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Non-compete Agreements

by Clay Stribling, Esq.

One of the most frustrating aspects of running a business is losing valuable employees. This is particularly true for medical equipment companies since employees often possess unique skills and have contacts that are highly valuable to the home medical equipment (HME) supplier. In many cases, an HME supplier takes time to train an employee, assist the employee in developing contacts, only to lose the employee to a competitor who then benefits from the supplier’s investment in training the now valuable employee.

Although this is a frustrating scenario, there are tools at the HME company’s disposal to address this problem. Proper use of non-competition and confidentiality agreements can significantly increase an HME supplier’s ability to protect its confidential information and to prevent its employees from becoming competitors.

Non-compete agreements vary greatly from state to state. In many states, non-compete agreements are inherently unenforceable. In other states, although enforceable, the agreement must contain specific provisions in order to pursue any remedy for violation. It is important to remember that under any circumstances, an HME supplier should consult with an attorney licensed to practice in its own state to determine the enforceability of any non-compete agreement.

Generally speaking, agreements not to compete are only enforceable if they are reasonable. Most states have statutes that set out the following requirements to make a covenant not to compete enforceable:

• The covenant must be ancillary to an otherwise enforceable agreement, but if the covenant not to compete is executed on a date other than the date on which the underlying agreement is executed, then the covenant must be supported by independent valuable consideration, and
• The covenant must contain reasonable limitations as to time, geographic area, and scope of activity that do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer.

In most states, a covenant not to compete executed at the beginning of an at-will employment agreement is unenforceable. This is because the at-will employment relationship is not an otherwise enforceable agreement. In order to render the non-compete potentially enforceable, the supplier will need to change the at-will nature of the employment agreement or find another agreement to which the non-compete can relate.

The level of independent valuable consideration required is an open question. Some courts have specifically stated that special training or knowledge acquired by the employee during the employment may constitute independent valuable consideration. However, in many cases, the supplier must be prepared to show that special training or knowledge was actually provided to the employee at the time the non-compete agreement was executed.

Many states have judicial systems which inherently seek to strike down non-competition agreements. For this reason, it is important that HME suppliers do not treat non-compete agreements as an absolute safeguard against the loss of an employee to a competitor. Non-compete agreements can serve as a significant deterrent to the employee seeking other employment; however, enforcing non-compete agreements through a judicial process is often ill advised.

In addition to executive non-compete agreements with key employees, it is also important for medical equipment companies to have all employees sign agreements pledging to protect the company’s confidential information both before and after employment. Such provisions should broadly define confidential information to include essentially all elements of a company’s business including accounting, operations, and marketing, and should specifically include all information related to specific beneficiaries and referral sources. In addition, confidentially provisions should require that employees return all patient lists, referral source lists, and documents referencing company business to the company upon termination.

It is very difficult to enforce confidentiality provisions beyond requiring employees to return company information. This stems from the fact that a supplier cannot require an employee to forget names of referral sources they have visited or names of individual patients with whom they have
worked in the past. Because employees may remember this information, they could be free to contact referral sources from their new employer. However, requiring the employee to return all information and having a carefully drafted non-compete agreement can assist in preventing such contact.

Despite the fact that employees are vital company resources, it is inevitable that HME suppliers will experience turnover in both their rank-and-file and management staff. By taking appropriate steps to protect legitimate business interests, employers can often limit the damage of employee loss by requiring employees to return all confidential information, to pledge that they will not use such information after employment with the company, and to pledge that they will not engage in competitive activities for a reasonable period of time in a reasonable geographic area after the employee has left the company. By following these general guidelines, HME suppliers can help to protect their competitive advantage.

How to Contact
Clay may be reached at 806- 345-6346 or cstribling@bf-law.com.

This article is not intended to be legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only.