Tuesday, January 29, 2019
12:30 p.m. – 1:45 p.m. ET 

Issues arising from employees and information moving from one employer to another continue to proliferate and provide fertile ground for legislative action and judicial decisions. Many businesses increasingly feel that their trade secrets or client relationships are under attack by competitors—and even, potentially, by their own employees. Individual workers changing jobs may try to leverage their former employer’s proprietary information or relationships to improve their new employment prospects, or may simply be seeking to pursue their livelihood.

How can you put yourself in the best position to succeed in a constantly developing legal landscape?

Whether you are an employer drafting agreements and policies or in litigation seeking to enforce or avoid them, you will want to know about recent developments and what to expect in this area.

Join Epstein Becker Green attorneys David J. Clark, William Cook, and Aime Dempsey for a webinar providing insights into recent developments and expected trends in the evolving legal landscape of trade secret and non-competition law.

During this webinar, the panel will discuss:

  • Legal trends in the enforceability of non-competes
  • Steps employers can take to comply with new laws
  • New and pending state and federal legislation, including the Massachusetts Noncompetition Agreement Act
  • Recent judicial decisions regarding restrictive covenants, including an important California case concerning provisions barring solicitation of employees
  • New cases and statutes regarding protection of trade secrets
  • Continuing governmental scrutiny of “no poach” agreements

Register today for this complimentary webinar!

So far, the year 2018 has brought an increasing number of labor and employment rules and regulations. To help you stay up to date, we are pleased to invite you to join our Employment, Labor & Workforce Management Webinar Series. Each month, we will focus on a specific industry, topic, or practice area.

Our July webinar will be hosted by Epstein Becker Green’s Health Employment and Labor (HEAL) strategic service team and Trade Secrets and Employee Mobility service team. This webinar will provide an overview of the legal landscape of non-compete agreements in the health care industry, including state law requirements and restrictions, public policy considerations, recent developments, and expected trends. The webinar will also address key considerations when drafting and enforcing non-competes, engaging in the due diligence process, and integrating providers following a health care transaction.

Tuesday, July 24, 2018
12:00 p.m. – 1:00 p.m. ET

Register for this complimentary webinar today!

Many physicians and other health care workers are familiar with restrictive covenants like non-competition and/or non-solicitation agreements, either as employees who have been asked to sign such covenants as a condition of their employment or as business owners seeking to enforce such covenants to protect their medical practices from competition. These covenants are usually designed to prohibit physicians or other practitioners from leaving and setting up a competing practice nearby using patient contacts, information, and/or training that they received during their employment or association with the former employer.

Restrictive covenants generally are regulated by state laws and cases, which can differ markedly from one state to the next. For physicians and some other health care professionals, there can be an additional level of complexity in the analysis of such covenants, because many states, in light of the unique position the medical profession holds in the public interest, apply special rules to covenants that restrict medical practice. Courts considering such covenants may ask whether enforcement will cause a shortage of doctors in a particular area, or within a particular specialty. A paramount consideration usually is the right of patients to obtain treatment from the physician or other health care professional of their choice.

By statute, several states that may allow non-competes generally (provided they are reasonable and protect legitimate business interests) will not enforce them at all against physicians. Massachusetts was an early adopter, in 1977, of a statutory prohibition on physician non-competes. Mass. Gen. Law Ch. 112 § 12X renders void any non-compete provision restricting “the right of a physician to practice medicine in a particular locale and/or for a defined period of time.” In the early 1980s, Delaware and Colorado enacted similar laws. 6 Del. Code Ann. § 2707; Colo. Rev. Stat. § 8-2-113.[1] In 2016, Rhode Island followed suit and enacted a law just like Massachusetts’ statute. R.I. Gen. Laws §5-37-33.

Some other states do not prohibit physician non-competes but apply stricter standards to such agreements than they do to employee non-competes generally. For example, enacted in 2007 and amended several times thereafter, Tennessee’s statute allows physician (including radiologist) non-compete provisions if they: (1) are in writing; (2) last no longer than two years after the physician’s employment is terminated; and (3) either (a) are geographically limited to the greater of the county where the physician is employed or a ten mile radius of the primary practice site; or (b) there is no geographic restriction, but the physician is restricted from practicing at any facility in which the employer provided services during the physician’s time of employment. Tenn. Code Ann. § 63-1-148.

