referral sources, which are not mentioned in the statute, are not the same as relationships with unidentified prospective patients [which are mentioned in the statute].
Still, acknowledging a split of authority by the appellate courts, the Fourth District certified an express and direct conflict between the District Courts to the Florida Supreme Court.
Ultimately, given the certified conflict between the appellate courts, it will be interesting to see how the Florida Supreme Court will resolve the conflict. Although the Florida Supreme Court originally accepted jurisdiction to review the Fifth District’s decision in Tummala, the Court subsequently discharged jurisdiction before any resolution on the merits. However, in a dissenting opinion regarding the jurisdictional issue in Florida Hematology & Oncology Specialists v. Tummala, 969 So. 2d 316 (Fla. 2007), available here, the Chief Justice stated that, “[o]n a daily basis, economic futures are placed at risk through the use of [all types of restrictive] covenants,” adding that “clarification of what the law is with regard to restrictive covenants is imperative.”
It therefore appears that either the Florida Legislature or the Florida Supreme Court will weigh in the matter soon and likely provide needed clarification to the legal and business communities. It also appears that the Third and Fourth Districts’ decisions in Torregrosa and Infinity Home, respectively, provide a more reasoned and balanced analysis of the issues in dispute. The protection of referral sources-for the business world in general, and for the medical services field in particular-is a legitimate business interest worthy of protection, especially where a company or industry cultivates referral relationships over a material period of time, dedicates resources to maintain and grow those relationships, and depends upon them as a significant and predictable source of business, as the Fourth District noted in Infinity Home.
We will continue to monitor these issues and will report any meaningful developments.
Regardless, the case law in jurisdictions throughout the United States, including in Florida, confirms that enforcement of restrictive covenants heavily depends on the specific facts and circumstances involved, as well as the specific laws of the jurisdiction at issue. Likewise, the current conflict under Florida law offers many lessons for businesses seeking to enforce these covenants, including that employment agreements should be carefully tailored to the nature of the business at issue by spelling out exactly what is so important about the information, relationships, goodwill or training for which protection is sought. Similarly, if/when a company or firm seeks to enforce its commercial agreements containing restrictive covenants, careful attention should be given to developing a factual predicate that establishes exactly how a business interest has been or will be negatively impacted such that enforcement of the agreements is necessary.
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