Whether existing covenants not to compete (“non-competes”) will survive a business acquisition may influence the decision to proceed with the acquisition or may impact the anticipated success underlying the acquisition. Critically, the manner in which the acquisition is structured may determine the validity of non-competes between the acquired company and its employees. Thus, in Nevada, what may make the most sense from a tax perspective may not make the most sense from a business perspective.
An Example
An important client informs you that her company intends to acquire a competitor. The client explains that the primary reason for acquiring the competitor is the established relationships members of the competitor’s sales staff have with valuable customers not currently served by the client’s company. The client anticipates the acquisition will provide the company with immediate access to customers it otherwise had little chance of serving, which in turn will expand the company’s customer base and increase its revenues. The client has been advised that each member of the competitor’s sales staff is subject to a non-compete which essentially prevents him or her from engaging in the same business within the client’s sales area for a period of two years.
The client asks you for your advice on how to structure the transaction. Under the circumstances, it appears to be more advantageous from a tax perspective to acquire the competitor via an asset purchase rather than a merger. You advise the client as such, and the client, who is always in favor of minimizing her company’s tax burden, acquires the competitor via an asset purchase.
Shortly after the acquisition, three of the former competitor’s star salespeople leave the company and start their own business in competition with the company. To make matters worse, these salespeople take many of the customers they have served to their new business. These salespeople have rebuffed your client’s demands that they cease violating their non-competes, stating that they have been advised by their attorney that the non-competes are invalid as a consequence of the acquisition. Did the decision to structure the acquisition as an asset purchase undermine the anticipated benefits of the acquisition? Quite possibly.
The Basics
While it is beyond the scope of this article to explore the nuances of non-competes, some background is in order to provide context for the issue. A non-compete is an agreement in which a person or business agrees not to compete with another person or business for a specific period of time, within a specific geographic area. Non-competes typically arise as part of an employment agreement or in conjunction with the sale of a business.
There exists a common misconception that covenants not to compete are not enforceable. While this may be true in some jurisdictions, it is not true in Nevada. In Nevada, non-competes are enforceable so long as they do not impose “any greater restraint than is reasonably necessary to protect the business and goodwill” of the person or entity benefitted by the non-compete. Hansen v. Edwards, 426 P.2d 792, 793 (1967). The primary considerations in determining the reasonableness of a non-compete are (1) the duration of the restriction and (2) the geographic scope of the restriction. Id. Nevada courts have, in fact, found enforceable non-competes restricting the activities of physicians and, yes, accountants. See id.; see also Sheehan & Sheehan v. Nelson Malley and Co., 117 P.3d 219 (Nev. 2005).
Although not per se unenforceable, non-competes are disfavored by the law, and courts will strictly construe them. Consequently, care must taken by employers and sellers of businesses who desire the protection afforded by non-competes to craft the non-competes in such a manner so as to maximize the likelihood of enforcement. This is another topic altogether.
Mergers, Asset Purchases, And The Assignability Of Non-Competes
In a situation involving the acquisition of a business with existing non-competes, the structure of the transaction could determine the enforceability of the non-compete. Two relatively recent Nevada Supreme Court decisions have brought the issue to light.
In Traffic Control Services, Inc. v. United Rentals Northwest, Inc., 87 P.3d 1054 (Nev. 2004), the Nevada Supreme Court addressed whether a covenant not to compete could be assigned when a business was acquired by means of an asset purchase. The Court held that, because non-competes are personal in nature, they are “unassignable as a matter of law, absent the employee’s express consent.” Id. at 1058. Consequently, the Court held that in order for a non-compete to be assignable, there must be (1) an express clause permitting the assignment of the covenant and (2) additional and separate consideration given in exchange for the covenant itself (i.e. something more than continued employment must be given by the employer in consideration for the assignability. Ordinarily, courts will not inquire into the adequacy of consideration; as such, a nominal payment (e.g. $50 or $100) or some other additional benefit should be sufficient). Id. at 1059. Since the non-compete lacked these requisites, the Court effectively invalidated the non-compete, holding that it could not be assigned to the acquiring entity.
