Business

New legislation significantly changes the law regarding covenants not to compete involving physicians.  This new law effective July 1, 2016 (Public Act 16-95) is intended to increase competition among healthcare providers.  While there has never been a really bright line rule for enforcing non-competes in Connecticut, and elsewhere, courts typically considering the “reasonableness” of the restrictions imposed.  With this new law, Connecticut now has a bright line rule limiting physician non-competes to no more than: (a) 1 year; and (b) 15 miles from the “primary site” where the physician practices.

The reasonableness standard that has always applied to non-competes will continue to be important.  In any enforcement action, physician non-competes will continue to be enforceable only if: (a) necessary to protect a legitimate business interest; (b) reasonable in limiting time, geographic scope and practice restrictions; and (c) otherwise consistent with law and public policy.  An important drafting note for non-competes and when making hiring decisions is determining (and defining) “the primary site” to avoid conflicts in interpretation and when more than one location may apply.  The “primary site” where the physician practices” is defined as “the office, facility or location where a majority of the revenue derived from the physician’s services is generated.”  The statute also includes additional restrictions for non-competes entered into, amended or renewed, after the effective date, between hospitals, health systems, medical school or medical foundations allowing these covenants to restrict the physician’s right to practice only with another such entity or foundation.

Also, these non-competes will be void and enforceable against a physician if: (1) the employment agreement was not made in anticipation or part of a partnership or ownership agreement and the agreement expires and is not renewed, unless, prior to the expiration, the employer makes a bona fide offer to renew the contract on same or similar terms and conditions; or (2) the employer terminates the employment or contractual relationship without cause.  It’s important for employers to note that if a non-compete drafted under the new law exceeds the scope of its provisions (both the long existing “reasonableness standard” and the new bright line rule defining the time and geographic limitation from the primary site); or if the physician’s employment or contractual relationship is terminated without cause, or the agreement expires, the non-compete will be utterly void and unenforceable.

Lastly, in order to prevail, a party seeking enforcement must prove: (1) the non-compete complies with the new statute in all respects; (2) that they have not violated its provisions; and (3) that actual damages were suffered.

With the important new requirements under this bill, effective July 1, 2016, we can’t stress enough the importance of reviewing existing physician non-competes before contracts are renewed and having counsel prepare or review non-competes for all new hires to ensure they meet the requirements of this new law.  We welcome inquires on how we can assist.

The Delaware Supreme Court thought so – even though most attorneys and business people, who regularly draft these documents know they’re always meant to be a non-binding expression of the major deal points to see if it makes sense to move forward with a deal and definitive, binding agreement. LOIs almost always state that they’re non-binding and courts in most jurisdictions seem to agree.

So what happened in the Delaware case SIGA Tech Inc. v PharmAthene, Inc. No 314, 2012, 67 A 3d 330 where the LOI was found binding is worth a close look. The parties in this case first entered into a non-binding licensing agreement term sheet (LATS) for a potential licensing deal, but PharmA insisted they explore a merger first. The parties then executed a Merger Agreement, which provided if the merger didn’t close by a certain date the parties would “negotiate in good faith with the intention of executing a definitive licensing agreement in accordance with the terms of the LATS”. The merger failed to close by the deadline. In a fortuitous turn of events for SIGA (but not so fortuitous in light of the high court’s later ruling), National Institutes of Health (NIH) agreed to provide significant funding for a new drug bumping the original valuation from $6mm to $40mm. SIGA refused to go forward with terms it earlier said were acceptable and PharmA, in turn, objected stating the terms were “radically different” from the LATS. SIGA then issued an ultimatum that PharmA negotiate “without any preconditions”. The lawsuit followed.

Even thought the LOI stated it was “non-binding” (most do to avoid potential claims and typically only state the major deal terms), the court found the language in the earlier License Agreement Term Sheet (LATS) incorporated into the merger agreement requiring negotiations “in good faith” compelling. The Delaware Supreme Court upheld the lower trial court’s decision that SIGA acted in bad faith. The Supreme Court went even further finding PharmA could recover “benefit of the bargain damages” (the value of the licensing agreement that would have been entered into but for bad faith) holding the parties were obligated to negotiate toward a license agreement on terms substantially similar if the merger wasn’t consummated. Great result for PharmA, not so much for SIGA.

