AMARILLO, TX – Well-trained, loyal and competent employees are critical to a DME supplier. High employee turnover is a drain on the supplier’s time and resources. It should be a top priority for a supplier to retain its most valuable employees.
On the opposite end of the spectrum, it is important that the supplier have safeguards in place that will protect it in the event that a key employee decides to “jump ship” and go to work for a competitor. These safeguards might include one or more of the following: (i) making the employee aware that certain information about the supplier is confidential and proprietary to the supplier; (ii) making the employee aware of his obligations under HIPAA; (iii) having the employee agree to a non-competition agreement; and (iv) understanding the steps that the supplier can take if a key employee goes to work for a competitor.
Awareness of Confidentiality
The key employee needs to be made aware that certain information he has gathered about the supplier is confidential and proprietary to the supplier. In other words, if the employee leaves, then he cannot take the confidential/proprietary information with him. The employee can be made aware of his duty of confidentiality in one of the following ways:
- The employee can sign a written Employment Agreement that contains a section entitled “Protection of Employer’s Confidential/Proprietary Information.”
- Instead of signing an Employment Agreement, the employee can sign a Confidentiality and Non-Disclosure Agreement that (i) delineates what is confidential and proprietary to the supplier and (ii) prohibits the employee from taking such confidential and proprietary information with him if he leaves his employment.
- The supplier can produce an employee handbook that has a section entitled “Protection of Employer’s Confidential/Proprietary Information.” The supplier can have the employee execute an acknowledgment that he has read and will adhere to the requirements set out in the handbook.
Awareness of HIPAA
The documents described in the preceding three bullets should also contain language that (i) states that the supplier and its employees are required to comply with HIPAA; (ii) any information that can lead to the identification of patients falls under the HIPAA definition of “Protected Health Information” or “PHI;” and (iii) the employee cannot use or disclose PHI without the permission of the supplier.
Most states are “at-will” states, meaning that employees are employed at the discretion of the employer. Generally, in an “at will” state, the employer can terminate the employee at any time, without cause.
In order for the employee to be subject to a covenant not to compete, then the employee will normally need to sign an Employment Agreement that contains a section entitled “Non-Competition Covenant,” or similar wording. But then the question arises: “Is an agreement not to compete enforceable?” The answer to this is determined by state law. The law varies from state to state. However, in most states a covenant not to compete is enforceable if certain conditions are met.
An Employment Agreement may contain a clause that forbids the employee from competing with the employer during and after leaving employment. Agreements not to compete are only enforceable if reasonable. Many state statutes set out requirements similar to the following for enforceable non-competition covenants:
- The covenant must be ancillary to an otherwise enforceable agreement;
- The covenant must be supported by independent valuable consideration; and
- The covenant must contain reasonable limitations as to the time, geographic area, and scope of activity to be restrained that do not impose a greater restraint than is necessary to protect the goodwill or other legitimate business interest of the employer.
In many states, a covenant not to compete executed at the beginning of or during an at-will employment agreement is unenforceable because it is not ancillary to an otherwise enforceable agreement.
The level of “independent valuable consideration” required to support a covenant not to compete is an open question. Some courts have stated that “special training or knowledge acquired by an employee during employment may constitute independent valuable consideration.” In most states, continuation of an at-will employment agreement is insufficient consideration to support a covenant not to compete.
Generally, in order to be enforceable, a covenant restricting employment must be reasonable. It must have reasonable limitations as to time, area and activity and propose no greater restraint or restriction than necessary to protect the employer’s legitimate business interests. Where unreasonable, some courts will reform the restrictive covenant.
In most states, the following apply:
- A covenant not to compete must be supported by “independent valuable consideration.”
- What constitutes “independent valuable consideration” varies. It may include special training and knowledge (subject to adequate proof) as well as confidential and proprietary information or stock options.
- A covenant not to compete entered into by an employee who performs his work in a particular state will normally be construed under the law of that state.
In order to enter into an enforceable covenant not to compete with an employee, an employer can try one of the following: (i) offer an Employment Agreement for a definite term with a “for cause” termination provision (thus resolving the employment at-will problem); or (ii) provide “independent valuable consideration” to the employee and recite the same in the covenant not to compete agreement.
The employer should also consider including several additional provisions to make the document more reasonable on its face. For example, the employer should consider (i) identifying the employer’s interests to be protected; (ii) including an acknowledgment by the employee that the employer will suffer irreparable harm, requiring injunctive relief, if the agreement is violated; and (iii) providing the employee with the option of obtaining the employer’s acknowledgment that the employee’s new employer is not a competitor within the meaning of the agreement.