Texas law allows physician non-competes provided that the covenant must: not deny the physician access to a list of the patients seen or treated within one year of termination of employment; provide access to medical records of the physician’s patients upon proper authorization; provide for a buyout of the covenant by the physician at a reasonable price; and allow the physician to provide continuing care and treatment to a specific patient or patients during the course of an acute illness. Tex. Bus. & Com. Code Ann. § 15.50.

A New Mexico statute first enacted in 2015 prohibits provisions in agreements which restrict the right of healthcare practitioners (including physicians, osteopathic physicians, dentists, podiatrists and certified registered nurse anesthetists) to provide clinical healthcare services.[2]  (That limitation does not apply to agreements between shareholders, owners, partners or directors of the practice.) The law, however, does allow non-disclosure provisions relating to confidential information; non-solicitation provisions of no more than one (1) year; and imposes reasonable liquidated damages provisions if the practitioner does provide clinical healthcare services of a competitive nature after termination of the agreement.  In addition, healthcare practitioners employed by the practice for less than three (3) years may be required, upon termination, to pay back certain expenses to the practice, including loans; relocation expenses; signing bonuses or other incentives related to recruitment; and education/training expenses.  N.M. Stat. § 24-1l-1 et seq.

And a Connecticut law enacted in 2016, rather than prohibiting physician non-competes, limits the allowable duration (to one year) and geographical scope (up to 15 miles from the “primary site where such physician practices”) of any new, amended or renewed physician agreement.  The law also renders physician non-competes unenforceable if the physician’s employment or contractual relationship is terminated without cause.  Conn. Gen. Stat. §20-14p(b)(2).

Other states may have, or may be considering enacting, statutes restricting non-competes and related agreements for healthcare providers. The trend is certainly toward limitations on such agreements. Accordingly, consultation with local legal counsel regarding these issues is highly recommended for any person or entity practicing in the healthcare industry.

____________

[1] Under Delaware and Colorado’s non-compete statutes, physicians can be required to pay damages “reasonably related to the injury suffered” by a breach of any such agreement. The Colorado statute was amended in 2018 to clarify that physicians may disclose their continuing practice and provide new contact information to any of their patients who have a “rare disorder,” and not be subject to claims for damages.

[2] This prohibition was expanded in 2018 to include certified nurse practitioners and mid-wives, and to prohibit the use of choice of forum and choice of law agreements to prevent circumvention of the prohibition.

Legislative efforts to limit or ban the use of non-compete provisions in employment agreements have proliferated in the early months of 2018.

Perhaps most eye-catching was legislation (titled the “Workforce Mobility Act”) introduced in the U.S. Senate in late April 2018 that would prohibit employers from enforcing or threatening to enforce non-compete agreements with employees and require employers to post prominently a notice that such agreements are illegal.  Co-sponsored by Democratic Senators Chris Murphy (CT), Elizabeth Warren (MA) and Ron Wyden (OR), the bill envisions the Department of Labor enforcing the non-compete ban by levying fines on employers of $5,000 for each week that a violation of the Act occurs.  The bill also provides for a private right of action for workers to pursue damages in federal court.  A companion bill was introduced in the House of Representatives.  If enacted into law, the Workforce Mobility Act would have sweeping effects in the workforce.

Efforts by state legislatures to curb non-competes have continued apace, but such bills generally are drafted with more limited scope than the Workforce Mobility Act bill.  For example, on May 10, 2018, the New Jersey Assembly Labor Committee advanced Assembly Bill A1769, which would bar the use of non-compete agreements with respect to certain types of workers (mostly low-wage workers), and set a one year limit on employee non-compete agreements with respect to employees who are terminated by a company.

Massachusetts legislators have long tried (unsuccessfully so far) to enact legislation restricting non-competes, and they are at it again.  On April 17, 2018, Massachusetts House Bill 4419 was introduced, and it seeks, among other things, to prohibit enforcement of non-competes against certain low-wage employees, to limit the geographic and temporal scope of non-competes, and to require employers to provide advance notice to prospective employees if entering into a non-compete is a condition of employment.

Earlier this year, Utah and Idaho passed or amended their statutes dealing with post-employment restrictions on competition.  Colorado passed new limitations on non-competes involving physicians.

