A legal fight between healthcare IT company Change Healthcare and a former executive over a noncompete agreement could drastically change how healthcare employers can restrict their workers' future business opportunities, and lead to increased labor costs, legal experts say.
The dispute involves dueling federal cases in Tennessee and Massachusetts courts. Change Healthcare sued former executive Michael Feeney in Tennessee chancery court in April, alleging that by joining competitor Olive AI, Feeney violated the noncompete terms of his contract. The case has been moved to the state's federal court.
Feeney, a Massachusetts resident, separately sued Change Healthcare in Massachusetts federal court in May, alleging the company's restrictive covenant violates state law around noncompete agreements.
Massachusetts law requires companies to offer former employees pay for the entire length of their noncompete agreement—a policy known as garden leave—or a "mutually agreed-upon equivalent," such as additional stock options. Massachusetts has the broadest garden leave requirements in the nation.
But Change Healthcare didn't offer Feeney either benefit, although he lived and worked in Massachusetts during his three-year tenure, the complaint alleged. Feeney has asked a federal judge to find the noncompete unenforceable.
"Smart companies are redoing their agreements to comply with the law," said Mark Whitney, a Boston-based lawyer representing Feeney. "Change Healthcare did not take the opportunity to fix his agreement. They screwed up."
Change Healthcare declined to comment on pending litigation.
If the Tennessee judge decides the Massachusetts statute applies to the case, the complaint would set a legal precedent that forces any employer with noncompetes that hires workers in Massachusetts to offer garden leave or a similar benefit, said Russell Beck, a partner at the Boston-based Beck Reed Riden law firm who helped draft the state statute on noncompete clauses.
Because such a large portion of Massachusetts' talent pool is based in healthcare and biotechnology, this provision could disproportionately impact those industries, particularly companies hiring remote workers, Beck said.
States have long looked to model their noncompete laws after Massachusetts.
The Uniform Law Commission, a non-partisan group of lawyers that writes legislation for states to adopt nationwide, modeled its 2021 noncompete law after the Massachusetts statute. The group recommended states require businesses with noncompetes to offer individuals garden leave—payment of at least 50% of their base salary for the 12 months they are barred from working for competitors—or an agreed upon equivalent.
In July 2021, President Joe Biden issued an executive order asking the Federal Trade Commission to "curtail the unfair use of noncompete clauses," calling out the practice in healthcare specifically.
This year, states have introduced at least 30 bills focused on ending the practice of noncompetes in healthcare, Beck said.
"The healthcare industry itself is definitely one of the areas of focus for states," he said. "There's a real public policy issue of whether whether people in the healthcare industry should be subjected to noncompetes."
Massachusetts law bans physicians, psychologists, social workers and nurses from being forced to sign noncompetes. Its statute regarding garden leave also states that the provision must be applied to anyone who has lived or worked in the state for at least 30 days, even if their company is based elsewhere. But there has yet to have been a case that has tested the strength of this statute for out-of-state companies, Beck said.
"The Massachusetts statute is so new," Beck said. "Most lawsuits involving noncompetes involve people who have been at the company for some amount of time. It's only been about three and a half years since the statute became effective. This is going to be a big issue."
In November 2018, Feeney accepted a job as chief of staff at Change Healthcare's technology-enabled services business unit and, two years later, was promoted to vice president of operations transformation for physician revenue cycle management, according to the Change Healthcare lawsuit. As part of his employment agreement, and subsequent equity grants he was awarded over the years, he agreed not to work for a competitor, disclose trade secrets or solicit current or prospective Change Healthcare customers for 12 months, the lawsuit alleged.
As part of his employment contract, he also agreed to personal and exclusive jurisdiction in Tennessee law, according to Change Healthcare's complaint.
Accepting the role of senior vice president of provider market operations at Olive represents a breach of contract, Change Healthcare alleged.
"The confidential information to which he had access in his role at Change Healthcare will provide Olive and Feeney with a significant competitive advantage," the Change Healthcare lawsuit said. "It is inevitable he would disclose confidential information regarding Change Healthcare's products, processes and services to Olive."
Both Feeney and Olive are confident he can perform his new job without violating Change Healthcare's nondisclosure agreement, Feeney's complaint said.
Olive, which is not named as a defendant, did not respond to an interview request.
The dispute highlights why more companies have started paying employees not to work or compete, said John Bauer, a partner at the law firm Lawson & Weitzen in Boston and an adjunct professor at Suffolk University Law School, where he teaches a course on trade secret law.
"There's definitely reform efforts going on right now in states, and now the federal government is getting involved," Bauer said. "Garden leave could rise in other states. I almost never saw garden leave prior to this bill."