Restrictive Covenants in Health Care: Are Specialty Groups’ and Staffing Companies’ Most Important Relationships the Least Protectable in Florida?
By Effie D. Silva and Justin P. Aiello
Effie D. Silva (email@example.com) is a partner with McDermott, Will & Emery, LLP, in the Miami office where she practices complex commercial litigation and arbitration with a focus on health care. She has extensive experience in representing major health care providers, hospitals and health care systems, physician groups and other organizations in litigation, including non-compete, contractual and shareholder disputes. Justin P. Aiello (firstname.lastname@example.org) is a litigation associate with McDermott Will & Emery, LLP in the Miami office. He focuses his practice on health care and arbitration matters.
Open enrollment for health insurance through one of the Affordable Care Act’s new online marketplaces runs through March 31st of this year. A swell of 48 million uninsured Americans will have the opportunity to obtain health insurance, and physicians will be inundated with new patients and new pressures as they acclimate to the effects of Obamacare. Physicians may feel financial pressure to join companies that have relationships with larger care organizations, and specialists may sense the need to protect their relationships with primary care physicians as these physicians will be responsible for the referral of the flood of newly insured Americans to the appropriate specialist.
One way for specialist practices to protect these relationships is to require their employees to sign restrictive covenants. Similarly, staffing and management companies, who provide physicians with access to a source of patients through their highly lucrative, exclusive contracts with hospitals, will increasingly require their physicians to sign non-competition clauses in their employment or independent contractor agreements.
Florida’s restrictive covenant law may, however, result in some unintended consequences for specialty physician groups that look to protect their significant relationships with referring physicians by requiring their newly recruited doctors, as a condition of employment, to sign a restrictive covenant.
While most employers have only their ultimate consumer to protect from competition by a former employee, medical specialty groups have two “customers” that require protection: their patients and their source of patients, referring physicians. Additionally, staffing and management companies with exclusive hospital contracts appear to be uniquely vulnerable to departing employees that desire to compete with their ex-employer. These vulnerabilities require not only the careful drafting of any restrictive covenants, but also a clear understanding of the uncertainties within this area of Florida law.
Florida’s Enforcement-Friendly Attitude Toward Restrictive Covenants
Currently, Florida has a strong public policy in favor of enforcing restrictive covenants. Indeed, courts are statutorily forbidden from interpreting a restrictive covenant too narrowly, against the restraint, or against the drafter.1
To be considered valid, a restrictive covenant must be reasonable in time, area, and line of business.2 More importantly, the restrictive covenant must be reasonably necessary to protect a legitimate business interest.3 In Florida, a legitimate business interest includes, but is not limited to, the substantial relationships with specific prospective or existing customers, patients, or clients.4
Finally, courts are reluctant to enforce otherwise valid non-competes against physicians when doing so would be injurious to the “public interest”–for example, where there is a dearth of physicians practicing a given specialty in an underserved area.6
Florida Courts Split on Protectability of Referring Physicians as a Legitimate Business Interest
Medical specialty groups invest a significant amount of both time and money to cultivate good-standing relationships with local primary care physicians in order to increase the likelihood that those physicians will start to or continue to refer patients to the medical specialty group’s practice. When these specialty groups hire a new, young physician, they intend to share with the physician access to the relationships that the groups have already developed with local referring physicians.
Often, the referring physician would have no basis for referring a patient to an otherwise rookie physician without that physician’s employment at an established practice. Indeed, employers will often write, on behalf of their new employee-physicians, letters of introduction to hospitals and referring physicians in an effort to help the new employee-physicians establish a presence in the community that will benefit the practice. Specialty practices have an interest in protecting this relationship with the referring physician lest the young physician decide to leave the group and begin to siphon away referrals from her former employer. Typically, to protect a business relationship like this, an employer has its employee sign a restrictive covenant.
In Florida, however, it is unclear whether a restrictive covenant prohibiting a former physician from soliciting the specialty group’s referring physicians will be enforced. Indeed, Florida Supreme Court Chief Justice Lewis noted this conflict of law in a 2007 case, Fla. Hematology & Oncology Specialists v. Tummala, 969 So. 2d 316 (Fla. 2007) (“Tummala II”). In Tummala II, Justice Lewis identified a conflict between the Fifth and Third District Courts of Florida; each ruled exactly the opposite on the same issue, i.e., whether referring physicians constitute a legitimate business interest. In December of 2010, the U.S. District Court for the Southern District of Florida noted that the conflict remained outstanding.7
The Fifth and First District Courts of the State of Florida determined that referring physicians do not constitute a legitimate business interest in Fla. Hematology & Oncology Specialists v. Tummala, 927 So. 2d 135 (Fla. 5th DCA 2006) (“Tummala I”), and Univ. of Fla. v. Sanal, 837 So. 2d 512 (Fla. 1st DCA 2003) (“Sanal”).
In Tummala I, a hematology and oncology group sought to enjoin a former employee-physician from accepting patient referrals from a referring physician with which the group had an existing relationship. It argued that referring physicians were its most crucial business interest because referring physicians are the major source of new business for a specialist’s medical practice.8 The group explained that it expended significant effort, money, and energy to cultivate relationships with referring physicians.9
However, the Fifth District stated that referring physicians could not be a legitimate business interest under the express language of Florida’s non-compete statute.10 Specifically, the statute protects only “substantial relationships with specific prospective and existing … patients.”11 The Fifth District held that referring physicians supply only a “stream of unidentified prospective patients with whom [the specialty group] had no prior relationship.”12 For this reason, the Fifth District believed that referring physicians could not fall within Florida’s definition of a legitimate business interest.
