Liquidated Damages Affirmed for Breach of Non-Solicitation Agreement

The Fourth Circuit Court of Appeals has affirmed a Western District of Virginia ruling upholding a non-solicitation clause in a contract for trained personnel. ProTherapy Associates, LLC contracted with nine nursing homes to provide and train licensed physical and occupational therapy and speech/language pathology personnel. To protect its interests, it included in each contract a restrictive covenant precluding the nursing homes from “directly or indirectly” soliciting or hiring Pro Therapy employees:

“Non-Solicitation. During the term of this Agreement and for one year thereafter, [the nursing home] shall not, directly or indirectly, for [the nursing home] or on behalf of any other person or business entity for the benefit of [the nursing home]: (a) solicit, recruit, entice or persuade any Therapists or other employees or contractors of [ProTherapy] who had contact with [the nursing home] pursuant to this Agreement to become employees or contractors of [the nursing home] responsible for providing services to Patients like the Services hereunder; or (b) employ or use as an independent contractor any individual who was employed or utilized as a contractor by [ProTherapy] for the provision of Services at any time during the twelve (12) months prior to such proposed employment or contracting. Recognizing that compensatory monetary damages resulting from a breach of this section would be difficult to prove, [the nursing home] agrees that such breach will render it liable to [ProTherapy] for liquidated damages in the amount of ten thousands dollars ($10,000) for each such individual.”

When the nursing homes asked for a rate reduction, ProTherapy provided a new contract with the same clause. The contract also permitted either party to terminate the contract with 90-days’ notice. Just weeks later, the parent company of the nursing liquidate.jpghomes gave ProTherapy 90-days’ notice and hired Reliant Pro Rehab, LLC to do the same job at a lower cost. During the remaining 90-day period, Reliant began recruiting ProTherapy’s personnel who were still working in the nursing homes. Reliant was able to meet with them because the nursing homes provided lists of the ProTherapy personnel and helped make them available. As a result, Reliant hired sixty four of the ProTherapy therapists for its contract.

ProTherapy sued the nursing homes for violating the non-solitication clause, asking for $10,000 per poached employee, in accordance with the liquidated damages clause, for a total of $640,000. ProTherapy argued the nursing homes, through Reliant, indirectly solicited and employed the very employees the non-solicitation clause prohibited them from employing.

The nursing homes claimed Reliant, alone, was responsible. They also argued the non-solicitation clause was unenforceable under Florida law which generally prohibits contracts in restraint of trade unless the party invoking the restrictive covenant shows it was reasonably necessary to protect a legitimate business interest. The parties agreed Florida law applied. The nursing homes further argued the liquidated damages clause amounted to an unconscionable penalty rather than attempting to provide legitimate compensatory damages.

The district court found the nursing homes indirectly hired the therapists within the period contemplated by the non-solicitation clause, noting they could simply have prohibited Reliant from hiring ProTherapy employees or could have gotten Reliant to indemnify them for improper hiring practices. Instead, they gave the personnel lists to Reliant and made the employees available to Reliant recruiters. The court upheld the non-solicitation clause as a reasonably necessary restriction to protect ProTherapy’s legitimate business interests and awarded ProTherapy $640,000 in liquidated damages plus attorneys’ fees, calling it a “modest sum” in light of the expenses the company had incurred to train the employees only to have Reliant appropriate them.

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