The moral of the story? Draft carefully and include the most beneficial governing law provisions. LOIs have always been drafted and understood to be a non-binding first step to determine if parties want to move forward with a deal and definitive, binding agreement. What’s in the LOI and peripheral documents (here express good faith language or some other language a court may find binding and compelling enough to award damages) – must be carefully considered. Whether courts outside of Delaware may follow suit and what governing law provisions to include in the LOI must also be carefully considered.

This blog post is prompted by an important, recent decision and case of “first impression” by the Connecticut Supreme Court containing valuable discussion of the special rules governing successor liability – Robbins v Physicians Women’s Health. (See case notes and citation below.) The following is oriented to Connecticut law, but many jurisdictions have similar rules.

How Successor Liability Arises – The General Rules:

Let’s assume a buyer wants to buy an existing business (or portion of a business). While there are many important considerations in a potential sale or purchase, successor liability (and how to avoid it) must be carefully considered. Agreements for business acquisitions are generally structured as either: (1) mergers or stock purchases of a company’s equity; or (2) purchases of the selling entity’s assets. Successor corporations may be liable for the debts and liabilities of the predecessor where there is a merger or consolidation of the two; or where there is a purchase of equity (corporate shares or LLC membership interests). Unlike most asset purchases where assets are typically transferred free of debts and liabilities. But care must be taken to ensure the right result.
Generally speaking, a purchaser can avoid successor liability by purchasing the assets of the selling entity, rather than purchasing the entity, itself. As the high court Robbin’s decision notes,” the general rules of corporate nonliability serve, in effect, as a security blanket to protect corporate successor from unknown or contingent liabilities of their predecessors”. But deals have to be structured correctly to avoid these perils and there are important exceptions.

Exceptions to the Rules Limiting Successor Liability:

As the Connecticut Supreme Court states in the Robbins decision, the rule limiting liability is nonetheless subject to four well-established exceptions. As successor corporation may be held liable for the debts and liabilities of its predecessor when: “(1) there is an express or implied assumption of liability; (2) the transaction amounts to a consolidation or merger; (3) the transaction is fraudulent; or (4) the transferee corporation is a mere continuation or reincarnation of the old corporation.”

The specific issue decided by the Supreme Court in Robbins was limited to: “Did the Appellate Court properly determine that the covenant not to sue executed by the Plaintiff in favor of a corporate tortfeasor does not foreclose imposition of successor liability, as a matter of law, on the subsequent purchaser of that company’s assets?” The Defendant in the case claimed the covenant not to sue executed by the Plaintiff in favor of a predecessor entity (Shoreline) prior to the acquisition by Physicians Women’s Health discharged any action against both Shoreline and its successors. The Supreme Court agreed.

The court found the covenant not to sue persuasive in precluding the Plaintiff from bringing an action against the subsequent purchaser, who later acquired Shoreline’s business. If you intend to purchase a business, it’s imperative that the purchase be structured to provide sufficient protections from these kinds of claims. And the old adage “Buyer Beware” always applies. Purchasers need to conduct appropriate levels of due diligence and have strong contractual provisions they can rely on after the closing to avoid the prospect of any later arising, expensive problems.

(Case Notes: The Robbins decision was published in 304 Conn. 926 and contains an interesting discussion of covenants not sue versus releases and various theories advanced by Plaintiff, including the liability of employers and joint tortfeasors under theories or respondent superior, which the court found unpersuasive “straw man” theories. The underlying case involved a medical malpractice claim that Plaintiff had settled with Shoreline where she provided covenants not to sue in connection with the settlement. Shoreline was later bought out by a successor medical provider and Plaintiff attempted additional recovery from Shoreline’s successor.)