Restraints on Physician Competition in Georgia – Part 2

C. Non-Recruitment Covenants

Because the Restrictive Covenants Act does not expressly mention non-recruitment covenants, it is unclear if they are even covered by the Act. They are arguably contemplated in O.C.G.A. § 13-8-51(15), which defines “restrictive covenant” as any agreement between two parties to protect the first party’s interest in, among other things, employees. On the other hand, non-compete covenants also protect the employer’s interest in employees,⁸⁹ so the Act’s applicability to non-recruitment covenants is by no means clear.

To the extent they are covered under the Restrictive Covenants Act, non-recruitment covenants should be treated no differently than non-compete covenants, which require geographic and time restrictions.⁹⁰

Alternatively, non-recruitment covenants could be evaluated under the old law, which requires a territorial restriction⁹¹ and which prohibits application of a non-recruitment covenant to all employees, regardless of position or tenure.⁹²

The courts will likely have to clarify whether the Restrictive Covenants Act applies to non-recruitment covenants.

D. Non-Disclosure Covenants and Inevitable Disclosure

Courts apply a two factor test to non-disclosure agreements: (1) whether the employer intends to protect confidential information regarding the business, including: trade secrets, operational methods, customer names and personnel data and (2) whether the covenant relates to protecting such information.⁹³ In a change from the prior law, a non-disclosure agreement can now be enforced into perpetuity so long as the information remains confidential.⁹⁴

The wording of the confidentiality covenant is critical because an employer has no right to restrict the use of publicly available information. Thus, a court will uphold a covenant that prevents the employee from using confidential information, but it will invalidate a covenant that bars the employee from using any information relating to the employer’s business.⁹⁵ The Restrictive Covenants Act likely remedied this situation because it allows the court to blue pencil the covenant so that it only applies to non-public information.⁹⁶

In the medical field, a non-disclosure covenant would typically protect a variety of sensitive information such as patient medical information, patient names and contact information, insurance reimbursement rates, referral sources and strategic plans. When a physician departs, the handling of patient health records can be a source of controversy. While the provider (employer) is the owner of patient health records, it is clear that the patient has the right to obtain a copy of his records.⁹⁷ The best approach is for the patient to execute a release authorizing the departing physician to take the records with him. Any interference with the patient’s request for medical records is unlawful.⁹⁸

While a court might decline to enforce a non-compete covenant with a nationwide scope, it could enforce a confidentiality covenant (without any geographic restriction) to prevent an employee from working for a competitor because he cannot do so without using or disclosing the former employer’s confidential information.⁹⁹ In that sense, a non-disclosure covenant can serve as a de facto non-compete covenant.¹⁰⁰

Relatedly, the inevitable disclosure doctrine provides that “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.”¹⁰¹ In those jurisdictions that have adopted the doctrine, courts consider whether: (1) the employers are direct competitors providing similar products or services; (2) the employee’s position with the new employer has responsibilities similar to the position held with the former employer; (3) the employee will be unable to complete those responsibilities without relying on the former employer’s trade secrets; and (4) the trade secrets are valuable to both employers.¹⁰² Many courts also consider the employee’s bad faith conduct or intent to disclose trade secrets.¹⁰³

It is doubtful that the inevitable disclosure doctrine is viable in Georgia. In Essex Group v. Southwire Co., Essex hired away from its direct competitor (Southwire) an employee who led a team that developed a trade secret-protected logistics system.¹⁰⁴ Though the Georgia Supreme Court did not find that the employee took tangible materials from Southwire, it acknowledged that he possessed trade secrets within his memory, and it upheld the injunction barring him from working for Essex on that basis, seemingly adopting – implicitly at least – the inevitable disclosure doctrine.¹⁰⁵ In 2013, however, the Supreme Court in Holton v. Physician Oncology Services, L.P. rejected the notion that Essex adopted the inevitable disclosure doctrine, holding that “a stand-alone claim for the inevitable disclosure of trade secrets – untethered from the provisions of our state trade secret statute – is not cognizable in Georgia.”¹⁰⁶ The Holton court reserved ruling on whether the inevitable disclosure doctrine could apply to support a claim for the threatened misappropriation of trade secrets.¹⁰⁷ This statement raises more questions than it answers since the Georgia Trade Secrets Act already authorizes injunctive relief for threatened misappropriation.¹⁰⁸

