The Public Interest Nullifies Another Health Care Non-Competition Agreement

Balancing the rights of employees and employers

On March 1, the Tennessee Supreme Court declined to hear Columbus Medical Services LLC v. Thomas, an August 2009 Tennessee Court of Appeals decision, which highlighted the importance of the public interest in noncompete litigation in Tennessee, especially in the health care field.[1] In 2005, in the Udom case, the Tennessee Supreme Court held that noncompetition covenants between physicians were unenforceable because they were not supported by the public interest.[2] In 2007 in reaction to Udom, the Tennessee General Assembly statutorily mandated that as long as certain temporal and geographic restrictions were used, noncompetes between physicians were enforceable, essentially overruling Udom by statute.[3] The Columbus Medical Services decision reaffirms the significance of the public interest in medically related non-compete litigation.

Background

While most Tennessee court opinions say that covenants not to compete are disfavored in Tennessee and are construed strictly in favor of the employee,[4] the reality is that generally speaking noncompete covenants will be enforced in Tennessee to the extent necessary to enforce legitimate, protectable business interests of the former employer. The rewriting of non-compete covenants approved by the Tennessee Supreme Court in the seminal case of Central Adjustment Bureau Inc. v. Ingram[5] usually gives the trial court enough room to enforce the former employer's non-compete agreement to some meaningful extent. The problem for the new employer is that if it does not predict correctly the extent to which the non-compete will be enforceable, the new employer may be liable under Tennessee's inducement to breach statute, which provides for treble damages and attorney fees.[6]

In Columbus Medical Services LLC v. Thomas,[7] the Court of Appeals held a non-compete covenant unenforceable due to the public interest. Columbus Medical Services (CMS) is a staffing agency that had a contract with the State for providing occupational therapists, speech therapists and physical therapists for residents of the Arlington Developmental Center, a state facility for persons with physical and mental disabilities. The therapists were not physicians. CMS had non-compete covenants in its contracts with the therapists. Liberty Healthcare Corporation (Liberty), a new staffing company, won the bid to provide the staffing services to the state and hired the very therapists who had been employed by CMS at the facility.

The trial court enforced the non-compete covenants. The Court of Appeals reversed. In a lengthy opinion written by Judge Kirby, the court found that CMS had a protectable interest and that the significant hardships to the employees did not bar enforcement. Since the residents' continued care would be interrupted if the non-compete agreements were enforced, however, the Court of Appeals found that the public interest prevented enforcement of the non-competes.

Important to the Court of Appeals was the fact that after CMS lost the contract, the superintendent of the facility urged the therapists to keep working at the facility with Liberty. The superintendent and others testified as to the importance of "continuity of care" for the residents of the facility, who were described as "severely compromised patient[s]."[8] Because the therapy "frequently required repetition and routine over a long period of time," the court found persuasive the testimony that this patient group needed the same individuals to provide the treatment. The Court of Appeals considered the fact that the therapists were required to understand the individual patients' idiosyncrasies and had to take into account potentially life-threatening conditions. The court was impressed by the serious consequences of a change in the care continuum, noting that a change in the whole group could cause serious consequences to the patient population. The court also considered that the state's investment in the use of these particular therapists would be lost if the non-compete were enforced.[9]

Ultimately, the Court of Appeals refused to enforce the non-compete because of the public interest in maintaining the continuity of care over this particular patient population. The opinion highlights the continued importance of the public-interest element in non-compete enforcement litigation.

Analysis

In Tennessee only reasonable non-competition agreements are to be enforced.[10] In addition, to be enforceable, the employer must have a legitimate protectable interest at stake.[11] Thus, the elements typically at issue in a non-compete enforcement case are:

  1. whether the former employer has a legitimate protectable interest that is threatened by the employee's actions;
  2. whether the economic hardship imposed on the employee by enforcement of the covenant is excessive; and
  3. whether the covenant is inimical to the public interest.[12]

The ascendancy of the importance of the public interest became evident in the 2005 ruling of the Supreme Court in Udom, invalidating most physician non-competes.[13] In Udom, a medical clinic's non-competition agreement with one of its physicians was invalidated because of the public interest. The Supreme Court cited the public's right to freedom of choice in physicians, the right of patients to continue an on-going relationship with a physician, and the public benefit of having a number of physicians practicing in any given community as reasons for invalidating the employer's non-compete.