Five years later, the Nevada Supreme Court addressed the issue in the context of a merger and reached a different result. See HD Supply Facilities Maintenance, Ltd. v. Bymoen, 210 P.3d 183 (Nev. 2009). In Bymoen, the court recognized the “hard-and-fast distinction” between mergers and asset purchases. Unlike asset purchases, mergers are creatures of statute in which two entities effectively become one, with the surviving entity having all the contractual rights and liabilities of the entity merged into it. Based upon this principle specific to mergers, the Court held that the restrictions on the assignability of covenants not to compete applicable to asset purchases do not apply to mergers and found the non-competes enforceable.
An application of these principles to the example above reveals that the client’s tax driven decision to structure the acquisition as an asset purchase may have undermined the very purpose for the merger. Unless the non-competes contained provisions in which the (former) competitor’s salespersons agreed to the assignability of their non-competes and received independent consideration for them (provisions that are often missing from non-competes), the non-competes would be deemed unassignable and thus unenforceable by the company. This would leave the salespeople free to compete with the company and take with them the customers who were the primary reason for the acquisition.
The client potentially could have prevented the loss of these customers if the competitor had been acquired through a merger because the non-competes would vest with the client’s company regardless of whether there was a specific assignability provision and independent consideration. As indicated above, however, a merger would have caused unfavorable tax consequences.
As the above illustrates, when it comes to non-competes, good tax planning may lead to unintended, and ultimately unfavorable consequences in a business acquisition if the legal consequences of a particular structure are not considered.
This article is for general informational purposes only. It is not intended as professional counsel and should not be used as such. As legal advice must be tailored to the specific circumstances of each case, nothing provided herein should be used as a substitute for advice of competent counsel. Your use of the information contained in this article does not create an attorney-client relationship between you and the author or Bailey Kennedy, LLP.
Joshua M. Dickey is a shareholder in the Las Vegas-based firm Bailey Kennedy. His legal practice focuses on complex civil litigation, including disputes in such areas as commercial law, corporate law, business torts, and constitutional law. He is a member of the State Bar of Nevada’s disciplinary board and is on the editorial staff of the Nevada Civil Practice Manual. Reach Joshua Dickey by calling 702-562-8820 or email JDickey@BaileyKennedy.com.
They say “Green is the new Black,” but in the legal industry, making the change to a sustainable office and work environment can be an overwhelming task. With planning and organization, even the least energy-efficient firm can do its part to conserve.
Though Las Vegas is a relatively new city, many of its firms are in some of its oldest buildings. The decision to go green is not as easy if you are in an older building or are a tenant with little control over the materials used in your office. For those who own their own buildings, major changes can be costly but have effects beyond their long-term energy savings. To best decide how you can green your own office, first identify your reasons.
Why Go Green?
Energy efficiency and sustainability are no longer buzz words used by those in the industry. Clients and employees alike see them as a responsibility of our profession. Among the reasons firms have determined for improving their efforts in these areas are:
At my firm, we had the opportunity to implement energy efficiency when we moved into our new office. There are multiple sources of light for each room, allowing us to turn off the majority of the lights when the room is not being used, but still leave a little ambient lighting on.
When it comes to paper, law firms have traditionally been a paper company’s best friend. But you can reduce your paper consumption and costs considerably when incorporating easy modifications as our firm has done:
Celebrate Earth Day
April 22 is Earth Day. Why not use it as an opportunity to get staff members thinking of ways to go green? Issue a challenge: every person (or team) comes up with one idea to make the office more energy efficient. Your legal administrator can choose the best one and implement it. The winning person or team gets a prize, and it can become an annual firm activity. It’s that easy!
Appoint a Green Leader
Let your staff take control of the initiative. Most associate attorneys, interns and young employees have grown up knowing the importance of conserving energy. You’ll give them a leadership opportunity and allow them to hone their problem-solving skills. Task them with finding fun ways to help everyone develop good habits like:
Some firms encourage friendly competitions between floors or teams to see who can be the most green and they accumulate points for making good choices or receive “penalties” when they forget.
When Your Office Is Not Your Own
If your firm is a leased property, open a dialogue with building management to discuss opportunities for sustainability. Is there an opportunity to negotiate the lease agreement if you make energy-saving modifications? You can also help identify mutually beneficial opportunities that will help management enhance their offerings and both attract and retain tenants.
