The Pillars of Noncompetition Agreements in the Healthcare Industry: Illinois Law Considerations
Noncompetes typically limit an individual’s right to join or start a competitor business within a certain geographic range and for a designated period of time. Noncompetes are often supplemented by non-solicitation provisions, which restrict an individual from poaching a business’s clients, patients, or employees, and by confidentiality provisions.
In recent years, noncompetition agreements – also known as “noncompetes” – have garnered significant attention among healthcare practices and businesses in Illinois. These agreements have a long history in the state’s healthcare sector, but increasingly disputes over noncompetes are ending up in court – oftentimes with the outcome that the noncompete is ruled invalid and unenforceable.
These cases raise basic questions about the purpose of noncompetes and the requirements they must satisfy to be legally binding. In an effort to clarify this area of law, we offer a summary of Illinois law requirements for noncompetition agreements and answers to some common questions we receive from our clients here at Jackson LLP.
What Is a Noncompetition Agreement?
A noncompetition agreement is exactly what the name denotes: an agreement between two parties (often an employer and employee) that one of the parties will not compete against the other. Such agreements may seem anathema in our free enterprise system, but from a business standpoint, a noncompete can provide critical protection of a company’s assets and investments. In the healthcare sector, protectable interests may include patient lists, patient and referral relationships, and personnel whom a company has trained and developed.
Noncompetes can take a number of different forms, but generally they are structured to limit an individual’s right to join or start a competitor business within a certain geographic range and for a designated period of time. Noncompetes are often supplemented by non-solicitation provisions, which restrict an individual from poaching a business’s clients, patients, or employees, and by confidentiality provisions, which prohibit an individual from using or disclosing information the individual obtained from his or her affiliation with the business. Ultimately, the purpose of all of these provisions is the same: to limit an individual’s ability to take advantage of a business from within and inflict competitive harm upon it.
Noncompetition Agreements: The Basics of Illinois Law
In Illinois, as in other states, a noncompete must be part of a valid contract and must be supported by adequate consideration (meaning the party subject to the noncompete is getting something in return, such as employment). Whether a noncompete is enforceable depends on whether it is reasonable. To determine reasonableness, Illinois courts apply a three-part “rule of reason” test, which includes the following elements:
- The noncompete must be no greater than necessary to protect a legitimate business interest;
- The noncompete must not impose undue hardship; and
- The noncompete must not harm the public.
Recent cases in Illinois have focused on the “legitimate business interest” requirement. In the 2011 case of Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871, 965 N.E. 2d 393 (Ill. 2011), the Illinois Supreme Court explained:
[W]hether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Factors to be considered in this analysis include, but are not limited to, the near-permanence of customer relationships, the employee’s acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case.
Ultimately, as the Reliable Fire case shows, the validity of a noncompetition agreement is highly fact-specific. That’s why any noncompete should be drafted or reviewed carefully with the assistance of legal counsel to ensure it is tailored to the particular circumstances involved.
Common Questions About Noncompetition Agreements
Despite the circumstantial nature of noncompetes, one can draw some guidelines from the case law that has developed in Illinois. Here are our general thoughts in response to some frequent questions we hear from our healthcare clients at Jackson LLP:
As a licensed healthcare provider, aren’t I allowed to practice anywhere in the state? My license was difficult to acquire, and a noncompete denies me of my ability to make a living!
It is true that a medical or other type of professional license authorizes the license-holder to engage in the licensed activity anywhere in the applicable state. In Illinois, however, licensed healthcare providers may voluntarily agree not to practice in their licensed field pursuant to the terms of a reasonable noncompetition agreement. By contrast, other states, such as Colorado and New Jersey, have statutes that specifically prohibit or limit noncompetes in certain healthcare professions.
Given the significant impact a noncompete can have on one’s ability to pursue other career opportunities, healthcare providers should consult with legal counsel to review the terms of any noncompete before agreeing to its terms. Reviewing a noncompete in advance – rather than in the midst of a job change that could violate the noncompete – could spare the provider a tremendous amount of stress, uncertainty, and expense.
What are some examples of enforceable and unenforceable noncompetition agreements in Illinois?