The ruling was criticized for its "negative commercial effect on medical practices"[14] and was essentially reversed by the General Assembly in 2007.[15] Nevertheless, the public interest has always been an element in the injunction analysis[16] and, as evidenced by the CMS ruling and other cases, will continue to play a significant role in analyzing the enforceability of non-competition covenants, especially in health care cases.

1. A Legitimate Business Interest

Tennessee courts have long held that a covenant not to compete must be used by an employer to support a legitimate business interest.[17] The Tennessee Supreme Court has observed that mere ordinary competition is not subject to protection through a non-compete agreement. Special facts must be present "such that without the covenant not to compete the employee would gain an unfair advantage in future competition with the employer."[18] Specialized training, trade secrets, and whether the employer's customers tend to associate the business with the employee are the three most common situations that justify the finding of a protectable interest.[19]

In CMS, the Court of Appeals examined the legitimacy of CMS's interest thoroughly, indicating that whether the employment agency's interest was sufficient was a close call. An Eleventh Circuit decision in Consultants & Designers Inc. v. Butler Serv. Group Inc.[20] was relied upon by the Court of Appeals as the guiding case on the legitimacy of an employment agency's interest. The service provided by the employment agency as a "time-honored middleman" was ultimately the aspect of the former employer's interest that was deemed sufficiently legitimate to support an enforceable non-compete covenant.[21]

2. Undue Hardship on Former Employees

Another element in determining the enforceability of a non-compete covenant is the degree of hardship placed on the former employee.[22]   Using traditional injunction balancing analysis, the courts are charged with the responsibility of comparing the burdens on the former employer and the employee. If the former employer has some special training, trade secret, or relationship that the employee is using, the employee will be hard pressed to show that his burden of being unemployed in the same line of work is greater. However, if the former employer is merely seeking to limit "ordinary competition," the burden on the employee will be greater and the non-compete covenant may fail.[23]

In the CMS case, the burden on the employees did not prevent enforcement of the covenant. The trial court found that the former employees would be forced to cease work entirely or to accept a position in a different field and likely at a lower wage. The trial court said that the employees were forced into "a position of blind loyalty to [CMS], which carried with it the prospect of no job at all, or at best a job at substantially reduced income."[24] This "onerous" burden did not inhibit enforcement of the non-compete agreement for the Court of Appeals due to the legitimacy of CMS' business interest.

3. The Public Interest

In determining whether a covenant not to compete is enforceable, the public interest must be considered.[25] Although Udom was essentially reversed by the enactment of Tenn. Code Ann.  § 63-1-148 in 2007,  the statute has not been deemed as a rejection of the Supreme Court's view that public interest must be considered in evaluating non-competition agreements. Continued reliance on the importance of the public interest is an inherent acknowledgement that the public interest is traditionally a significant element in evaluating any injunction case.

In CMS, the Court of Appeals stated: "we must also consider ... the impact that enforcement of the non-compete covenants would have on the state, on [the treatment center], and on [the treatment center]'s vulnerable patient population."[26] The Court of Appeals quoted approvingly the finding in Udom that "the services provided by medical professionals such as physicians go 'well beyond merely providing goods or services.'"[27] Ultimately, the medical treatment related interest of the residents who needed the services of the therapists was tantamount. The court said that vulnerable residents "must be safeguarded." The importance of "continuity of care" for the residents was the ultimate factor weighing in favor of nullification of the non-compete.[28]

Curiously, a year earlier, the Court of Appeals enforced a non-competition agreement against a certified orthotist.[29] The trial court held that an orthotist was not a physician, and thus the Supreme Court's ruling in Udom did not apply. In addition, the trial court found that patients rarely choose their orthotist and the relationship between an orthotist and the patient was not a fiduciary one, like that between attorney and client or between patient and physician.[30] "[T]he orthotist['s] role is more akin to providing goods and services."[31] Accordingly, the trial court held, the public interest did not protect the employee in the certified orthoist case.[32] Despite the employee's health care profession, the Court of Appeals did not address the public interest in its opinion.[33]

The CMS case essentially invalidates a non-competition agreement that would have been enforced against most physicians under Tenn. Code Ann.  § 63-1-148. Although heightened protection for non-physicians seems disingenuous, the same public policy concerns led the Supreme Court to ban physician non-competes in Udom, only to have that ban reversed by the legislature. If the courts are going to continue to recognize the significance of patient-health care provider relationships in the health care field as the Court of Appeals did in CMS, then the General Assembly will have to continue to act if it wants to nullify those court decisions.

