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A generation or two ago, we were a relatively stationary society. It was common for a person to work his or her whole life for one company. Retirement was the company pension. This is no longer the case. We are now a mobile society. Before the average American worker retires, he or she will have worked for a number of different employers. Retirement is not a company pension, but the worker's own 401(k) ... or what is left of it. Although moving from one employer to another is relatively easy in the corporate world, in the health care industry it is trickier and fraught with pitfalls.
Assume John Smith has worked for ABC Mobility, Inc. for the past five years. Now assume effective Sept. 1, 2011, Smith leaves ABC and goes to work for a competitor, XYZ Mobility, Inc. What can Smith do, and what can he not do? As the old saying goes, “The devil is in the details.” Let me explain.
Duty of Loyalty
So long as Smith is an employee of ABC, he has a duty of loyalty to ABC. While an employee of ABC, Smith cannot clandestinely begin working for XYZ.
As a long-standing employee of ABC, Smith will have possession of and access to information unique to ABC. This will include customer lists, marketing manuals, lists of referral sources (physicians, rehab clinics, physical therapists), guidelines for measuring and fitting patients, patient compliance guidelines, and personnel manuals. This is information ABC has expended time and money to produce. ABC will consider this information to be proprietary. The law in most states will prohibit Smith from taking this proprietary information with him. State law will determine what information is, and is not, proprietary.
If Smith has a written employment agreement with ABC, then the agreement may have a non-compete provision in it. A typical non-compete provision will prohibit Smith from competing with ABC for a period of time (e.g., one year) and within a defined geographical radius (e.g., within 100 miles of Des Moines). The non-compete provision must be reasonable as to time and scope. If it is unreasonable — that is, if it is overreaching — then a judge will normally have the right to “reform” the non-compete provision. What this means is the judge will have the right to reduce the time period (e.g., from one year to six months) and/or the geographical scope (e.g., from 100 miles to 50 miles).
A non-compete must be part of an “otherwise enforceable agreement.” Let’s say Smith has a written three-year employment agreement with ABC. However, the agreement states ABC can terminate the agreement upon 30 days’ notice “without cause.” Essentially, this means Smith has a month-to-month contract that is “terminable at will” by ABC. Smith has very few rights under such an agreement. This is not an “otherwise enforceable agreement” that will support a non-compete restriction. On the other hand, assume the agreement is a three-year agreement and ABC may terminate the agreement only “for cause.” Assume “cause” is narrowly defined so ABC cannot terminate Smith unless Smith steps over the line. Such an agreement gives a valuable right to Smith... the right not to get fired unless Smith truly messes up. This type of agreement will normally be considered to be “otherwise enforceable.”
ABC’s legal rights under the agreement can be strengthened if ABC gives additional consideration to Smith. For example, at the time of execution of the agreement, ABC can give to Smith a $5,000 signing bonus, alternatively, 12 months after execution of the agreement, Smith can be entitled to an employee retention payment of $5,000.
HIPAA prohibits ABC and Smith from disclosing “protected health information” (PHI) about a patient unless (i) a statutory exception to HIPAA is met or (ii) the patient gives his written consent to the disclosure. The applicable statutory exception is the “treatment, payment, operations” (TPO) exception. This states ABC and/or Smith can disclose PHI (about a particular patient) to another entity if the disclosure is for the purpose of treatment of the patient, or for submission of claims, or copies (electronically or hard copy) multiple files of patients of ABC, then transmits the files to Smith’s new employer, XYZ. Such transmittal of patient files does not fall within an exception to HIPAA and will likely be construed to be for the purpose of marketing. This would render Smith and XYZ liable for HIPAA violations.
Assume it is Sept. 2, 2011, and Smith has handed to XYZ a list of ABC patients. Can XYZ and Smith call the ABC patients, inform them Smith now works for XYZ, and invite the patients to visit Smith at XYZ? No.
The federal telephone solicitation statute states an home medical equipment (HME) company (i.e., XYZ) cannot call a Medicare beneficiary unless one of the following exceptions are met: (i) the beneficiary has given his written permission to be called; (ii) the HME company has previously sold a Medicare-covered item to the beneficiary, and the phone call pertains to that particular covered item; or (iii) the HME company has sold a Medicare covered item to the beneficiary within the past 15 months and the phone call pertains to other products and services offered by the HME company.
Assume Mary Jones is a 78-year-old customer of ABC. On Sept. 2, 2011, she is a customer of ABC, not a customer of XYZ. XYZ has never sold a Medicare-covered item to Jones. Unless Jones has properly given her prior written permission to XYZ to be called, then neither XYZ nor Smith (on behalf of XYZ) may call Jones. In terms of obtaining the written permission from Jones, the “smell test” applies. For example, Smith cannot call Jones in order to obtain her written permission to be called by XYZ. Simply speaking, Jones’s phone may not ring.
Again, assume on Sept. 2, 2011, Smith hands to XYZ a list of ABC patients. Can Smith go knock on the patients’ doors? No. Smith’s knowledge regarding the names and addresses of the patients emanates from the proprietary information Smith took from ABC. For the same reasoning, XYZ may not send marketing material to the individuals contained on the list of ABC patients. Assume Smith took with him only a list of commercial ABC patients. No Medicare patient is found on the list. The telephone solicitation statute would not apply. However, XYZ may not call the patients, or knock on their doors, or mail marketing material to them because the commercial patients constitute the proprietary information of ABC. Furthermore, even if the list of patients does not contain the names of any Medicare beneficiaries, the federal (or applicable state) “do not call” statute will likely prohibit XYZ from making the calls.
