Rhode Island Bars Physician Non-Competes

Only rarely do courts strike non-competes on the final element of the three-part reasonableness test: whether enforcement would be contrary to a public interest.

Earlier this year, a Rhode Island court followed Massachusetts' lead and held that a physician non-compete could not be enforced through injunctive relief. The court believed "the strong public interest in allowing individuals to retain health care service providers of their choice 'outweighs any professional benefits derived from a restrictive covenant.'" Med. & Long Term Care Assocs., LLC v. Khurshid, 2016 R.I. Super. LEXIS 39 (R.I. Super. Ct. Mar. 29, 2016). Khurshid did not, however, rule out the possibility of a damages award for a breach. Its ruling was tailored to the injunction the medical practice sought.

It didn't take long for the other shoe to drop.

In July, Rhode Island banned physician non-competes in their entirety - meaning that the narrow escape hatch for employers to seek legal relief has closed (at least for contracts signed after the law's effective date of July 12, 2016. It is likely that contracts entered into before this date are governed by the common-law, which still may bar injunctions but may not prevent a damages award.

Public policy arguments like the one advanced in Khurshid (and in other states for that matter) are difficult to make. Normally, statements of public policy come through constitutional provisions, statutory text, or a widely and universally declared judicial policy. In the context of non-compete arrangements, lawyers generally are not bound by them due to the Rules of Professional Conduct. Physicians have met with some success in Rhode Island in elsewhere due to the public interest in fostering the doctor-patient relationship. Investment advisers, on the other hand, are susceptible to non-compete enforcement, as are accountants. Other states carve out certain professions through legislative fiat, such as the relatively recent Hawaii law that bans non-competes for tech workers.

Public policy arguments are indeed difficult to make in the normal case because trial court judges do not set policy. And most non-compete disputes are quite fact-intensive. It is unusual to see blanket, categorical exclusions for enforcement.

Court Considers Hypotheticals In Determining Overbreadth of CVS Non-Compete Agreement (Saban v. Caremark Rx, LLC)

I have written often on the important of good, clear drafting.

At a seminar I presented last week, a circuit court judge agreed with my observation on the blue-pencil rule. She stated that in 23 years, she has not modified an overbroad covenant. Courts simply do not warm to the idea of subjecting the parties to a contract to which they did not agree.

A recent case involving a former key employee of Caremark illustrates the danger of poor drafting that yields potentially absurd results. The one-year non-compete in the case of Joel Saban provided Saban could not work "in any capacity" for a business engaged in "Competition." The biggest problem for CVS was its definition of "Competition", which included for instance any retail business with plans to include a pharmacy as a "component of its business.

Saban, however, was not a CVS pharmacist or retail employee. He was, essentially, a key business-to-business guy who negotiated drug price discounts in the pharmacy benefits management side of Caremark. Utilizing hypotheticals about what the covenant would prohibit yielded "canyon-like" overbreadth in terms of potential restrictions. Caremark objected to the use of such hypotheticals, contending it was inconsistent with ascertaining the parties' intent at the time of contracting.

The court had little trouble rejecting this argument. The use of hypotheticals to demonstrate overbreadth is part and parcel of a non-compete defense on the issue of reasonableness. This all goes back to the concept of notice and basic fairness. If the terms of the covenant are not sufficiently clear to advise an employee of what conduct is prohibited, then an employee's burden to comply is too high.

Hypotheticals are most relevant to illustrate cases on the edge - where the employee believes he is complying, but the employer says he isn't. But they are still relevant even in claims where indisputably direct, vigorous competition exists. This is so because the employee challenging the covenant may have sought legal advice on whether to compete based on the reasonableness of the covenant's language.

The larger point here is that overbroad covenants do not get a free pass if the actual facts show true and substantial competition. Any employer deploying a covenant must run through a series of hypotheticals to see if the terms capture too much business activity or that commensurate with the interest it is trying to protect.

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Court: United States District Court for the Northern District of Illinois

Opinion Date: 4/11/11

Cite: Saban v. Caremark Rx, LLC, 2011 U.S. Dist. LEXIS 38847 (N.D. Ill. Apr. 11, 2011)

Favors: Employee

Law: Rhode Island

Breach of Non-Compete Agreement Can Occur Before Blue-Pencil Order (Astro-Med v. Nihon Kohden America)

In a hard-fought non-compete case originating in Rhode Island, the First Circuit Court of Appeals rejected an employee's unique defense under the blue-pencil rule. Specifically, the defendant did not argue that the district court failed to narrow the non-competition covenant properly, but rather contended that the court could not find that he "breached" a covenant which was only made reasonable by virtue of the blue-pencil rule.

