Craft the perfect covenant: Evaluating non-compete clauses and other restrictive contract agreements

Mention the word "non-compete" in a group of veterinarians and you'll most likely get a heated response. A non-compete agreement is a type of restrictive covenant used to limit a veterinarian's activities once he or she leaves a practice. While they're often viewed with disfavor, restrictive covenants can also be a valuable practice management tool. The key is to custom-tailor an agreement that balances the needs of the practice and affected veterinarians, maximizing the benefits and minimizing the pitfalls of their use.

There are three general types of restrictive covenant agreements used in veterinary practice: non-disclosure, non-competition, and non-solicitation. These agreements can stand alone or be included within other contracts, such as employment, partnership, or practice sale agreements. In a few states (such as Alabama, California, Montana, North Dakota, and Oklahoma), restrictive covenants aren't enforceable. So if you practice in one of these states, you can stop reading right now. For the rest of you, it's essential to understand the role restrictive covenants play.

If you're a practice owner and are looking to hire an associate, bring a partner into your ownership structure, or sell your practice, you may be thinking of using a restrictive covenant. Or if you're a veterinarian looking to join a practice as an associate or partner, you may be asked to sign an agreement containing restrictive covenants. No matter what category you fall into, understanding how restrictive covenants can help (or hurt) your interests will help you negotiate a favorable agreement.

LAYING OUT THE PATTERN

First, let's define the three types of restrictive covenants.

Non-disclosure agreements. Non-disclosure (or confidentiality) agreements seek to protect a practice against a current or former employee's unauthorized disclosure of proprietary information, such as details about its clients, fee schedules, referral sources, marketing strategies, business operations, finances, and prospective business opportunities. Some jurisdictions consider this information, including client lists and client contact information, to be "trade secrets" that are entitled to additional protection under the law.

Non-competition agreements. Non-competition agreements restrict a former employee of a practice from working in competition with that practice for a specific period of time or within a certain geographic area. For example, a veterinarian formerly employed by Practice A may be prohibited from establishing a practice or working for a competing practice within five miles of Practice A for one year after the employee's resignation or termination of employment.

Non-solicitation agreements. Non-solicitation agreements prohibit a former employee of a practice from soliciting the practice's contractually protected relationships—such as those with patients, clients, vendors, and referral sources—but otherwise don't hinder the former employee from establishing or working for a competing practice. These agreements can prohibit the former employee from soliciting or hiring the original practice's employees, advertising the establishment of a new practice or announcing a new practice affiliation, and even communicating with former or prospective clients of the first practice. These agreements are limited in duration and can be limited geographically as well.

TRIMMING AWAY MISCONCEPTIONS

A common—and potentially costly—misconception about restrictive covenants is that they "aren't worth the paper they're printed on." That's simply not true. Most courts won't hesitate to enforce a non-disclosure agreement. They'll also enforce a reasonably drafted non-solicitation agreement. While non-competition agreements can be more difficult to enforce, courts in many states do regularly enforce them.

As a rule, agreements that contain shorter time restrictions and are limited to a practice's actual clients (as opposed to former or prospective clients) or geographical area are easier to enforce than agreements not specifically tailored to a practice's actual needs. In addition, each state has its own laws and policies governing enforceability. You must consider these guidelines carefully when drafting or evaluating a restrictive covenant. If they're designed to protect only the reasonable, legitimate business interests of the practice and to conform to state parameters, a restrictive covenant will typically be enforced.

ONE SIZE FITS THREE

Restrictive covenants generally affect three distinct parties.

1. The established practice. Practice owners have a legitimate interest in protecting confidential and proprietary business information. They've spent considerable time, effort, and money developing their practice's reputation and fostering client goodwill. As a result, these owners often choose to protect their investment with restrictive covenant agreements. These covenants can also increase a practice's value to prospective purchasers. Owners generally require new associates to sign the agreements when they first join the practice, before granting access to proprietary information.

The new doctor. Recent graduates who are about to join their first practice, or veterinarians who've moved to a new community and taken a job as an associate, often view restrictive covenants in a very different light. They may see the agreements as unreasonably binding them to a practice in which they have no equity. Or if they pay little attention to the restrictions when they join the practice, they may eventually come to view them as unfair and overly restrictive.

The experienced practitioner. Many experienced practitioners, including equity partners, also need to deal with restrictive covenants contained within partnership agreements, buy-sell agreements, or contracts presented by third parties interested in purchasing their practices. While these experienced doctors often appreciate the value that restrictive covenants can add to their equity interests, they can also be concerned about the negative aspects of such agreements. For example, another party could purchase or control the practice they've spent their careers developing and then restrict their ability to service the client base they've personally developed over the years—or even to work in the community in which they've long practiced. Experienced practitioners can find themselves caught in the middle.

FINDING THE PERFECT FIT

Existing practices, new doctors, and veteran practitioners alike can reconcile their competing interests by balancing their needs in an agreement that contains only those prohibitions necessary to protect the practice's legitimate business interests. Here are two examples:

Example 1. A practice offers to hire a new associate and presents him with an employment agreement that contains a two-year post-employment covenant against solicitation of the practice's clients and a two-year, five-mile covenant against competition with the practice. In negotiating the terms of the agreement, the veterinarian understands that the practice is primarily concerned about future "raiding" of its clients and trading off on the practice's established goodwill once his employment ends. Accordingly, he agrees to be bound by the non-solicitation covenant but not the non-competition covenant. Specifically, he agrees not to correspond with any of the practice's clients, not to reference the practice's name in any advertisement or announcement (i.e., "Dr. Smith, formerly of Main Street Veterinary Hospital, has joined Side Street Veterinary Hospital"), and not to hire any employee of the practice for two years after his employment ends. He won't otherwise be restricted from practicing in any location of his choice.

Example 2: A hospital with both a small animal and equine patient base seeks to impose a 24-month post-employment restriction against any competition within a 10-mile radius of its facility. A veterinarian seeking employment successfully negotiates terms she finds more acceptable but that still protect the practice's primary concerns. She seeks permission to engage in the practice of equine medicine within the 10-mile radius (eliminating the two-year restriction on such competition) in exchange for agreeing to be bound by a 12-month, 10-mile radius restriction against competition with the small animal practice and by a 24-month restriction against owning, establishing, providing services to, or entering into a referral relationship with any other veterinary hospital within 10 miles of the facility.

Regardless of your perspective on restrictive covenants, an awareness of how they affect you and your business will help you make the best decisions for your practice, your professional career, or both.

Amy Beth Dambeck, JD, is an attorney with Stark & Stark in Lawrenceville, N.J. Send comments to ve@advanstar.com.