Referral Sources Can Be A Protectable Interest Under Florida Law
In Florida, non-competition and other restrictive covenant agreements are enforceable to the extent they are tailored to protect a legitimate business interest. On September 14, 2017, the Florida Supreme Court held that a company’s relationships with business referral sources may constitute a protectable business interest – White v. Mederi Caretenders Visiting Services of Southeast Fla., No. SC16-28, and Americare Home Therapy, Inc. v. Hiles, No. SC16-400. Importantly, the Court stressed that its decision is highly fact-specific and depends on the role of referrals in particular industries and companies in question.
In a majority of business situations, the solicitation of new business involves direct communication between business representatives and their potential customers or clients. However, in certain industries, businesses are largely or even exclusively reliant on third party referrals. Home health care (“HCC”) providers, for instance, obtain new patients by way of referrals from those patients’ treating physicians.
Instead of competing over patients, HHC providers generally dedicate the bulk of their business development efforts toward the development of relationships with patient referral sources. However, as noted in the recent Florida Supreme Court decision, HHC providers and other types of businesses have historically run into trouble enforcing non-compete and non-solicitation agreements that restrict competition over referral sources, as opposed to actual customers, clients or patients.
Restrictive covenant agreements in Florida are governed by Florida Statute Section 542.335, which provides that restraints on competition are enforceable to the extent that they protect a “legitimate business interest.” The statute goes on to provide a non-inclusive list of “legitimate business interests,” one of which is described as “substantial relationships with specific prospective or existing customers, patients, or clients.”
Notably, the Florida non-compete statute does not list referral relationships as a legitimate business interest. Further, conferring protected status to such referral relationships might seem to conflict with the statute’s express protection of relationships with “specific prospective or existing customers, patients, or clients.” In this regard, referral sources, by their very nature, are relied upon for customers, patients or clients whose identities are not yet known.
Despite acknowledging the above concerns, the Florida Supreme Court ultimately held that such factors do not preclude the designation of referral sources as protectable legitimate business interests. First, the Court pointed out that the statutory list of legitimate business interests is expressly non-inclusive. Second, the Court concluded that “[a]ttempting to protect identifiable referral sources is distinct from claiming an interest in an unidentified patient base.”
Central to the Court’s holding was the unique nature of the HHC business model. As the Court explained, HHCs “are dependent upon referrals to obtain patients as HHCs do not directly solicit patients. In fact, a physician signing a treatment order can be a condition precedent to receiving home health services, similar to a prescription… Therefore, for an HHC to obtain a specific prospective or existing patient…, it must first develop a referral source to supply the patient.” In other words, referral relationships are “crucial business interests” for an HHC, and, therefore, are consistent with “the legitimate business interests listed in the statute.”
Importantly, the Court was careful to emphasize that the determination of protected status for referral relationships is “heavily industry- and context-specific.” Therefore, employers should proceed cautiously before attempting to restrict former employees from competing for referral sources. For example, employers should consider the manner in which they rely on referral sources for business opportunities; the degree to which they rely on those referral sources; the contractual or other relationship with the referral sources themselves; and the investments made to develop and retain referral relationships.