Employers should stay aware of these legislative efforts regarding non-competes, as they could, if enacted, invalidate some or all of the employers’ non-competition provisions with their employees.  In evaluating that possibility, employers should consider whether they are adequately protecting their legitimate business interests in their trade secrets and client relationships through other means as well, such as confidentiality/non-disclosure, non-solicitation agreements, and/or “garden leave” provisions.  As Ben Franklin said, “By failing to prepare, you are preparing to fail.”

A little-noticed decision from earlier this year rendered by the Supreme Court of New York, Westchester County, demonstrates how enforcement of post-employment restrictive covenants will often boil down to a single question: does the restriction protect a legitimate business interest of the employer?

In Cindy Hoffman, D.O., P.C. v. Raftopol, plaintiff applied for a preliminary injunction against its former employee, a physician’s assistant, who began working for a competitor in technical violation of her past employment non-compete restriction which barred her for two years from working for competitors located within fifteen miles of any of the plaintiff-employer’s several offices.  Plaintiff asked the court to apply relaxed scrutiny to the covenant, arguing that the physician’s assistant position could be considered to be a “learned profession” in which her services performed were unique and extraordinary.  The court declined to apply such deference where the defendant was not in fact a physician.  Examining the two year restriction under New York’s traditional reasonableness standard, the court still was reluctant to enforce it as written.  Instead, Justice Terry Jane Ruderman blue-penciled the agreement and granted the preliminary injunction only to the extent of preventing the defendant from affirmatively soliciting clients of the plaintiff’s practice for a period of two years.

Safeguarding the plaintiff’s client relationships was the true legitimate business interest worthy of protection, and the court was willing to go no further than that in granting its injunctive relief.

The Colorado Court of Appeals, in Crocker v. Greater Colorado Anesthesia, P.C., recently examined several unique enforceability considerations with respect to a physician non-compete agreement.  Of particular interest was the Court’s treatment of a liquidated damages provision in the agreement.  Pursuant to a Colorado statute (8-2-113(3), C.R.S. 2017), the Court held that the provision was unenforceable because the liquidated damages were not reasonably related to the injury actually suffered.

Michael Crocker, a former physician-shareholder at Greater Colorado Anesthesia (Old GCA), signed an employment agreement with Old GCA that contained a non-compete provision that prohibited Crocker from practicing anesthesiology within 15 miles of a hospital serviced by Old GCA, for two years following termination of the agreement. The employment agreement also included a liquidated damages clause that required a former employee who violated the non-compete agreement to pay “(1) the three-year annual average of the gross revenues produced by the doctor’s practice; (2) minus the three-year annual average of the direct cost of [Old GCA] employee; (3) multiplied by two, to reflect two years of competition; and (4) plus $30,000 to cover the estimated internal and external administrative costs to terminate and replace the competing doctor.”

In January of 2015, Old GCA’s shareholders voted to approve a merger. Crocker dissented. Crocker severed his employment relationship with Old GCA and later began working for another anesthesiology group within the non-compete area outlined in his employment agreement. After the merger, New GCA sought damages for Crocker’s breach of his non-compete. The district court determined that the non-compete was unenforceable. The Court of Appeals affirmed the district court’s decision on several grounds, including hardship on Crocker and Crocker’s rights as a dissenting shareholder with respect to the merger.

The court also independently rejected New GCA’s request for liquidated damages, determining that the company suffered no damages, and that the liquidated damages clause was unenforceable because it was not reasonably related to “any injury [New GCA] actually suffered due to Crocker’s departure.” Citing the Colorado statute governing liquidated damages clauses in physician non-compete agreements, the court explained that “a damages term in a non-compete provision such as here is enforceable only if the amount . . . is reasonably related to ‘the injury suffered’ in the past tense. Under this plain language, the reasonableness of the relationship between the two amounts must be demonstrated, and it cannot be analyzed prospectively; by definition, it can only be determined upon the termination of employment.”

This case underscores the need for employers seeking to enter into restrictive covenants with their employees to consult with counsel when drafting such covenants. In the circumstances of this case, there was a state statute specifically bearing upon the liquidated damages provision in the physician non-compete agreement, which effectively prevented that provision from being enforced against the employee. The world of restrictive covenants can be tricky and compliance with state laws (statutes and case law) is crucial when the time comes to enforce them.

