Puerto Rico Supreme Court validates non-compete clauses in independent contractor agreements

For the first time, the Puerto Rico Supreme Court has upheld the validity of non-compete clauses in contracts with independent contractors, specifically in the healthcare sector, and, in doing so, it has established the framework for their enforcement. In this alert, we outline the Court’s opinion in MCG Therapy Group LLC v. Maestre Rivera and set out key takeaways for entities that rely on non-compete protection in their professional services arrangements.

Background

The decision arose from a dispute over a non-compete clause in a professional services contract between MCG Therapy Group LLC (MCG) and a psychologist engaged as an independent contractor. The clause prohibited the psychologist from serving, for one year after resignation, the same special education students that she had treated through the company.

After the psychologist began contracting directly with the Puerto Rico Department of Education while still providing services to MCG, the company sued for breach. Lower courts dismissed the claim, holding that the assignment of the contract to MCG required a separate written ratification of the non-compete. The Puerto Rico Supreme Court reversed, holding that the assignment was valid, the non-compete transferred with the contract, and the restriction was enforceable.

Three justices dissented, raising concerns about public policy in the special education context, the sufficiency of consent to the assignment, and the adequacy of the reasonableness analysis.

Non-compete standards by relationship type

Employer–employee relationships

The Court reaffirmed the strict Arthur Young standard, which requires the employer to demonstrate a legitimate business interest tied to the employee’s role and to ensure that any restriction is narrowly tailored in object, limited in duration to twelve months, and limited in geographic or client scope. The non compete must also be supported by adequate consideration beyond mere continued employment, and it must be set out in a written agreement reflecting clear consent and valid contractual cause.

Failure to meet these requirements renders the clause null as contrary to public policy.

Franchise and business sales relationships

Under Martin’s BBQ, courts apply a more flexible reasonableness test in franchise and business contracts, recognizing the commercial nature of these agreements. Territorial and activity restrictions must be reciprocal and tied to protecting the franchisor’s competitive position. Courts will not rewrite overbroad clauses.

Independent contractor relationships: A new standard

For the first time, the Court articulated a standard for non-compete clauses in independent contractor agreements. The reasonableness test applies but with greater flexibility than in employment relationships, reflecting the contractor’s greater autonomy and bargaining power.

Key factors include the contractor’s proximity to clients, the extent to which the contractor possesses specialized knowledge that could facilitate client solicitation, and the nature of any training provided by the contracting entity. Courts also consider broader equitable principles aimed at preventing unjust enrichment and ensuring that the contractor does not unfairly benefit from relationships or advantages developed through the contracting party’s structure.

Legitimate interests supporting non-compete clauses in this context include protection of institutional clientele, prevention of disintermediation, safeguarding goodwill, and continuity of client contracts.

Healthcare and professional services: Public interest considerations

The Court emphasized that healthcare related non compete clauses require heightened scrutiny because of the public’s interest in maintaining access to essential services, though such clauses are not inherently invalid. Courts must balance the contracting entity’s legitimate commercial interests with the availability of other providers, the risk of monopolization or service shortages, and the public’s interest in preserving meaningful choice among healthcare professionals. Restrictions limited to specific clients, rather than broad geographic bans or blanket restrictions on professional practice, are more likely to withstand review.

Contract assignment and transferability of non-compete clauses

A central holding in MCG Therapy Group LLC v. Maestre Rivera is that a valid assignment transfers all rights and obligations, including non-compete clauses, unless the contract provides otherwise. The Court held that assignments do not require a specific form and may be perfected through tacit consent, in addition to holding that continued performance after notice of assignment constituted such consent. A separate written ratification of the non-compete was not required.

Practical guidance for clients

Clients are encouraged to review existing non compete provisions for independent contractors to ensure that they comply with the newly articulated reasonableness standard and prioritize restrictions tied to specific clients rather than broad territorial or industry wide prohibitions. Provisions should also clearly articulate the legitimate business interest being protected, such as preventing disintermediation, safeguarding goodwill, or avoiding client diversion, and tailor the restriction to that specific risk. Adequate consideration must be confirmed, whether through higher fees, access to client networks, or specialized training.

In addition, clients may document any contract assignments and retain evidence of notice and continued performance to establish tacit consent. In the healthcare and education sectors, it is essential to account for the public interest by avoiding restrictions that could limit access to essential services or create service gaps. Finally, non compete clauses should be drafted narrowly, as courts will not modify overbroad provisions and will instead declare unreasonable restrictions null in their entirety.

For more information, please contact the authors.