Conclusion

In litigation over non-compete covenants, the public interest will be a significant factor and has been greatly implicated in recent health care cases. Such cases may result in non-competition agreements being unenforceable if the public interest weighs heavily in favor of the maintaining care for a specific group of people in need of continuing medical care, as in the CMS case.

  1. 2009 WL 2462428 (Tenn. Ct. App. Aug. 13, 2009), perm. app. denied (March 1, 2010).
  2. Murfreesboro Medical Clinic P.A. v. Udom, 166 S.W.3d 674 (Tenn. 2005).
  3. Tenn. Code Ann.  § 63-1-148 (2008).
  4. Hasty v. Rent-A-Driver Inc., 671 S.W.2d 471, 472 (Tenn. 1984)
  5. 678 S.W.2d 28 (Tenn. 1984),
  6. Tenn. Code Ann.  § 47-50-109 (2008).
  7. 2009 WL 2462428 (Tenn. Ct. App. Aug. 13, 2009), perm. app. denied (March 1, 2010).
  8. 2009 WL 2462428 at *23.
  9. Id.
  10. Central Adjustment Bureau Inc. v. Ingram, 678 S.W.2d 28 (Tenn. 1984).
  11. Vantage Tech LLC v. Cross, 17 S.W.3d 637, 644 (Tenn. Ct. App. 1999).
  12. Allright Auto Parks Inc. v. Berry, 409 S.W.2d 361, 363 (Tenn. 1966); Vantage Tech LLC v. Cross, 17 S.W.3d 637, 644 (Tenn. Ct. App. 1999); Murfreesboro Medical Clinic, P.A. v. Udom, 166 S.W.3d 674 (Tenn. 2005). A fourth element stated in the cases is that there is sufficient consideration to support the covenant. See, e.g., Murfreesboro Medical Clinic, P.A. v. Udom, 166 S.W.3d 674 (Tenn. 2005); Allright Auto Parks Inc. v. Berry, 409 S.W.2d 361, 363 (Tenn. 1966). Because continued employment is sufficient consideration in Tennessee to support a non-competition covenant, Central Adjustment Bureau Inc. v. Ingram, 678 S.W.2d 28, 33 (Tenn. 1984), this element is rarely an obstacle to enforcement.
  13. Murfreesboro Medical Clinic P.A. v. Udom, 166 S.W.3d 674 (Tenn. 2005).
  14. O. Carr, "Physician Noncompete Agreements Go Under the Knife: The Tennessee Supreme Court Rejects Physician Noncompete Agreements," 36 U. Mem. L. Rev. 1115, 1117 (2006).
  15. Tenn. Code Ann.  § 63-1-148 specifically allows post-employment contract restrictions if the duration of the non-compete is two (2) years or less, and the geographic limit is no greater than ten miles or within the boundaries of the county of residence of the former employer.

    As originally passed in 2007, the foregoing restrictions were not binding upon a physician who had been employed for six years or more. Id. On April 14, 2010, the General Assembly amended the statute to allow a non-compete to be enforeceable against a health care provider who has been employed for at least six years so long as the agreement is legitimately negotiated after the health care provider's six-year hire date, is supported by consideration, does not extend the contract by more than another six-year term, and does not contain an automatic renewal provision. 2010 Public Acts, ch. 851  § 1 (April 14, 2010). Further, "[r]efusal by either party to extend or enter into a new employment contract shall not be considered grounds for terminating an existing employment contract so long as the employment term of the contract then in effect is a term longer than month-to month." Id.