In managing workforces, particularly when addressing employee turnover, employers often find themselves facing issues regarding how best to safeguard their confidential business information and how to protect their relationships with clients and employees. In recent years, the legal landscape underlying these issues has been evolving, as lawmakers and judges grapple with the tension in these matters between protection and free competition.

In this Take 5, we examine recent developments, both in the courts and legislative bodies, concerning trade secrets and employee mobility:

  1. Antitrust Action Against No-Poaching Agreements: The Trump Administration Continues Obama Policy
  2. Drafting “Garden Leave” Clauses in Employment Agreements
  3. Will Insurance Cover a Company Sued in a Trade Secrets Lawsuit?
  4. Defend Trade Secrets Act Developments in 2017
  5. New and Proposed State Statutes and Federal Legislation Limiting Non-Compete Agreements

Read the full Take 5 online or download the PDF.

On October 20, 2016—just about three weeks before the presidential election won by Donald Trump—the Department of Justice and the Federal Trade Commission issued a remarkable document, entitled “Antitrust Guidance for Human Resources Professionals,” which outlined an aggressive policy promising to investigate and punish employers, and even individual Human Resources employees, who enter into unlawful agreements concerning recruitment or retention of employees.  As stated in that document, “[a]n agreement among competing employers to limit or fix the terms of employment for potential hires may violate the antitrust laws if the agreement constrains individual firm decision-making with regard to wages, salaries or benefits; terms of employment; or even job opportunities.”

For over a year, a question on the minds of many practitioners was whether the Antitrust Guidance document and policy would remain a priority for the DOJ and FTC under President Trump.  Those agencies had not issued public pronouncements, and there was uncertainty over whether conduct like wage-fixing and no-poaching agreements would continue to warrant serious civil or criminal scrutiny.  Would the new administration continue the Obama Administration’s antitrust guidance initiative or would it lean more toward a more laissez-faire, do-not-interfere with corporate management philosophy?

We may now have the answer.  The Trump administration has voiced support of this Obama-era policy.  On Jan. 19, 2018, U.S. Assistant Attorney General for the Antitrust Division Makan Delrahim remarked at a conference that if employers have engaged in no-poaching or wage-fixing agreements since the issuance of the policy, their actions will be treated as criminal.  He noted the Antitrust Division has “been very active” in reviewing potential violations, and that, “[i]n the coming couple of months, you will see some announcements, and to be honest with you, I’ve been shocked about how many of these there are, but they’re real.”

Employers and practitioners should stay tuned for these announcements from the Antitrust Division.

Financial analytics firm Novantas, Inc. and two individual defendants closed out 2017 with a victory, securing the dismissal of claims by rival First Manhattan Consulting Group LLC (“First Manhattan Consulting Group”) [1], which accused them of competing unfairly by poaching First Manhattan Consulting Group’s employees in order to steal its trade secrets.  The result demonstrates the need for plaintiffs in such cases to be able to prove with specificity which trade secrets were taken or threatened by the defendants’ conduct.

The Complaint alleged that Novantas engaged in a “pattern and practice of poaching” First Manhattan Consulting Group’s employees, including defendants Peter Gilchrist and Andrew Frisbie in 2014, to gain access to First Manhattan Consulting Group’s confidential information.  These individuals, who were officers of First Manhattan Consulting Group, were subject to contractual confidentiality and employee non-solicitation obligations.  First Manhattan Consulting Group asserted causes of action for breach of contract against the individuals, for tortious interference with contract and unfair competition against Novantas, along with a misappropriation of trade secrets claim against all defendants.

The case went to trial in Supreme Court, New York County. Justice Barry Ostrager declined to submit the misappropriation claim to the jury, because the information presented by First Manhattan Consulting Group at trial did not appear to the Court to be a trade secret, and there was no testimony concerning trade secrets.  In its verdict, the jury unanimously found no liability on any of the other claims.  On December 19, 2017, the Court dismissed First Manhattan Consulting Group’s claims.

For practitioners, this outcome is a useful reminder that trade secret misappropriation claims require in-depth understanding of the client’s business, detailed allegations in pleadings of the legally required elements of a misappropriation claim and, at trial, a full presentation regarding the wrongdoing and what specific information was taken and how the plaintiff has been damaged.

 

[1] First Manhattan Consulting Group is unrelated to First Manhattan Co.