Implement some or all of the measures firms across the country have taken:
You don’t need to take your firm green in one fell swoop. Even incremental changes can have a big effect in the long run. Taking small steps will eventually lead to a big change…in your organization, your city and your planet. They are worth it!
Alice O’Hearn is the Legal Administrator for Bailey Kennedy, LLP. After working nearly fifteen years as a legal secretary at Lionel Sawyer & Collins, she helped John R. Bailey open his law practice in 2001. That solo practice has evolved into Bailey Kennedy, a 12-lawyer firm with 28 employees and three “Best Places To Work” awards. Alice serves on the Board of Directors for the Las Vegas Chapter of the Association of Legal Administrators. An avid supporter of racing greyhound rescue, she has been a copy editor for the award winning Celebrating Greyhounds Magazine for nine years. Her own recycled racers are named Bailey and Kennedy.
First, a disclaimer. While I am an attorney, I may or may not be YOUR attorney. Keep these helpful tips in mind should you ever find yourself being served with a subpoena. Then call your legal counselor.
You may know your business like the back of your hand, but would be lost if you were ever served with legal documents. In today’s challenging economy, more and more businesses are finding themselves in legal battles with former partners, parent companies, former clients and even employees.
Sometimes a party in a lawsuit or trial needs witnesses and evidence from persons not a part of the litigation. To get this evidence, the litigating party issues a subpoena.
A subpoena is a court order that requires either the production of documents and things or the presentation of a witness for testimony at a deposition, a hearing, or trial. You are being required by the court to provide these at a specified time and place.
The subpoena may be served upon you in your individual capacity, or it could be served upon you as a representative of your business. Your attorney will be able to advise you as to how best to respond to these two very different types of subpoenas.
Keep in mind that a subpoena doesn’t mean you’ve done anything wrong. However, you must do what the subpoena asks of you or risk fines (or even jail time) for contempt of court.
If you ever receive a subpoena, it will be delivered by a representative of the court or a process server. Before he or she leaves you, make sure that A) the subpoena is actually intended for you and not someone with a similar name and B) you understand what is being required of you. If you receive a subpoena in any other manner, for instance, by mail, contact your attorney to determine if the subpoena was legally served upon you.
As soon as you receive the subpoena, you should take certain steps to protect your interests. First, be sure to preserve all documents related to the subject matter of the subpoena so that you will not risk being charged with obstruction of justice. This may include making adjustments to your computer system to prevent automatic deletions of emails and files and automatic over-writing of other electronic information. Find a lawyer and speak only to him or her about the subpoena. Do not confide in friends or contact others who may be in the same situation, since they may be cooperating with the authorities and could end up testifying in court against you.
While the judicial system is designed to protect people, be aware that the system is adversarial in nature. The court will not take pity on your work or vacation schedule. If you receive a subpoena, you should plan on appearing when and where you are told to do so.
And of course, you should call an attorney if you receive a subpoena. They can help you understand what is being asked of you and help you navigate the process.
Sarah E. Harmon is an attorney with Bailey Kennedy, Attorneys At Law. Her firm focuses primarily in litigation, healthcare law and administrative law. Contact Sarah at SHarmon@BaileyKennedy.com or by phone at 702-562-8820.
Guidelines for the Retention of Medical Records in Nevada
It is axiomatic that all patients are eventually released from a healthcare provider’s care. Following a patient’s discharge (or death), providers may wonder how long they should retain a patient’s medical records. There is no law requiring medical records to be destroyed after a certain amount of time has passed following a patient’s discharge. If storage space and means permit, healthcare providers are certainly permitted to store and maintain all of their patient records. However, for most providers, storage space is becoming increasingly limited and costly, which necessitates medical record retention policies that are both legally and practically adequate and cost-efficient.
In formulating medical record retention policies, providers should consider: 1) Nevada laws governing the retention of certain medical records; 2) federal laws relevant to the retention of medical records; 3) Nevada’s statute of limitations relating to medical malpractice claims; and 4) other practical considerations relating to the retention of medical records.
