What follows is one of the most absurd, complicated, fantastical non-compete-related disputes that I have ever seen. This is going to be a long one.
The Major Players
In 1997, two individuals in Pennsylvania formed a company called Freedom Medical, Inc. Freedom Medical engages in the business of buying and selling medical equipment. In 1999, Freedom Medical hired Gregory Salario as a salesman. Within a few years, Salario was promoted to vice president of sales for a territory covering the eastern half of the country and Texas. At the time of his hiring, Salario signed an employment agreement that contained non-disclosure and non-solicitation provisions. In 2001, Salario signed a new, more robust agreement that contained similar provisions, along with a non-compete clause. These restrictions applied only to an area within a 75 mile radius of any Freedom Medical office where Salario had worked, but exempted the state of Louisiana.
In 2001, while working at Freedom Medical, Salario and two other employees, George Rivera and Thomas Gillespie, started their own competing company: Harbor Medical, LLC. At that time, Rivera was the manager of Freedom Medical’s New York branch and Gillespie was vice president of marketing and sales and attached to the corporate headquarters in Pennsylvania. Harbor Medical engaged in only a limited number of transactions. Remember Rivera and Gillespie. They come back later. But for now, let’s stick with Salario.
In 2003, through his work at Freedom Medical, Salario met Gumit Bhatia. Bhatia owned a Texas-based company called Techmate, which serviced equipment for Freedom Medical. In late 2003, Salario and Bhatia decided to form a new company, U.S. Med, to rent, sell and service medical equipment. Given the terms of Salario’s non-compete agreement with Freedom, he was assigned one territory: Louisanna. While the two got U.S. Med up and running, Salario continued working for Freedom Medical and occasionally diverted opportunities from Freedom to either Techmate or U.S. Med. In August 2003, Salario resigned from Freedom and went to work full-time for U.S. Med in Lousianna. During this same time period, Bhatia continued to operate his other company, Techmate, which worked hand-in-hand with U.S. Med, providing a variety of services related to billing, inventory and customer service. In September 2003, two other employees of Freedom Medical left the company to go work for Techmate and U.S. Med.
During much of this time, Salario maintained contact with various Freedom Medical employees. In the spring of 2004, Salario contacted a branch manager in Baltimore and asked him to refer business to U.S. Med. In one instance, Salario learned that an employee was looking to leave Freedom and got her a job with Techmate. And, of course, Salario was in regular contact with Gillespie, his partner from Harbor Medical, who was still working at Freedom. As it turns out, Gillespie had been busy.
In addition to working at Freedom, Gillespie had started yet another company. In late 2003, after George Rivera was terminated by Freedom, he and Gillespie started a company called American Medical Logistics, LLC (“AML”). Again, Gillespie is still at Freedom. AML worked hand-in-hand with U.S. Med. Gillespie frequently diverted business opportunities from Freedom and AML. But Gillespie wasn’t finished. When Freedom began scaling back its operations in the market for emergency medical services equipment, Gillespie saw this as an opportunity. He launched yet another company, Signature Emergency Products, LLC, (“SEP”) which, as expected, started diverting business from Freedom. Gillespie’s partner in SEP, and the final player in this sordid affair, was Clifford Hall. Ironically, Hall beat everyone to the punch: After leaving Freedom back in 2001, Hall had launched his own company, Signature Medical LLC and had been taking Freedom’s business via Gillespie for quite some time.
So, in a nutshell: Between 2001 and 2004, a bunch of people who were employed by Freedom Medical either (1) Started competing ventures while working at Freedom Medical (2) Left Freedom Medical and started competing ventures and (3) Diverted a bunch of business from Freedom Medical to their new companies. Some of these people had non-compete agreements and some of them did not.
The Theft (The Short Version)
On December 29, 2004, Freedom Medical filed Chapter 11 bankruptcy. Unfortunately, for Freedom, things did not get any better. In 2006, Freedom learned that some of its employees were moonlighting for the Signature companies, stealing Freedom’s equipment, and then selling it to Signature Medical. Signature Medical, in turn, would resell, rent or trade the equipment. Upon discovering the theft, Freedom contacted the authorities who launched a criminal investigation into Hall and his Signature entities. Hall was subsequently tried and convicted of offenses related to the theft of the Freedom Medical equipment.