Steps to Take When the Employee Leaves and Violates His Duties to the Supplier
Let us look at several scenarios:
- Employee Agreed to Nothing – Assume that the employee did not sign anything and was not made aware of his duties to protect the supplier’s confidential/proprietary information. It is likely that state law has a statute that affords protection to an employer’s confidential/proprietary information. If such a law exists, then the supplier can send a “cease and desist” letter to the departed employee and his new employer that states that under state law, neither of them can use the supplier’s confidential and proprietary information. Likewise, the letter can point out that HIPAA prevents the departed employee and his new employer from having possession of, using, and/or disclosing PHI.
- Employee Agreed to, or is Otherwise Made Aware of, his Obligation to Maintain the Confidentiality of the Supplier’s Confidential/Proprietary Information – Assume that the employee has not signed an Employment Agreement but has signed a document acknowledging his obligation not to have possession of and/or use or share the supplier’s confidential/proprietary information. The supplier can send the same type of “cease and desist” letter as the one described in the preceding bullet.
- Employee Signed Employment Agreement With a Non-Competition Provision – Assume that the employee signed an Employment Agreement with an enforceable non-competition provision. The supplier can send the same type of “cease and desist” letter as the one described in the preceding two bullets. In addition, the letter can point out that the employee is prohibited from competing against the supplier in accordance with the terms of the non-competition provision. The letter can state that the new employer is also potentially liable under a tort theory such as collusion, conspiracy, unfair competition and tortious interference.
Such a “cease and desist” letter may be enough to convince the departed employee and his new employer to take the following steps: (i) the departed employee and his new employee will not use the confidential/proprietary information and PHI and, in fact, will return the information/PHI to the supplier, and (ii) if the employee had signed an enforceable non-competition provision, then the departed employee and his new employee will adhere to the restrictions of the non-competition provision.
If the “cease and desist” letter does not achieve the desired result, then the supplier can file a lawsuit against the departed employee and his new employer. The lawsuit can be based on breach of contract and/or the tort theories discussed above. The lawsuit can request a temporary restraining order (“TRO”) that, if signed by the judge, stops the former employee and his new employee from engaging in the objectionable actions until a hearing his held before the court. At the hearing, the court can (i) convert the TRO into a temporary injunction that will remain in effect until trial or settlement or (ii) dissolve the TRO and not grant a temporary injunction. Going to court is expensive and time consuming…and should be used only as a last resort.
AAHomecare’s Retail Work Group
The Retail Work Group is a vibrant network of DME industry stakeholders (suppliers, manufacturers, consultants) that meets once a month via video conference during which (i) an expert guest will present a topic on an aspect of selling products at retail, and (ii) a question and answer period will follow. The next Retail Work Group video conference is scheduled for September 12, 2019, at 11:00 a.m. Central. Kevin Brown, All-Star Medical, will present “Finding Your Retail Niche.” Participation in the Retail Work Group is free to AAHomecare members. For more information, contact Ashley Plauché Manager of Government Affairs, AAHomecare (firstname.lastname@example.org).
AAHOMECARE’S EDUCATIONAL WEBINAR
Steps to Successfully Buy and Sell a DME Supplier
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C. & Tom A. Knapp, Esq., Brown & Fortunato, P.C.
Thursday, September 19, 2019
3:00-4:00 p.m. EASTERN TIME
When a person intends to buy … or sell … a DME supplier, there are a number of documentation and regulatory issues that must be addressed. First, the seller must take a number of steps to make itself more “attractive.” The buyer and seller need to decide whether the transaction will be an “asset” sale or a “stock” sale. The parties will need to engage in the normal transactional steps: (i) mutual nondisclosure agreement, (ii) letter of intent, stock purchase agreement/asset purchase agreement, and (iii) other closing documents.
The buyer will need to engage in three types of due diligence: financial, corporate and regulatory. And the parties will need to meet a number of regulatory requirements such as submitting change of ownership notifications.
This program will discuss all of these (and other) issues associated with the purchase and sale of a supplier. Register for Steps to Successfully Buy and Sell a DME Supplier on Thursday, September 19, 2019, 3:00-4:00 p.m. ET, with Jeffrey S. Baird, Esq. and Tom A. Knapp, Esq., of Brown & Fortunato, PC.
Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Texas. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or email@example.com.