Nevada Law Governing Medical Record Retention
Nevada law requires providers of healthcare to maintain patient records for five (5) years following the date on which the patient record was created. This applies to all providers of healthcare, including licensed physicians, licensed dentists, licensed nurses, registered physical therapists, licensed psychologists, chiropractors, medical laboratory directors or technicians, and licensed hospitals and their employees.
In complying with Nevada’s five-year medical record retention requirement, patient records “may be retained in written form, or by microfilm or any other recognized form of size reduction, including, without limitation, microfiche, computer disc, magnetic tape and optical disc, which does not adversely affect their use…” Further, physicians who have performed an abortion are required to maintain certain medical records relating to the abortion for at least five (5) years after it is performed.
Federal Law Relevant to Medical Record Retention Policies
In addition to Nevada laws governing the retention of medical records by providers of healthcare, there are also a number of federal laws that may impact a
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See NRS § 629.051.
NRS 41A.017.
Id.
NRS 442.256 (providing that a “physician who performs an abortion shall maintain a record of it for at least 5 years after it is performed. The record must contain: 1. The written consent of the woman; 2. A statement of the information which was provided to the woman pursuant to NRS 442.253; and 3. A description of efforts to give any notice required by NRS 442.255.”).
provider’s obligation to retain a patient’s medical records. Principal among these include the following:
Medicare and Medicaid
As a condition of a hospital’s participation in the Medicare and Medicaid program, hospitals are generally required to retain the medical records of Medicare and Medicaid patients in their original or legally reproduced format for a period of at least five (5) years. Further, Medicare and Medicaid regulations require Critical Access Hospitals to retain medical records for at least six (6) years from the date of the last entry, or longer if the records may be needed in any pending proceeding.
The Health Insurance Portability and Accountability Act (HIPAA)
Contrary to popular belief, HIPAA does not mandate that medical records be retained for a certain period of time. Rather, HIPAA requires healthcare providers to retain only certain types of HIPAA documentation for a period of six (6) years from the date of its creation. Documentation that must be retained under HIPAA include a healthcare provider’s policies and procedures relating to HIPAA compliance, and communications or items explicitly required to be in writing or documented under HIPAA. Specifically, these documents include signed authorizations for disclosure of Protected Health Information, and responses to a patient who wants to either amend or correct a record, among other documents. Further, HIPAA generally provides patients with a right of access to inspect and obtain a copy of their medical records for as long as those records are maintained by the healthcare provider.
Mammography Quality Standards Act (MQSA)
MQSA requires a facility performing a mammogram to maintain the patient’s mammography films and reports for at least five (5) years, or at least ten (10) years if no subsequent mammogram of the patient is performed at the facility.
False Claims Act and the Federal Civil Statute of Limitations
The False Claims Act imposes penalties on persons who present false or fraudulent claims for payment to the United States Government. A false claim that is subject to penalties under the False Claim Act may involve a person who knowingly bills Medicare for services that were not provided. The False Claim Act allows claims to be brought up to six years after the act giving rise to the violation was committed, or three
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42 C.F.R. § 482.24(b)(1).
42 C.F.R. § 485.638(c).
See 45 C.F.R. § 164.530(j)(2).
See 45 C.F.R. § 164.530(j)(1).
See 45 C.F.R. 164.508(b)(6); 45 C.F.R. 164.526(f).
See 45 C.F.R. § 164.524(a).
21 C.F.R. 900.12(c)(4).
31 U.S.C. § 3729.
(3) years after the acts material to the false claim are known or reasonably should have been known by the United States Government, but in no event more than ten (10) years after the date on which the violation is committed, whichever occurs last. Further, the federal statute of limitations for civil penalties under a Federal Health Care Program is six (6) years.
Retention of Medical Records for Purposes of Medical Malpractice Lawsuits
A patient’s medical records have often been described as the single most important piece of evidence in a medical malpractice action. Without medical records, a healthcare provider may not be able to establish that the treatment provided to plaintiff met the standard of care. Additionally, providers should be aware that there are severe penalties for destroying or spoliating medical records that are relevant to potential or pending litigation.