VI. Potential Employer Vulnerabilities Under the New Law

There is little for employees to like in the Restrictive Covenants Act. It legislatively overrules much of the pro-employee case law and it now allows courts to blue pencil agreements instead of striking them down in their entirety. The justification for disallowing such modifications had always been to discourage employers from “fashioning overly broad covenants that will remain unchallenged in most instances.”¹⁰⁹ Now employers have every incentive to do just that. For example, under the old law, many savvy employers chose not to demand non-compete covenants because they were so difficult to enforce and because an invalid non-compete would doom an otherwise valid non-solicitation covenant.¹¹⁰ That is no longer the case. Now a valid non-solicitation covenant will survive even if the non-compete covenant is struck down or, more likely, judicially modified.¹¹¹

There are potentially two bright spots for employees. The first requires a person or entity seeking to enforce a covenant “to plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant.”¹¹² This is hardly an onerous burden since the employer will likely describe the business interest in the agreement and require the employee to acknowledge its legitimacy.¹¹³ Nevertheless, O.C.G.A. § 13-8-55 may give a court the statutory justification it seeks to strike down or curtail a covenant.

The second bright spot for employees is somewhat brighter. O.C.G.A. § 13-8-58(d) permits the court, when assessing the reasonableness of a covenant, to “consider the economic hardship imposed upon an employee.” The economic hardship argument is only available to employees; it does not benefit business sellers, partners, distributors, franchisees or the like.¹¹⁴ This is perhaps the only provision in the Act that puts employers at risk for extracting unreasonable covenants from employees, but that risk is mitigated because covenants that do impose an economic hardship on the employee can always be blue penciled.¹¹⁵

While the Restrictive Covenants Act offers little assistance to employees, traditional equitable principles may continue to be a valuable resource since employers’ preferred relief is typically injunctive. One potent equitable principle is that one who seeks equity must do equity. In Morgan Stanley DW, Inc. v. Frisby, for example, the district court refused Morgan Stanley’s request for a preliminary injunction because it had unclean hands, holding “Morgan Stanley regularly hires brokers from competitors and, in so doing, engages in the very same practices that it challenges here.”¹¹⁶

A second equitable principle helpful to an employee is that party seeking injunctive relief must demonstrate irreparable harm and no adequate remedy at law. Thus, in Morgan Stanley, supra, the court declined to enter injunctive relief, ruling that Morgan Stanley’s injury is a loss of commissions, which are easily traceable in the highly regulated brokerage industry, and which can be remedied through money damages.¹¹⁷ A physician could make the same argument since fees for services are typically governed by Medicare and private insurance reimbursement rates, thus making the employer’s losses easy to quantify.

VII. Conclusion

In the wake of the recently adopted Restrictive Covenants Act, Georgia courts are now more likely than ever to enforce restrictive covenants against physicians. Consequently, physicians are well advised to consult with competent legal counsel before executing covenants.

References

¹ McMurray v. Bateman, 221 Ga. 240, 241, 144 S.E.2d 345 (1965).

² Rash v. Toccoa Clinic Medical Assocs., 253 Ga. 322, 323, 320 S.E.2d 170 (1984).

³ Davita, Inc. v. Othman, 270 Ga. App. 93, 96, 606 S.E.2d 112 (2004).

⁴ West Coast Cambridge, Inc. v. Rice, 262 Ga. App. 106, 109-110, 584 S.E.2d 696 (2003).

⁵ Davita, Inc., 270 Ga. App. at 93.

