Stites & Harbison, PLLC

By Lynne Jeter

Case law from around the country indicates referral sources are generally not known in the industry as worthy of trade secret protection. However, if an employer can prove that significant time, effort, research and expense went into compiling its list, which it treats with the highest level of confidentiality, such a list could constitute a trade secret, pointed out Donna Roberts, a Nashville attorney for Stites & Harbison, PLLC.

Roberts recently won a case on dismissal for a home health provider who was sued by a competing agency for hiring three of its former employees. Among other issues, the lawsuit claimed breach of non-compete and non-solicitation provisions.

The lawsuit centered around three factual issues. The former employer, Roberts said, complained the three employees were soliciting its referral sources for home care referrals in violation of their non-compete; that they violated the confidentiality portion of the agreement by disclosing information regarding salaries and the identity of referral sources; and that they were attempting to lure away other employees in violation of the non-solicitation agreements.

"The plaintiff company asked the court to enjoin my client from visiting the same referral sources, disclosing the information they believed to be confidential, and soliciting their employees," said Roberts. "The court denied the former employer's request, stating they weren't likely to succeed on the merits of their claim at trial."

The most significant issue in the case in terms of precedential value was whether the non-compete for the highest grossing account executive restricted her from contacting "referral sources," the lifeblood for healthcare service providers.

The actual terminology used by the non-compete was "clients or patients," and the plaintiff company asked the court to define those terms to include "referral sources," which were not specifically mentioned in the agreement.

"I asked the court to dismiss this claim for a number of reasons and the court agreed with my analysis," said Roberts. "The agreement at issue prohibited the employee from contacting, soliciting, selling or rendering services 'to any client or patient of company.'"

Both parties' businesses consist of providing home health care services to patients or end-users that pay for the services either individually or via health insurance. Referral sources are individuals and facilities—physicians, therapists, discharge planners and hospitals—that provide information to their patients regarding home health care services.

By law, patients must be given a choice of providers, and referral sources may not contract with any one home health care agency to only refer services to that agency, explained Roberts.

"All revenue is generated from patients, whom we maintained are the 'clients or patients' described in the agreement," she explained. "The court held that the agreement was unambiguous in that it did not include the term 'referral sources,' and in the healthcare industry, referral sources cannot be considered patients or clients because no service is rendered to them, and they do not pay for services."

The take away is this: healthcare service providers should choose their non-compete language very carefully, emphasized Roberts.

"In addition to complying with state laws regarding restriction of certain healthcare providers such as physicians," she said, noting that in Tennessee, recent legislation allows non-competes to be enforced against certain physicians with specific limitations, "employers may want to review their non-compete agreements to add a distinction between clients and referrals."

Referral sources do not constitute clients or patients, Roberts maintained.

"However, the traditional non-compete agreement usually restricts contact with 'patients.' Oftentimes, the sales person or account executive does not have direct contact with the patients, but rather sells the company's services through referrals by physicians and other sources. The healthcare service provider stands the best chance of enforcing a non-compete agreement restricting contact with referral sources if their identity constitutes a trade secret or there are other special facts requiring such protection," she said.

Referral sources in the home health care industry are easily obtained through independent public sources.

"In the context of non-competes, restricting an ex-employee's further contact with referral sources specifically may be an unreasonable restraint of trade and should be analyzed through the lens of each individual state's laws," said Roberts. "In Tennessee, non-competition agreements are enforced only when a legitimate business interest warrants protection of the former employer. To establish a protectable business interest, the employer must show 'special facts present over and above ordinary competition' such that the employee would have an unfair advantage over the former employer absent the non-competition agreement."

Becoming the "face" of the company to a referral source through repeated contacts could elevate the former employer's business interest to a level warranting protection, Roberts pointed out.

"However, the former employer's chances of enforcing a non-compete restricting access to referral sources greatly increase when other business interests are comingled, for example, if the former employer's list of referral sources constitute a trade secret, or if the employee received specialized training—something more than just general skill and knowledge—in working with these individuals."