Nevada’s statute of limitations generally requires that medical malpractice actions be brought within three (3) years from the date of injury, or one (1) year after the plaintiff should have reasonably discovered the injury, whichever occurs first. However, merely maintaining medical records until the statute of limitations has passed is inadequate for a number of reasons.
First, the statute of limitations is merely an affirmative defense which may lead to the dismissal of plaintiff’s claims after the suit is filed. However, it does not preclude a suit from being filed against the healthcare provider in the first place.
Second, there are certain exceptions that toll the time under the statute of limitations. For example, Nevada’s statute of limitations regarding medical malpractice claims is extended to the extent that a provider has concealed any negligent act upon which a plaintiff’s action is based.
Third, Nevada’s statute of limitations does not apply to many types of suits filed against healthcare providers. Nevada’s statute of limitations relating to medical malpractice actions applies to claims based upon the professional negligence of a healthcare provider. Under Nevada’s medical malpractice statute, professional negligence is defined as “a negligent act or omission to act by a provider of health care in the rendering of professional services.” Consequently, the statute of limitations does not apply to actions not based upon professional negligence, including actions involving intentional torts, criminal misconduct, fraud and other suits where a patient’s
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31 U.S.C. § 3731(b).
See 42 C.F.R. § 1003.132; see also 42 U.S.C. § 1320a-7a(c)(1).
See e.g., SHARON BARANOSKI & ELIZABETH A. AYELLO, WOUND CARE ESSENTIALS: PRACTICE
PRINCIPLES 36 (Lippincott Williams & Wilkins 2d Ed. 2008); WILLIAM H. ROACH, MEDICAL RECORDS AND
THE LAW 46 (Jones & Bartlett 3d Ed. 2003).
NRS 41A.097(2).
NRS 41A.097(3).
NRS 41A.097(2).
NRS 41A.015.
medical records may be vital to the provider’s defense. Further, Nevada’s statute of limitations typically does not apply to claims made pursuant to federal law, such as claims asserting Medicare billing error against the provider.
Fourth, healthcare providers may want to retain patient records longer than the statute of limitations for tax purposes in order to provide documentation of billing, services rendered, and monies received in case of a tax audit.
Finally, providers should be aware that Nevada has authorized special statute of limitation periods that allow minors to sue for sexual abuse which occurred prior to the plaintiff reaching the age of majority. Suits involving sexual abuse of a minor may be filed within ten (10) years after the plaintiff reaches the age of eighteen (18), or within ten (10) years after the plaintiff discovers, or reasonably should have discovered, that the injury was caused by sexual abuse, whichever occurs later. Providers of healthcare who routinely treat infants and minors should be especially mindful of these provisions when formulating medical record retention policies.
Other Practical Considerations
HMOs, PPOs or other healthcare networks may require participating providers to maintain medical records for a certain period of time. Providers should review any provider contracts they have to determine any contractual obligations they have as a participating provider. With regard to the retention of patient medical records received from other healthcare providers, providers are generally not required to maintain such records if they are not pertinent to the specialty consult or necessary in treating the patient’s condition.
Recommendations
In light of exceptions to the statute of limitations and the numerous types of claims against healthcare providers where the statute does not apply, a provider’s best course of action is to maintain records far beyond Nevada’s five-year statute of limitations. Therefore, the best approach is to retain the medical records of adult patients for at least ten (10) years after the patient has been discharged, and retain medical records of minors until ten years after the minor has reached the age of 18. Further, it is vital that every health care provider implement a clear and consistently applied medical record retention policy in order to reduce the risk of penalties for destroying or spoliating records that are relevant to potential or pending litigation.
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See NRS 11.215.
Id.
See Medical Mutual Insurance Company of Maine, Medical Record Retention Recommendations for
Physician Office Practices, Aug. 2008, http://www.medicalmutual.com/risk/tips/16.php?sP=1.
This article is for general informational purposes only. It is not intended as professional counsel and should not be used as such. As legal advice must be tailored to the specific circumstances of each case, nothing provided herein should be used as a substitute for advice of competent counsel. Your use of the information contained in this article does not create an attorney-client relationship between you and the author or Bailey Kennedy, LLP.