The details of non-compete agreements

National Report — Fear of competition is driving a growing reliance on the use of non-compete agreements by veterinary practice owners, a noted expert reports.

And it still can be one of the most important professional contractual arrangements an owner and associate ever signs, explains James F. Wilson, DVM, JD of Priority Veterinary Consultants in Yardley, Pa.

Wilson, who speaks nationally on the subject and teaches law at many of the U.S. veterinary schools, explains that non-compete agreements are crafted to protect owners either during a practice sale or to guard a practice's client base when an associate veterinarian leaves the hospital.

When disputes erupt, legal nightmares emerge on both sides. The stories are out there — from associates walking off with equipment to owners drawing a circle around a 30-mile radius of the practice to fend off the threat of competition. How about the veterinarian owner who sold a practice, and then opened up a hospital in a new facility just down the street?

Technically, non-compete agreements violate anti-trust laws, Wilson explains, so the agreement should be based on what's reasonable. Distances and the length of a contract all have to be weighed against the financial risk for owners and an associate's right to make a living.

But, Wilson adds, the trend for drafting non-competes still does not address one of the most important underlying issues in the veterinary market: lack of succession planning. "What also is driving it is the lack of good methods and systems for bringing associates into the ownership realm of small-animal practices, and, instead, forcing them to go out and start their own practices."

The trend will only get more pronounced too, especially as associates are forced to find ways to improve their incomes to pay down an increasing debt burden.

"Veterinarians are independent-minded people. They like to practice medicine the way they like to do it. When they don't like the way their employer does it, they decide to open their own practice, which then increases competition. It's a vicious cycle."

When good will isn't enough

Today, non-competes are just a way of conducting business, but Wilson says many of these agreements are drafted without much foresight. In five states — Alabama, California, Montana, North Dakota, and Oklahoma — non-competes are unenforceable, so owners are relying on clauses barring solicitation of clients as a way to protect the business. In fact, a well-drafted non-compete agreement covers the issue of non-solicitation of clients, Wilson adds.

Non-compete agreements fail, Wilson says, because they are simply unreasonable. For example, many state courts are reluctant to enforce an employment contract for longer than two years, but many agreements extend to three years. The distance specified in a non-compete is just as crucial a consideration.

Other important criteria for non-compete agreements include:

• Area of the practice (metropolitan area, suburb, exurb, rural)

• Species treated (small animal, equine, mixed or food animal)

• Radius of the client base (miles)

• Population density of the area

• Geography (state borders, waterways, highways, mountains, bridges, etc.)

• Specialization (numbers of diplomates, numbers of referral practices and locations, etc.)

Satisfying the "reasonableness" of a non-compete agreement is as unique as the area and clientele a practice serves, Wilson adds. In fact, it might be perfectly reasonable to have a non-compete specifying a 25-30 mile radius around the practice, while a small-animal practice located in a suburb might warrant a three-mile radius.

"There are such huge variations. I mean 45 miles in New Jersey can wipe out half the state, but that might be completely appropriate for a specialty hospital that relies on referrals."

Wilson also recommends a short-term release clause that allows for non-enforcement. In other words, if a newly hired doctor is only employed with the practice for a few months and he or she leaves or is asked to leave, there should be a clause that releases that associate from the agreement. "How much damage could they do?" Wilson asks.

The key, Wilson says, is to look at "all the options that are available that would not be harmful to the employer but still allow the employee to make a living."