    In addition, and as originally passed, physicians who specialize in emergency room medicine are not covered by the statute. Tenn. Code Ann.  § 63-1-148 (2008).
  16. R. Banks, Jr., & J. Entman, Tennessee Civil Procedure,  § 4-3(j), at 4-22 (1999). See also Union Planters v. Memphis Hotel Co., 124 Tenn. 649, 139 S.W. 715 (1911); White v. Nashville and N.W.R. Co, 54 Tenn. 518 (1872); South Central Tennessee Railroad Authority v. Harakas, 44 S.W.3d 912 (Tenn. Ct. App. 2000).
  17. Vantage Tech LLC v. Cross, 17 S.W.3d 637, 644 (Tenn. Ct. App. 1999).
  18. Hasty, 671 S.W.2d at 473 (citations omitted); Selox Inc. v. Ford, 675 S.W.2d 474, 476 (Tenn.1984).
  19. Vantage Tech, 17 S.W.3d at 644. The legitimacy of the business interest has served to defeat a non-competition agreement. In Girtman & Associates Inc. v. St. Amour, 2007 WL 1241255 (Tenn. Ct. App., April 27, 2007), the Court of Appeals affirmed the trial court's determination that mere third-party training was not enough to support a legitimate protectable interest for Girtman (the former employer). Significantly, the training was not unique to Girtman and other competitors were present for the same training. Id. at *7. See also Cam International L.P., v. Turner, 1992 WL 74567 (Tenn. Ct. App., April 15, 1992) (no protectable interest because customer information was publically available and employee lacked a special relationship with former customers).
  20. Consultants & Designers Inc. v. Butler Serv. Group Inc., 720 F.2d 1553 (11 Cir.1983)
  21. 2009 WL 2462428, *18.
  22. 2009 WL 2462428, *21.
  23. A good example of the balance of the burdens is Girtman & Associates Inc. v. St. Armor, 2007 WL 1241255 (Tenn. Ct. App., April 27, 2007), in which the Court of Appeals found that the burden on the former employer was far outweighed by the burden on the employee. In Girtman, the employee and his new employer went to great lengths not to abuse the employee's knowledge of Girtman's business. The employee honored the non-compete for a year and the new employer assigned the employee to non-sales duties. Thus, the burden on the employee was cited as another reason not to enforce the non-compete in Girtman.
  24. 2009 WL 2462428 at *21.
  25. Udom, 166 S.W.3d at 678.
  26. 2009 WL 2462428, at *23.
  27. Id. (quoting Udom, 166 S.W.3d at 683).
  28. Id.
  29. Hanger Prosthetics & Orthotics East Inc. v. Kitchens, 280 S.W.3d 192 (Tenn. Ct. App. 2008). A Certified Orthotist is "a health care professional who is specifically educated and trained in the provision of certain orthoses. This includes patient assessment, formulation of a treatment plan, implementation of the treatment plan, follow-up and practice management." American Board for Certification in Orthotics, Prosthetics & Pedorthics, www.abcop.org.
  30. The Health Insurance Portability and Accountability Act (HIPAA), 42 U.S.C.  § 1320d, imposes significant confidentiality obligations on health care workers. See 45 C.F.R.  § 160.103. The limitations on an employee's use of protected health information ("PHI") led to the enforcement of a non-competition agreement in Accredo Health Group Inc. v. Lawrence, No. 34930 (Chancery Court, Williamson County, February 4, 2009) (Bivens, Ch.). (Unpublished opinion in author's possession.) Because the employee had learned PHI while employed by the former employer, the trial judge held that he could not call on those patients, despite the fact that he had not serviced those patients for over four years. Pure "competition" was not restrained by the Chancellor's ruling, and former patients were free to contact the former employee for service absent solicitation by him. Nevertheless, the protected health information status of the information learned by the health care worker was the substantial factor in the Court's ruling.
  31. Id. at 196.
  32. Hanger was decided by the trial court before the General Assembly acted to overrule Udom. The effective date of Tenn. Code Ann.  § 63-1-148 was January 1, 2008.
  33. While the Hanger court did not mention the public interest in its analysis, the fact that Hanger quit his job and immediately went to work for a competitor in the same market where he had worked for his previous employer certainly influenced the court to favor enforcement. The difference between Girtman and Hanger shows the need for the employee and the new employer to work to honor the former employer's non-compete agreement, at least to a substantial extent.

Clark Spoden M. CLARK SPODEN, a member of Frost Brown Todd LLC, is an experienced trial lawyer, primarily representing corporations in employment, commercial, personal injury, and environmental cases. In 1998, Spoden helped start the Nashville office of Frost Brown Todd. He clerked for the Hon. Thomas A. Wiseman Jr. (M.D. Tenn.), 1980-81. He practiced at Dearborn & Ewing, 1981-1992 and was chairman of the litigation section of that firm for two years. Spoden had his own law office for two years and was a partner/shareholder at Ogletree, Deakins, Nash, Smoak & Stewart, 1994-1998. Spoden has taught Remedies at the Nashville School of Law since 2003 and is a frequent employment law lecturer. He is a life member of the Sixth Circuit Judicial Conference, and in 2007 received the Nashville Bar Association Pro Bono Volunteer of the Year Award.