On strikingly similar facts and identical reasoning, the First District held in Sanal that referring physicians could not fall within the ambit of Florida’s non-compete statute.13 Therefore, it is clear that specialty practices will not be able to protect these types of relationships in northern Florida.
To the contrary, the Third and Fourth District Courts of the State of Florida determined that referring physicians do constitute a legitimate business interest in Southern Foot & Ankle Specialists, P.A. v. Torregrosa, 891 So. 2d 591 (Fla. 3d DCA 2004) (“Torregrosa”), Salamon v.Anesthesia Pain Care Consultants, Inc., 10 So. 3d 1112 (Fla. 4th DCA 2009).
In Torregrosa, a medical podiatry practice sought to enjoin a former employee-physician from competing with the practice. The practice presented evidence of how it developed its business over a period of 20 years and how it put the former employee into business just as he finished hospital training.14
Without much legal analysis of the Florida non-compete statute, the court held that the restrictive covenant was reasonably necessary to protect the practice’s legitimate business interests in its “patient base, referral doctors, specific prospective and existing patients and patient goodwill.”15
In Salamon, the Fourth District, without much analysis, affirmed the enforcement of a non-compete agreement against a former employee-physician based upon evidence showing that the former employee-physician’s employment supplied him with “numerous patient contacts and a network of referring physicians.”16
Therefore, while the authority is not strong, it is clear that specialty practices will be able to protect these types of relationships in south Florida. Given this outstanding conflict, specialty groups must be aware of their ability or inability to protect their interest in relationships with referring physicians depending upon their geographic location within Florida.
Vulnerability of Staffing and Management Companies’ Exclusive Hospital Contracts
Staffing and management companies frequently enter into exclusive contracts with local hospitals. Hospitals seek exclusive contracts to outsource all of the work in a particular department, such as anesthesiology, radiology, or emergency department services to a third party. The staffing or management company thereby assumes responsibility for effective administration, supervision, and coverage of all services within its contract. These contracts also ensure full-time availability of the contracted services at the hospital. Groups procuring such lucrative contracts want to protect them from employees thinking about leaving and either starting their own group to compete for the hospital contract or joining another group looking to acquire the contract.
Exclusive hospital contracts are vulnerable for two reasons: 1) exclusive hospital contracts can be terminated at will, resulting in the loss of a protectable business interest by the employer,17 and 2) at least one Florida court has opined that exclusive hospital contracts at a hospital that has granted staff privileges to unaffiliated doctors may not be protectable.18
If an employer loses an exclusive contract, it may have no ability to enjoin its employees from leaving and joining the company that won the employer’s former contract. Florida law requires that an employer be engaged in business in the area or line of business in which it seeks to enjoin its former employee from competition.19 For this reason, a staffing company with an exclusive hospital contract can only protect the contract for as long as it keeps it. Indeed, the staffing company will often make its employee-physicians sign an agreement promising that they will not leave and help any other company successfully bid for the employer’s exclusive contract.
However, consider the following scenario. The employer-staffing company employs four anesthesiologists to staff a hospital with which the employer has an exclusive contract. Two of the anesthesiologists want to jump ship to a new staffing company that is competing for their employer’s exclusive contract, which is either up for renewal or scheduled for termination. If the hospital enters into an exclusive contract with a new staffing company, then the old staffing company has no basis for enjoining its former employee-anesthesiologists from leaving because it no longer has a legitimate business interest to protect, i.e., the exclusive provision of anesthesiology services to the hospital.
In Tummala I, the employer alleged a legitimate business interest in its “exclusive contracts” with local area hospitals “such that only doctors associated with the employer were permitted to practice oncology and hematology in those facilities.” However, the court expressed concern regarding the employer’s interest where the “exclusive provisions” of the contracts did not preclude other unaffiliated oncologists from admitting patients into the hospitals.
For this reason, it is crucial for a company holding an “exclusive” hospital contract to ensure that the terms of the contract are conclusively exclusive.
On a related note, staffing and management companies with exclusive hospital contracts are particularly vulnerable to losses flowing from a hospital’s termination of their contract in favor of a new company because they have no ability to seek redress against the new company that wins the contract. This is because exclusive hospital contracts are typically terminable at will upon a 90-day notice. Where a company has a contract for a specific term, it will often be protected from other companies’ competition for the same business through the threat of a “tortious interference with a contract” action.
Companies in possession of exclusive hospital contracts will most likely not be able to hold off competitors through the threat of a tortious interference action, which often accompanies restrictive covenant enforcement actions. This is generally because a claim for tortious interference cannot succeed where the contract is terminable at will as there is only an expectancy that the contractual relationship will continue.21
Indeed, Florida courts have long recognized the privilege of competition, and that a competitor, therefore, has the privilege of interference in order to acquire the business for himself.22 Therefore, a medical specialty group or staffing company with an exclusive hospital contract terminable at will has no ability to seek redress for the loss of its contract with the hospital. Not only will the company have difficulty enjoining their former physicians from leaving to work for a direct competitor, but the company may find it impossible to stave off competitors by threat of a tortious interference suit. For these reasons, staffing and management companies should be particularly aware of the risks associated with the procurement of exclusive hospital contracts.
In conclusion, while Florida’s non-compete law is fairly developed there remain certain nuances in the health-care arena that require an employer’s close attention, especially in light of the Affordable Care Act. Both the prospective medical specialty group employers and physician employees should be aware of the potential risks that they face, and should be aware of the best ways to mitigate those risks under Florida law.