⁶ It is no small irony that restrictive covenants, while permitted against doctors, are prohibited against attorneys under the theory that there should be no interference with a client’s choice for legal representation. See Georgia Rule of Professional Conduct 5.6, and cmt. 1. In a non-binding opinion, the American Medical Association discourages non-compete covenants for physicians because they “restrict competition, disrupt continuity of care, and potentially deprive the public of medical services.” See American Medical Association Opinion No. 9.02 (last downloaded May 15, 2013). Nevertheless, Georgia courts have expressly ruled that physician covenants do not violate the state’s public policy or conflict with medical ethical principles. Rash v. Toccoa Clinic Medical Assoc., 253 Ga. 322, 326, 320 S.E.2d 170 (1984) (rejecting public policy attack on physician covenant). See also Pittman v. Harbin Clinic, P.A., 210 Ga. App. 767, 770, 437 S.E.2d 619 (1993) (physician covenants do not injure the public in general or conflict with medical ethical principles). Cf. Shankman v. Coastal Psychiatric Assoc., 258 Ga. 294, 368 S.E.2d 753 (1988) (Smith, J., dissenting) (“I would hold restrictive covenants in a medical contract illegal per se as against the strong public policy [to protect the health of its citizens and to regulate those professionals that it licenses] irrespective of whether the covenant is reasonable”).

⁷ Habif, Arogeti & Wynne, P.C. v. Baggett, 231 Ga. App. 289, 294, 498 S.E.2d 346 (1998).

⁸ Id.

⁹ Id.

¹⁰ H&R Block Eastern Enterprises, Inc. v. Morris, 606 F.3d 1285, 1291 (11th Cir. 2010).

¹¹ Palmer & Cay of Georgia, Inc. v. Lockton Companies, Inc., 280 Ga. 479, 481, 629 S.E.2d 800 (2006).

¹² Durham v. Stand-by Labor of Ga., Inc., 230 Ga. 558, 563, 198 S.E.2d 145 (1973).

¹³ O.C.G.A. § 10-1-760, et seq.

¹⁴ O.C.G.A. § 10-1-761(4).

¹⁵ Id.

¹⁶ O.C.G.A. § 13-8-50, et seq.

¹⁷ Ga. Const. of 1983, Art. III, Sec. VI, Para. V(c). This provision was amended in 2010 to specifically allow for the enforcement of certain restrictive covenants as provided in the Georgia Restrictive Covenants Act, O.C.G.A. § 13-8-50, et seq.

¹⁸ W.R. Grace & Co. v. Mouyal, 262 Ga. 464, 465, 422 S.E.2d 529 (1992).

¹⁹ Id.

²⁰ Id.

²¹ Id.

²² See, generally, Gale Indus. v. O’Hearn, 257 Ga. App. 220, 223, 570 S.E.2d 661 (2002).

²³ New Atlanta Ear, Nose & Throat Associates v. Pratt, 253 Ga. App. 681, 683, 560 S.E.2d 268 (2002).

²⁴ See Jenkins v. Jenkins Irrigation, Inc., 244 Ga. 95, 97–98, 259 S.E.2d 47 (1979).

²⁵ Martinez v. DaVita, Inc., 266 Ga. App. 723, 598 S.E.2d 334 (2004).

²⁶ Id. at 684.

²⁷ 262 Ga. App. 106, 109-110, 582 S.E.2d 696 (2003).

²⁸ American Control Systems, Inc. v. Boyce, 303 Ga. App. 664, 668, 694 S.E.2d 1 41 (2010).

²⁹ Watkins v. Avnet, Inc., 122 Ga. App. 474, 476-77, 177 S.E.2d 582 (1970) (“Although the contract here involved is clearly related to the sale of a business, and in this sense involves only one aspect of a larger transaction, it is nonetheless a contract of employment, and must be construed under the rules applicable to the latter”).

³⁰ Mohr v. Bank of New York Mellon Corp., 371 Fed. Appx. 10, 16, 2010 WL 1063856 (11th Cir. 2010). See also Clower v. Orthalliance, Inc., 337 F. Supp. 2d 1322 (2004) (identical covenants in business sale agreement and employment agreements were reviewed under slight scrutiny because the employment agreements “are manifestly part of the sale of the business”).