Illinois is rich with reported cases involving disputes over noncompetes in the healthcare context. Consider just the following cases which have been litigated in the less than 10 years since the Illinois Supreme Court reiterated the requirements for noncompetition agreements in Reliable Fire:
- Apex Physical Therapy, LLC v. Bell, 2018 U.S. Dist. LEXIS 170208 (S.D. Ill. Oct. 2, 2018)
The court invalidated a confidentiality provision in the employment contracts of two individuals who left a physical therapy company, Apex, to start a new physical therapy business. According to the court, the confidentiality provision was excessively broad, prohibiting the employees “from utilizing just about anything and everything they ever learned or used while they worked at Apex, including simple know-how that is useful to Apex in any manner.” The confidentiality provision was also deficient because it lacked any time or geographic qualifiers.
However, the court did uphold a non-solicitation clause in one of the employment agreements. For two years after termination of employment, the provision prohibited the employee from soliciting any referral sources with which the employee had any contact within the two years prior to termination of employment. The court concluded that the non-solicitation provision was “narrowly tailored to prevent former employees – only within two years of leaving Apex – from poaching near-permanent relationships that the former employee used in some manner while they worked at Apex.”
- Prairie Rheumatology Associates., S.C. v. Francis, 2014 IL App. (3d) 140338, 24 N.E.3d 58 (Ill. App. 2014)The court refused to enforce a noncompete in a rheumatologist’s employment agreement which, for a two-year period after her employment, prohibited her from starting a competitive rheumatology practice within a 14-mile radius of the offices where the physician worked. Because the physician worked at the practice for only 15 months, the court held that the physician did not receive adequate consideration in exchange for the noncompete. As the court noted, generally employment of at least two years constitutes adequate consideration to support a noncompete. The court also pointed out that the practice did not assist the physician in obtaining her hospital credentials, introducing her to referral sources, paying her credentialing fees, or marketing her practice. Thus, there were not other grounds to find consideration to enforce the noncompete.
- Gastroenterology Consultants of the North Shore, S.C. v. Meiselman, 2013 IL App (1st) 123692, 989 N.E.2d 1126 (Ill. App. 2013)The court ruled that a gastroenterologist was not bound by a noncompete in his employment agreement which prohibited him, for three years following his employment, from soliciting patients from his employer practice or treating any of that practice’s patients in connection with a competitor practice located within 15 miles of the employer’s offices. The court determined that the noncompete did not meet the first element under the “rule of reason” test: the practice failed to show it possessed a legitimate business interest in need of protection. To this end, the court observed that the physician had practiced gastroenterology for 10 years in the geographic area before joining the practice; he continued treating patients and accepting referrals from physicians with whom he had relationships prior to his employment; he separately marketed his practice and billed for his services; and he had his own office and phone number.
Are noncompetes limited only to employment agreements?
No. Noncompetes are especially common in employment agreements, but they aren’t limited only to those agreements. Parties that are contracting on an independent contractor basis may also agree to a noncompete. However, this is less common since many independent contractor workers maintain business relationships with multiple clients and are not always privy to the same proprietary or confidential information that a company’s employees may have access to. Noncompetes may also appear in shareholder or partnership contracts, as well as asset purchase agreements involving the sale of a business or practice.
What happens if an employee violates a noncompetition agreement?
That depends, in part, on the particular contract. Some noncompetes, for example, include a “liquidated damages” provision. This essentially allows the employee to “buy out” his or her noncompete by paying a specified sum. In other instances, an employer may seek an injunctive order in court prohibiting the employee from violating the noncompete. If a court finds that an employee breached a valid noncompete, the employer may be able to recoup money damages and, if authorized in the contract, the legal fees incurred during the litigation.
Does an employer have a legal obligation to determine if a new employee is bound by a noncompetition agreement? Is the employer liable for the new employee’s violation of a noncompetition agreement?
It’s a good practice (though not legally required) for any business to inquire and confirm if a prospective new employee is subject to a noncompete before extending an employment offer. That way, the business can assess the risks it may incur if it were to hire the individual.
Only the parties to the noncompetition agreement are subject to its terms. Thus, an employer will not be bound by a new employee’s noncompete with a prior employer. However, should an employer decide to hire a new employee knowing the employee is prohibited by a noncompete from accepting the employment, the employer may expose itself to liability for tortious interference with a contract. That is to say, the prior employer might also name the new employer in a lawsuit to enforce the noncompetition agreement and claim that the new employer induced the employee to violate the noncompete.
Jackson LLP’s Experienced Healthcare Attorneys Can Help You Draft or Review Your Noncompetition Agreement
At Jackson LLP, we’ve learned that no two noncompetes are alike. Each one requires thoughtful review and analysis based upon the client’s unique situation. Whether you are a business or practice looking to include noncompetes in your employment agreements, or a healthcare professional who has been presented with a noncompetition agreement, we can assist in evaluating what your rights and options are.
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