CVS has been dominating the news lately: CVS-Aetna merger, CVS’s free drug deliveries, its efforts to curb opioid epidemic, etc. This post is about a recent litigation commenced by CVS against its ex-executive John Lavin to prevent him from working for a competitor, Pill Pack. After Amazon purchased PillPack last year, CVS’s shares dropped and ever since CVS has been concerned about PillPack’s expansion. Further discussion.
During Lavin’s employment with CVS, he signed a non-compete agreement. After 27 years with CVS, Lavin decided to work in the same position for PillPack. Understandably, CVS panicked and filed a legal action seeking a preliminary injunction for violating the non-compete. Lavin’s lawyers argued that the non-compete was so broad that it effectively prevented Lavin from working anywhere in the pharmaceutical industry and therefore it was unenforceable.
The U.S. District Judge concluded that the non-compete was reasonable and issued an injunction against Lavin. The judge reasoned that because Lavin can use certain trade secrets and internal information to harm CVS’s market, the non-compete in this situation was appropriate. Because Lavin was an executive of the PBM branch – Caremark – the judge ruled that the confidential information obtained and learned while at CVS “poses a significant likelihood of harm.” The position at PillPack was substantially similar as it also involved negotiations between PBM and pharmacies, internal pricing and negotiations, and other proprietary information. And therefore, Lavin could use his knowledge to harm CVS’s share of the market. Lavin filed an appeal.
The healthcare industry is closely watching the case and not for the non-compete application but for any clues on PillPack’s future plans. For example, during a deposition in this case, the PillPack’s chief executive did not deny that PillPack is looking into a PBM model to add to its services.
Are non-compete agreements enforceable?
Non-compete agreements are usually provisions in employment contracts prohibiting employees from working directly or indirectly for any competitor for a certain period of time after terminating the employment .
Contractual relationships are typically governed by state law. But most states disfavor non-compete employment contracts and most courts enforce them only when reasonable or “when the restriction does not extend beyond what is apparently necessary for the protection of those in whose favor they are made.” (As the judge in Lavin’s case said in his opinion).
California, for example, is one of the states that rarely enforces non-compete agreements even if they appear reasonable and narrowly drafted. For a discussion on California’s history and enforceability of non-compete agreements, see Dowell v. Biosense Webster, Inc.case,(2009) 179 Cal. App. 4th 564, 574–75.
Moreover, California Bus. & Prof. Code Section 16600 states:
“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
There are only three statutory exceptions to this prohibition on non-compete agreements:
- One who sells the goodwill of a business, or all of one’s ownership interest in a business entity or substantially all of its operating assets and goodwill, to a buyer who will carry on the business may agree with the buyer not to carry on a similar business within a specified geographic area, if the business will be carried on by the buyer (Cal. Bus. & Prof. Code § 16601) (i.e. a sale of a pharmacy);
- Upon dissolution of a partnership or dissociation of a partner, such partner may agree not to carry on a similar business within a specified geographic area, if the business will be carried on by remaining partners or anyone deriving title to the business or its goodwill (Cal. Bus. & Prof. Code § 16602);
- And a member of a limited liability company may agree not to carry on a similar business within a specified geographic area, so long as other members or anyone deriving title to the business or its goodwill carries on a like business (Cal. Bus. & Prof. Code § 16602.5).
Section 16600 expresses California’s strong “public policy of protecting the right of its citizens to pursue any lawful employment and enterprise of their choice.” See Dowell v. Biosense Webster, Inc.
Unlike in other states, employers operating in California are not advised to add a non-compete clause in their agreements (unless the three above exceptions apply) because an employer’s use of an illegal noncompete agreement may violates the California Unfair Competition Law. (For further discussion on how an illegal non-compete can violate Unfair Competition Laws, see Application Group, Inc. v. Hunter Group, Inc. (1998) 61 Cal.App.4th 881, 906–908).
So if the Lavin’s case was decided by a California court or if California law was applied, the result would likely have been different.