³¹ Hilb, Rogal & Hamilton Co. v. Holley, 284 Ga. App. 591, 595-96, 644 S.E.2d 862 (2007) (“[W]hen parties execute separate contracts for the seller’s sale of the business and the seller’s subsequent employment and each contract contains different restrictive covenants, the restrictive covenants in the employment contract are subject to strict scrutiny”). Accord Russell Daniel Irrigation Co. v. Coram, 237 Ga. App. 758, 759, 516 S.E.2d 804 (1999) (“Subjecting two covenants to different treatment, even though found in agreements executed as a part of the same transaction, is consistent with the rationale behind the various levels of scrutiny”). See also Hix v. Aon Risk Services South, Inc., 2011 WL 5870059 (N.D. Ga. 2011) (on same facts, court held “[t]he obvious answer is that each covenant stands on its own. Each covenant is separate and distinct.”)

³² Martinez v. DaVita, Inc., 266 Ga. App. 723, 727, 598 S.E.2d 334 (2004).

³³ Baggett, 231 Ga. App. at 289-290.

³⁴ See, e.g., T.E. McCutcheon Enter., Inc. v. Snelling & Snelling, Inc., 232 Ga. 609, 212 S.E.2d 319 (1974).

³⁵ Hudgins v. Amerimax Fabricated Prods., 250 Ga. App. 283, 287-8, 551 S.E.2d 393 (2001).

³⁶ Pratt, 253 Ga. App. at 687 (blue pencil rule could not supply a missing geographic restriction but it could reduce a territory that, while described clearly in the agreement, was simply too large to be enforced).

³⁷ Sunstates Refrigerated Svcs. v. Griffin, 215 Ga. App. 61, 62-63, 449 S.E.2d 858 (1994).

³⁸ Id.

³⁹ Circle Appliance Leasing v. Appliance Warehouse, 206 Ga. App. 405, 425 S.E.2d 339 (1992).

⁴⁰ Johnstone v. Tom’s Amusement Co., 228 Ga. App. 296, 297-8, 491 S.E.2d 394 (1997).

⁴¹ Jenkins, 244 Ga. at 98.

⁴² Baggett, 231 Ga. App. at 294 (public accounting firm’s non-compete, which prevented CPA from accepting an “in house” accounting position with a company such as Coca-Cola or the Varsity, survived mid-level scrutiny but would have failed strict scrutiny).

⁴³ Peachtree Fayette Women’s Specialists, LLC v. Turner, 305 Ga. App. 60, 64, 699 S.E.2d 69 (2010) (applying strict scrutiny, court struck down a covenant that identified three hospitals the physician would be working in because, as it turned out, she only worked in two of the three hospitals). Cf. Habif, 231 Ga. App. at 294 (under mid-level scrutiny, fact that employee only worked in 9 of the 11 restricted counties at the time of his termination did not render the covenant overbroad because “the law does not require exact precision”).

⁴⁴ O.C.G.A. § 13-8-50, et seq.

⁴⁵ 2009 Ga. Laws, Act 64 (HB 173).

⁴⁶ Id.

⁴⁷ Id.

⁴⁸ Ga. Const. of 1983, Art. 10, Sec. 1, Para. 6.

⁴⁹ 2011 Ga. Laws, Act 99 (H.B. 30), § 4.

⁵⁰ 2011 Ga. Laws, Act 99 (H.B. 30), § 5.

⁵¹ Becham v. Synthes USA, 482 Fed. Appx. 387 (11th Cir. 2012) (applying Georgia law). In Becham, the Northern District of Georgia declared HB 173 unconstitutional because it was not constitutionally authorized at the time it was passed, thus providing persuasive authority for the proposition that any agreement executed before the November 3, 2010 constitutional authorization is governed by Georgia’s preexisting common law. Id. at 392.

⁵² Holton v. Physician Oncology Services, L.P., __ Ga. __, 2013 WL 1859294, *5, n.4 (May 6, 2013).

⁵³ Cone v. Marietta Recycling Corp., Dempsey, J., Fulton Sup. Ct., Case No. 2012-cv-22381 (Mar. 26, 2013).

⁵⁴ O.C.G.A. § 13-8-2.

⁵⁵ O.C.G.A. § 13-8-51(6).

⁵⁶ O.C.G.A. § 13-8-52(b).

⁵⁷ O.C.G.A. § 13-8-54(a).

⁵⁸ O.C.G.A. § 13-8-54(b).

⁵⁹ O.C.G.A. § 13-8-51(11).