The court rejected the defendant's position and held that it would "give the promisor in a non-competition agreement one free breach requiring a prior judicial order before the provision could be said to have been violated." A contrary result would have yielded a clear result the court was unwilling to sanction: for all but the most narrowly tailored non-compete agreements, an injunction may be the only effective remedy to protect the employer. Allowing a prior breach to fall within a broad safe-harbor would leave many employers without redress, even in the most egregious situations, and would deprive the employer of the benefit of his bargain even if it could show actual damages.

There is some limited support, however, for the opposite view. In Texas - generally an employer-friendly state - the governing non-compete statute provides that damages cannot be awarded before an order of reformation. Of course, Texas has a public policy that overbroad covenants must be reformed to make them reasonable, and apparently the legislature determined that a limitation on damages was a proper trade-off in favor of the employee. It is notable that the First Circuit did not even cite the Texas statute.

The First Circuit's decision confirms that such an unprecedented interpretation of a non-compete agreement is not something a court should decide. In the absence of a specific statute or contract clause, a prior breach of a modified non-compete is still a "breach" - and can support a damages award.

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Court: United States Court of Appeals for the First Circuit
Opinion Date: 10/22/09
Cite: Astro-Med, Inc. v. Nihon Kohden America, Inc., 2009 U.S. App. LEXIS 23298 (1st Cir. Oct. 22, 2009)
Favors: Employee
Law: Rhode Island

Missing Non-Compete Agreement Fails to Help Employees (Aim High Academy v. Jessen)

Should this really happen in a society that is rapidly going "paperless"? Probably not.

A recent Rhode Island trial court solved - with relative ease - the case of the missing non-compete agreements. The dispute arose out of a competitive cheerleading and gymnastics business operating in East Greenwich (the geographic center of what the court called "this wonderful, if diminuitive, state"). The owners of the plaintiff, Aim High Academy, were able to recruit the Jessens (a husband/wife tandem, the wife being a 1988 Olympian for the former Czechoslovakia) to work as coaches for Aim High. Prior to this time, the Jessens ran a financially-troubled competitor in Connecticut.

The treasurer of Aim High was concerned about the Jessens and made them sign non-compete agreements. However, when the Jessens were terminated in 2008, and after they started a competing gym in Warwick, the non-compete agreements were missing from their personnel files. In addition to the usual arguments concerning enforceability, the court had to confront the question of whether the agreements were ever signed in the first place.

The court had little trouble discounting the testimony of the Jessens and another ex-Aim High employee who started the Jessens' Warwick facility despite having no coaching credentials. It concluded the Jessens had in fact signed the agreements at or around the time of their employment. Those agreements both contained covenants against any competitive business activity for one year following termination of employment within the entire State of Rhode Island. This was an important trial court finding, since the Statute of Frauds would have barred enforcement of an agreement that could not be performed within one year. In Rhode Island, as in most states, an oral non-compete for 6 months is permissible, but not one extending a year or more.

The court, concluding the Jessens signed non-compete agreements, issued a preliminary injunction against business competition for the entire year. (Since the order was preliminary injunctive relief, it could be modified and the injunction dismissed if the dispute is ripe for final decision before the one-year period lapses.) It did, however, modify the non-compete agreements based on the overbreadth of the language. The court found that the geographic restriction extending to the entire State of Rhode Island was too broad and pared the scope back to 15 radius miles from Aim High's East Greenwich facility.

The court also upheld the non-disclosure provision in the agreement and managed to interpret that clause as a restriction against customer solicitation. How the court reached this conclusion is somehow unclear, but it found that customer information and coaching/training information was proprietary to Aim High. Apparently, it dovetailed a non-solicitation restriction out of this confidentiality clause. But, it did allow the Jessens to accept business from Aim High clients as long as they did not actively solicit them. Under the court's reasoning, passive acceptance of business from customers would not implicate the use of confidential information.

The decision is significant because it demonstrates that attorneys should advise clients to store (and password-protect) digital copies of key personnel documents. This would avoid an evidentiary problem if an employee is cunning enough to raid his or her personnel file. The decision also is significant in that it is sort of a poor-man's inevitable disclosure case; the court used a confidentiality clause to impose a customer-based restriction on an employee.

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Court: Superior Court of Rhode Island
Opinion Date: 12/10/08
Cite: Aim High Academy, Inc. v. Jessen, 208 R.I. Super. LEXIS 152 (R.I. Super. Ct. Dec. 10, 2008)
Favors: Employer
Law: Rhode Island