Steps the Former Employer Can Take Against the Departed Employee and His New Employer
ABC should hold an exit interview with Smith. If the parties had previously executed an employment agreement that contains a non-compete provision, then ABC needs to remind Smith of his obligations under the agreement. If Smith will do so, ABC should have Smith sign a document confirming he will adhere to the terms of the non-compete provision. If the parties had not previously executed an employment agreement with a non-compete provision, then ABC should nevertheless remind Smith of his obligations not to abscond with any proprietary information, including customer lists and those other documents described above. If Smith will do so, ABC should have Smith sign a document confirming he will not take any proprietary information with him.
If ABC suspects Smith and XYZ will attempt to contact ABC’s patients, then ABC should attempt to inoculate its patients by forewarning them such a contact may be made. ABC can ask its patients to let ABC know if such contact occurs. If ABC wants to be aggressive, it can ask its patients to send to ABC any correspondence and e-mails from Smith. ABC may even want to ask its patients to save any voicemails from Smith. Likewise, if ABC suspects Smith and XYZ will attempt to contact ABC’s referral sources, then ABC should be proactive and tell its referral sources Smith has gone to work for XYZ, Smith will likely attempt to contact the referral sources on behalf of XYZ, and ABC hopes the referral sources will remain loyal to ABC.
Assume Smith and XYZ are engaging in acts that clearly violate Smith’s non-compete or are infringing on ABC’s proprietary information. What responsive steps can ABC take? One step is for ABC to send a cease and desist letter to Smith and XYZ. The letter will point out the legal basis upon which ABC asserts Smith and XYZ cannot engage in the prohibited acts (e.g., calling or otherwise contacting ABC’s patients). Such a legal basis may include breach of the non-compete provision in Smith’s employment agreement, violation of the state statute prohibiting the improper use of proprietary information, unfair competition, and tortuous interference. The letter will demand Smith and XYZ cease engaging in the prohibited acts, and state failure to do so will result in ABC filing a lawsuit against both of them. The letter will point out if such a suit is filed, then ABC will ask for a temporary restraining order, injunctive relief, actual damages, punitive damages, costs of court and attorney’s fees. While Smith may ignore the cease and desist letter (he likely is not a “deep pocket” and he needs to work), XYZ will be less inclined to ignore the letter. Unless Smith is truly a superstar, XYZ will not be excited about expending the attorney’s fees to defend ABC’s lawsuit. XYZ may be inclined to simply let Smith go. If Smith and XYZ ignore the cease and desist letter, then ABC can proceed with its lawsuit.
If ABC wants to be even more aggressive, it can file a complaint (against Smith and XYZ) with the Office of Civil Rights for the HIPAA violation. ABC can file a complaint with the Office of Inspector General (OIG) for Smith’s and XYZ’s violation of the telephone solicitation statute.
So What Is the Departing Employee Allowed to Do?
All of the discussion above pertains to what Smith and XYZ cannot do and the steps ABC can take to protect itself. Now our discussion turns to what Smith and XYZ can do. XYZ can publish an ad in the local newspaper telling the community Smith has now joined XYZ. XYZ may contact referral sources (sources XYZ knows, not referral sources whose names were given to XYZ by Smith) and notify them Smith has left ABC and has joined XYZ.
A more aggressive move on Smith’s and XYZ’s part will be for Smith to recreate by memory a list of ABC’s patients. XYZ can then mail marketing material to the patients. However, there is risk ABC will assert the recreated list nevertheless constitutes proprietary information. Smith may recreate by memory a list of ABC’s referral sources and then XYZ will contact the referral sources. There is a risk ABC will assert the recreated list constitutes proprietary information. If Smith did not sign a non-compete with ABC, then an aggressive move on his (and XYZ’s) part would be for Smith to take with him a list of ABC’s patients and referral sources and assert under the applicable state statute, the lists do not onstitute proprietary information.
The most prudent course of action for ABC to take when it hires Smith is to have him sign a written employment agreement with a non-compete provision. Let’s say ABC desires for Smith to sign a non-compete a couple of years after he has been working for ABC, this can be done (and the non-compete can be enforceable) so long as ABC offers sufficient independent consideration to Smith for the non-compete. Such independent consideration can include converting Smith’s employment arrangement from “at will” to “terminable for cause.” Regardless of whether Smith signs an employment agreement, it would be prudent for ABC to have Smith sign a document that acknowledges patient names and other patient information, and other types of information, constitute proprietary information and are protected by HIPAA.
The most prudent course of action for Smith is for him to sign nothing. If ABC asks Smith to sign an employment agreement or another type of document, then Smith needs to have an attorney review and advise him regarding the document. When hiring Smith, the most prudent course of action for XYZ to take is inquire if Smith ever signed an employment agreement, or a related document, with ABC. If the answer is “yes,” then XYZ needs to examine the document.
Contact the author
Jeff may be reached at firstname.lastname@example.org or 806.345.6320.
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 only.