⁶⁰ 2011 WL 4601028, * 3 (N.D. Ga. 2011).

⁶¹ Id.

⁶² See, e.g., Baggett, 231 Ga. App. at 292.

⁶³ Smith v. HBT, Inc., 213 Ga. App. 560, 445 S.E.2d 315, 318 (1994) (concluding a five-year covenant not to compete was reasonable with respect to duration).

⁶⁴ ALW Marketing Corp. v. McKinney, 205 Ga. App. 184, 188, 421 S.E.2d 565 (1992) (provision stating that the restricted period is tolled while the employee is in violation of the covenant is void on its face because it “potentially extends the duration of the covenant without limit”). Cf. Paul Robinson, Inc. v. Haege, 218 Ga. App. 578, 579, 462 S.E.2d 396 (1995) (upholding provision stating that restricted period is tolled while employee is in violation of the covenant, as found by a court of competent jurisdiction). The former provision failed because it could extend the term limit of the covenant indefinitely, while the latter provision was tied to the happening of certain events.

⁶⁵ O.C.G.A. §13-8-57.

⁶⁶ Id.

⁶⁷ See, e.g. Howard Schultz & Assoc. v. Broniec, 239 Ga. 181, 236 S.E.2d 265 (1977) (covenant prohibiting employee from working in a business “similar to” that of employer was too vague for enforcement). There is one exception to the rule requiring that the covenant specifically describe the employer’s business. The exception provides that the business need not be specifically described if the employee/franchise owner is the “heart and soul” of the business. Allen v. Hub Cap Heaven, Inc., 225 Ga. App. 533, 539, 484 S.E.2d 259 (1977) (Covenant prohibiting, within a small geographic area and for a short time, a franchisee from owning or operating any “Hub Cap Heaven, Inc. type business” would not be too vague for enforcement if the former franchise owner was the “heart and soul” of the business).

⁶⁸ See, e.g., Ken’s Stereo Video Junction, Inc. v. Plotner, 253 Ga. App. 811, 813, 560 S.E.2d 708 (2002) (although the employee worked only as a car stereo and security system installer, the covenant unreasonably prevented him from working for a competitor company in any capacity – even as a janitor).

⁶⁹ Sunstates Refrigerated Svcs,, 215 Ga. App. at 62.

⁷⁰ O.C.G.A. § 13-8-53(c)(1).

⁷¹ Pratt, 253 Ga. App. at 685.

⁷² O.C.G.A. § 13-8-53(c)(2).

⁷³ Wiley v. Royal Cup, Inc., 258 Ga. 357, 370 S.E.2d 744 (1988).

⁷⁴ O.C.G.A. §13-8-56(2).

⁷⁵ 210 Ga. App. 767, 769, 437 S.E.2d 619 (1993)

⁷⁶ Id. at 770 (citing McMurray v. Bateman, 221 Ga. 240, 256, 144 S.E.2d 345 (1965) (upholding a 50 mile restriction in a physician employment agreement). See also Rash v. Toccoa Clinic Medical Assoc., 253 Ga. 322, 326, 320 S.E.2d 170 (1984) (upholding 25 mile restriction in a partnership agreement).

⁷⁷ See, e.g., McAlpin v. Coweta Fayette Surgical Assoc., 217 Ga. App. 669, 458 S.E.2d 499 (1995).

⁷⁸ Id. at 673. Accord Augusta Eye Center v. Duplessie, 234 Ga. App. 226, 506 S.E.2d 242 (1999) (upholding one year and ten counties).

⁷⁹ Id.

⁸⁰ 289 Ga. App. 474, 476, 657 S.E.2d 581 (2008).

⁸¹ O.C.G.A. § 13-8-51(10)(C).

⁸² Gill v. Poe & Brown of Ga., 241 Ga. App. 580, 583, 524 S.E.2d 328 (1999). See also Wachovia Ins. Svcs., Inc. v. Fallon, 299 Ga. App. 440, 682 S.E.2d 657 (2009) (non-solicitation covenant that defined customer as “any individual or entity that has purchased” insurance was over broad) (emphasis added).

