You Can’t Take It With You: Noncompetes Protect Referral Sources

Referral Sources Can Be Protected in Noncompete Agreements

A bedrock principle of noncompete law is that employers have the right to protect customer lists in noncompete agreements. But should referral sources – lists of people or businesses that don’t buy anything but may refer others – receive the same protection as customer lists? The Florida Supreme Court recently ruled that referral lists can be protected in noncompete agreements, cautiously adding the caveat, “depending on the circumstances.”

Although the case involved home health services companies, it could apply to any industry where referrals from other businesses are important, says Daryl J. Krauza, a shareholder in Dean Mead’s litigation department. “The court essentially has given referral sources the same status as customers,” he says, “and while that’s a huge win for employers, it could present problems for employees who rely on referral sources they personally have cultivated over the years.”

Home Health Services Referrals Were at Issue in Court Decision

This latest wrinkle to noncompetes came up in White v. Mederi. The case consolidated two disputes where marketing representatives for home health services companies went to work for competitors and used referral sources that the former employers said were proprietary information. The primary job responsibility of both women was to solicit physicians and medical facilities to refer patients who might retain their employers for home health services. After they quit and went to work for direct competitors, their former employers sued, contending the women had violated the noncompete agreements they signed. The women asked for summary judgment, arguing that the agreements were not enforceable because referral sources are not a legitimate business interest that can be protected in noncompete agreements.

The court’s ruling turned on the requirement in Florida law that noncompete restrictions must protect a “legitimate business interest.” Previously, state appeals courts had reached conflicting conclusions on whether referral sources qualified as a legitimate business interest. It was noted that the noncompete statute’s list of business interests that can be protected does not specifically mention referral sources, although it leaves the door open by adding a clause that says “includes but is not limited to.”

“It seems obvious that allowing an employee to work for a short period, receive pay to cultivate referral sources using an HHC’s resources, and then remove advantageous information to a direct competitor to solicit those same referrals – all of which was precluded by a noncompete contract that the employee signed – would not only condone but actually encourage unfair competition,” the court said in its ruling.

Context Is Key in Determining Whether Referral Lists Can Be Protected

As with most rulings in noncompete litigation, this one is context specific and doesn’t guarantee how the courts might view referral sources in another case. Explaining that neither the statute nor this ruling can contemplate every instance where referral sources might become an issue in a noncompete, the high court encouraged trial courts to interpret the statute in the factual context of each case. Still, it seems clear that the court leans toward allowing employers to protect referral sources, and employees who want to challenge this restriction in a noncompete will have to show that a former employer’s referral list didn’t require any real investment by the employer.

Krauza says challenges to these provisions in noncompetes are likely to turn on whether a referral list truly is proprietary. A list of doctors pulled from a public directory doesn’t require any work to assemble, but a carefully cultivated list of doctors that contains the details of contacts made by the company’s representatives over a period of years represents a substantial investment of time and money.

One problematic area, Krauza says, is that marketing representatives often are hired because they have extensive experience in an industry and may have developed their own lists of referral sources. Once they enter these referral sources into an employer’s database, the courts could regard the information as the property of the employer. “Imagine if someone spent 20 years working in home health care, getting to know the doctors in a community and developing connections. Then an employer says that even though you have only worked here a short time, those referral sources are ours when you leave,” says Krauza. “That’s the dilemma some people may find themselves in after this ruling.”

To gain more insight from the attorney quoted in this article, we invite you to contact Daryl J. Krauza at Krauza is a Shareholder in Dean Mead’s statewide litigation department. He focuses his practice in the areas of commercial litigation, construction law and litigation, real estate litigation, quiet title actions, bankruptcy and creditors’ rights. He represents several financial institutions and title companies. In addition, Krauza has litigated complex probate and trust matters, and represents trustees, personal representatives and family members in controversies regarding wills, trusts and estates.