At roughly the same time that Freedom began suspecting Hall and his Signature entities, Freedom also learned that U.S. Med had also obtained a bunch of Freedom’s equipment (apparently without knowing that much of this equipment had been stolen). Ultimately, Freedom identified 75 allegedly stolen items that wound up in the possession of U.S. Med. We are not talking about odds and ends. We are talking about medical equipment, including ventilators, with some individual pieces costing upwards of $10,000. Apparently, U.S. Med had leased some of the equipment from the Signature entities (who stole it from Freedom); bought some of the equipment from Signature (who stole it from Freedom); rented the equipment directly from Freedom, or had the equipment in its possession to service it for Freedom (but just never gave it back). You see, somehow, Freedom had actually been hiring U.S. Med to service some of its equipment and renting U.S. Med some of its equipment. According to U.S. Med, one of the reasons why it did not return certain of Freedom’s equipment that it had taken in to service was because freedom owed U.S. Med money and so U.S. Med was just keeping the equipment for leverage. I kid you not.
I could go on. There is even more to the story, but it’s more of the same: Gillespie started a fake company. There was more diversion of business. Some other things were stolen or went missing. You get the picture. In the end, it appears that Gillespie and Hall were the two principal thieves.
The Civil Lawsuit
As expected, Freedom Medical sued everybody (and rightfully so). Freedom’s lawyers did exactly what I would have done: Alleged a civil RICO claim in addition to a number of state law claims for breach of contract, tortious interference, misappropriation, breach of fiduciary duty and the like. On May 23, 2013, the Eastern District of Pennsylvania granted summary judgment for the certain defendants on the RICO claim, but denied summary judgment on the state law claims, leaving those claims to be decided at trial. This particular phase of the case dealt only with the “U.S. Med Defendants”, which includes U.S. Med, Salario and Bhatia.
As most practitioners know, civil RICO is always a hard sell. In rejecting the RICO claim, the court concluded that the plaintiff had failed to establish the existence of an enterprise. Recent Supreme Court decisions have held that the enterprise requirement (not to be conflated with the pattern requirement) is satisfied where the enterprise has a structure, it represents some distinct entity with its own purpose, relationships and longevity. See Boyle v. United States, 556 U.S. 938 (2009). According to the court’s opinion, although Gillespie was basically the linchpin, and a range of different individuals and corporate entities who operated in concert with Gillespie may have engaged in conduct detrimental to Freedom Medical, that does not necessarily create an enterprise. All of the pieces simply do not fit together into a cohesive whole, especially the U.S. Med Defendants. The US Med Defendants’ conduct was “individually opportunistic,” and not for the benefit of some larger enterprise. Sure, U.S. Med, Salario and Bhatia were in competition with Freedom. Yes, Salario had a non-compete agreement with Freedom and may have violated it. Yes, U.S. Med wound up with some equipment that had been stolen from Freedom. Yes, U.S. Med refused to give Freedom back some of Freedom’s equipment that it had for servicing, claiming that it had the right to keep the equipment to satisfy Freedom’s debts. This may be unfair and this may be ugly, but this does not point to the U.S. Med Defendants’ involvement in a RICO enterprise.
Turning to the state law claims against the U.S. Med Defendants, the court denied the motion for summary judgment and those claims will head to trial. From the record, it appears that there is more than enough evidence for a jury to hold the U.S. Med Defendants liable for things like breach of contract, tortious interference, breach of fiduciary duty, and unjust enrichment. So, while this may not be the stuff of a RICO enterprise (at least for the U.S. Med guys), the plaintiff still has plenty to work with at trial.
The case is Freedom Medical v. Gillespie, 2013 WL 2292023 (E.D. Pa. May 23, 2013).
Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. His office can be reached at 954-332-2380.