⁸³ See, e.g., O.C.G.A. § 13-8-51 (defining “legitimate business interest” to include “substantial relationship with specific prospective or existing customers, patients, vendors, or clients”) (emphasis added).

⁸⁴ Gill, 241 Ga. App. at 583.

⁸⁵ Akron Pest Control v. Radar Exterminating Co., Inc., 216 Ga. App. 495, 455 S.E.2d 601 (1995).

⁸⁶ 215 Ga. App. 310, 450 S.E.2d 219 (1994).

⁸⁷ Avnet, Inc. v. Wyle Laboratories, Inc., 263 Ga. 615, 617, 437 S.E.2d 302 (1993) (list of actual customers could constitute a trade secret if it derives its economic value from being non-public and if its owner made reasonable efforts to maintain its secrecy).

⁸⁸ American Medical Association Opinion 7.03 (http://www.ama-assn.org/ama/pub/physician-resources/medical-ethics/code-medical-ethics/opinion703.page) (last accessed May 15, 2013).

⁸⁹ See, e.g., Baggett, 231 Ga. App. at 294.

⁹⁰ O.C.G.A. § 13-8-56 & -57.

⁹¹ McGinnittie v. Hobbs Group, LLC, 420 F.3d 1234, 1242 (11th Cir. 2005) (citing Hulcher Servs., Inc. v. R.J. Corman R.R. Co., LLC, 247 Ga. App. 486, 543 S.E.2d 461 (2000)).

⁹² ALW Marketing Corp. v. Drunasky, 1991 WL 345313, **6-7 (N.D. Ga. 1991) (“Without the time to develop a lasting relationship with other agents, the short-term agent presents no threat to the employer’s competitive advantage in the employee marketplace and the employer needs no protection as to that employee.”)

⁹³ Lee v. Envtl. Pest & Termite Control, Inc., 271 Ga. 371, 373, 516 S.E.2d 76 (1999).

⁹⁴ O.C.G.A. § 13-8-53(e). Cf. Sunstates Refrigerated Svcs., 215 Ga. App. 61, 63, 449 S.E.2d 858, 860 (1994) (striking down non-disclosure covenant under the old law because it was unlimited in time).

⁹⁵ Cf. Lee, 271 Ga. at 374 (non-disclosure covenant that applies to confidential information is enforceable) and Nasco, Inc. v. Gimbert, 239 Ga. 675, 676, 238 S.E.2d 368 (1977) (non-disclosure covenant that applies to all of employer’s business information is too broad for enforcement).

⁹⁶ O.C.G.A. § 13-8-54(b).

⁹⁷ O.C.G.A. §§ 31-33-3 & 31-33-2(a)(2).

⁹⁸ O.C.G.A. § 31-33-2(a)(2).

⁹⁹ See, e.g., Lee, 271 Ga. at 374.

¹⁰⁰ Id.

¹⁰¹ PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir.1995).

¹⁰² Holton, 2013 WL 1859294, at *4.

¹⁰³ Id. at *2.

¹⁰⁴ 269 Ga. 553, 501 S.E.2d 501 (1998).

¹⁰⁵ Id. at 558.

¹⁰⁶ Holton, 2013 WL 1859294, at *1.

¹⁰⁷ Id. at *4.

¹⁰⁸ O.C.G.A. § 10-1-762(a).

¹⁰⁹ Palmer & Cay, Inc. v. Marsh & McLennan Cos., 404 F.3d 1297, 1303-04 (11th Cir. 2005).

¹¹⁰ See Sunstates Refrigerated Svcs., 215 Ga. App. at 62-63.

¹¹¹ O.C.G.A. § 13-8-54(b).

¹¹² O.C.G.A. § 13-8-55.

¹¹³ See, e.g., Rash, 253 Ga. at 325 (upholding covenant in part because physician “expressly agreed that the covenant was ‘reasonable’ and that breach of the covenant ‘would work harm’ to the partnership”).

¹¹⁴ O.C.G.A. § 13-8-58(d).

¹¹⁵ O.C.G.A. § 13-8-54(b).

¹¹⁶ 163 F.Supp.2d 1371, 1380 (N.D. Ga. 2001).

¹¹⁷ Id. at 1376.

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