Breaching a non-compete clause has consequences

I regularly give continuing-education lectures about non-competition covenants. I write about non-competes, draft and interpret them all the time. Despite of all of that, I still often hear this statement from veterinarians:

"Dr. Allen, I've heard that non-competes are unenforceable, that they aren't worth the paper they're written on."

All I can wonder is, if non-competes are meaningless, why are so many people writing, reading, interpreting, questioning, litigating and listening to lectures about them? The answer is that there is much more to a contractual obligation than merely its enforceability.

First, let me preface my comments by explaining that I believe in non-competition agreements (or non-compete terms, contracts, covenants, clauses, commandments, whatever you want to call them). They serve a specific legal and social purpose; when a fair one is executed, it should be honored.

Businesses hire employees with the express purpose of exchanging labor for money. The employee is compensated for doing work, including professional work, with the mutual anticipation that the employee eventually will leave that employer with the business in the same or similar condition as when the employee arrived.

A veterinarian who violates a fair, negotiated non-competition clause violates this principle. He receives and cashes his paychecks (in an amount to which there was mutual agreement at the outset), and the promised veterinary work is performed.

Doctors who violate their non-competes, (who "take away clients" by subsequently working within a non-compete radius) are taking something from their employers which was neither bargained for nor agreed to. The breaching veterinarian (and "breach" is really the correct term where a non-compete is ignored) is siphoning off a capital interest in the prior employer's enterprise without paying for it.

While most veterinarians would never, ever consider stealing supplies or backing their pickup truck up to the clinic and loading up their boss' ultrasound machine, many have no problem with the idea of signing a non-competition agreement with the full intent of violating it in the future because they do not believe it to be enforceable.

In doing so, the doctor is plotting to take that which he agreed not to take; he is planning to plunder some of the employer's business good will, which is more valuable than an armload of supplies and more difficult to replace than any diagnostic machine.

The upshot is that, in my opinion, a fair and reasonable non-competition agreement between employer and employee makes sense. I further believe that when such an agreement is made it should be honored. The time to consider its fairness is prior to signing — not afterward. A fair and appropriate non-compete (if one is actually necessary, which is not always the case) can be attained through negotiation before the work relationship starts. If the non-compete issue cannot be resolved, then the job, and possibly the boss, may not be a good fit for the job seeker.

That said, let us examine the reality of just how significant the issue of enforceability really is. To do so, imagine that you have signed an employment agreement containing a non-compete term and that you intend to breach it later by working within the proscribed region. Where do you stand, knowing only that you are fairly certain the non-competition term (for whatever reason) is most likely not enforceable?

How much will you bet?

Given these facts, you have two options: You can either go about setting up your own practice within the non-compete area or take a job or partnership offer in that area.

Let's say you consider starting your own hospital. The lease on the new practice space is for five years, and the internal leasehold improvements are going to cost about $50,000. Because you need a staff and are looking to hire, you probably can't keep your deal a secret from your present boss. Therefore, your paychecks stop as soon as he learns of your intended breach.

Add the upfront costs with the contingent lease expenses and you have put quite a few chips on the table. Better hope you are dead right about that enforceability thing.

Perhaps you are shopping for a small-business loan. In today's market, do you think there might be a question on the loan application asking whether your intended use of the funds would violate or abrogate, in whole or in part, existing contractual obligations? OK, so you decide to lie; no biggie.

What happens when you are sued? Do you think you might have any trouble sleeping as the thoughts run through your head regarding your lack of current income and the mounting debt you are accumulating in anticipation of a good outcome at trial?

Oh, yes — you might also toss and turn dreaming about that clause in your loan contract which accelerates payment of the loan balance in the event of a provable material misstatement in the application. (I guess that was a biggie after all.)

How deep are your pockets?

Fair or not, there is some truth to the axiom that civil litigation frequently is won by the party with the most money to spend on it. If you are independently wealthy, it is probably economically feasible to violate a non-competition agreement and plan to prevail. On the other hand, if your ex-employer has more financial dry powder than you do, watch out when his lawyers start loading their muskets.

Employment-contract litigation is not covered by the standard AVMA PLIT insurance. Such litigation usually is paid for, out of pocket, by each side. And the costs mount by the hour — for every memo, telephone call, meeting, e-mail, letter, pre-trial motion, bit of library or internet research, interview and deposition your case demands.

Remember how you make sure that you do a full set of X-rays and blood work on every potentially serious case "just to be thorough and meet the professional standard of care?" Lawyers do the same. They do, and charge for, everything they deem necessary in the legal matter they are handling. It can get pretty expensive: Is your bank account litigation-ready?

Planning to take another job?

Let's say you don't feel that morally obligated to comply with the non-compete you signed "because my boss forced it down my throat." Therefore, you figure it is pretty much OK to just move down the street and work at a competitor's practice. The competitor may not particularly care that you violated your prior non-compete, but remember that the new boss may not be your last boss.

When you decide to move to the next job in town or even to one in another state, is it inconceivable that the owner of that "dream practice" you have been looking for your whole professional life might call the boss you burned and ask him whether you complied with your non-compete?

Personally, I simply ask interviewee veterinarians whether they have ever acted in violation of employment contracts they have signed. They can lie, of course. But if I find out they have done so either before or after they are hired, that fact impacts whether I hire them (I won't) and whether I keep them on any longer than contractually necessary (I don't).

Does it seem unfair to ask? It is dumb not to ask. Employers should always consider whether they are subject to litigation themselves for knowingly encouraging and abetting the violation of another's contract.

The perfect partnership

Finally, what happens when you have early-on violated that non-compete and years later you are considered for partnership at some super-lucrative animal hospital?

I recommend to my large-practice clients that they strongly consider if trustworthiness is important to them in deciding whether to take on someone as a partner.

Inevitably the answer is yes.

If that is the case, I encourage the existing partners to make telephone or letter inquiries to all of the candidate's former employers regarding any contractual violations, both those pursued through litigation and those which were waived.

I also urge that partnership and shareholder agreements contain a "material misstatement" clause permitting the orderly expulsion of a partner or shareholder who previously violated an employment agreement and failed to disclose it to the partnership.

Dr. Allen is president of the Associates in Veterinary Law P.C., which provides legal and consulting services to veterinarians. Call (607) 754-1510 or visit info@veterinarylaw.com