Non-compete clauses: make them reasonable

Non-competition agreements almost always hide issues involved when a veterinarian agrees to limit the scope or location of his or her right to practice veterinary medicine.

There is no body of state or federal law that lays out the specifics of what is or is not permissible in a non-competition agreement.

Rather, our system of law relies on parties to agree to rational terms in such contracts. Then, only after the agreement is made and allegedly violated, may a court be called upon to determine whether any of the contract's terms fell outside the limits of enforceability.

In addition, certain terms may be permitted in one part of a state, then held unenforceable when similar terms are interpreted elsewhere in the same state. Unfair? Possibly, but unquestionably legal.

Clarify

Let's use an example: Dr. B agreed in writing not to practice within five miles of his former boss, Dr. A. Dr. B built his new clinic six miles away on the only road between the two sites. Later, Dr. A discovers the buildings are actually only 4.95 miles from each other "as the crow flies."

1. Reasonable distance terms. One of the reasons why our legal system doesn't attempt to pass a statute to cover every contingency, although sometimes it seems that way, is that every situation and every contract is a little bit different. In defending the cases in the example, Dr. B might allege that among other things, five miles was too restrictive in the first place; that he was bullied into that long distance requirement and that it would be against public policy to enforce such a severe limitation on Dr. B's ability to earn a living in his community.

This argument has worked in the past in some cases. Public policy is considered violated when a contractual term is so restrictive that it would be unreasonable to permit members of society to agree to such things. For example, people used to donate lands for public parks, but the deeds contained covenants restricting use of the park to certain racial or religious groups. Courts routinely deny enforcement of such covenants as being against public policy.

As for Drs. A and B, it is unlikely that a five-mile restriction would be considered excessive, regardless of location, with the possible exception of an agreement covering two clinics in a densely populated city. In interpreting such clauses, courts often attempt to get some sense of what a practice's realistic radius of client base would be. If a non-competition radius forced a doctor out of an entire metropolitan area, it might be considered excessive.

2. Bargaining strength of parties. Often, courts are called upon to consider the nature of the parties and their legal sophistication in construing a non-competition provision. Keep in mind that it is not only individual doctors or small group practices that enter into non-competition agreements. Large medical practices and huge medical companies avail themselves of the protections offered by non-competes. In doing so, they may pay large sums of money for those restrictive rights and so can fairly expect strict compliance. A court can, however, treat Dr. B differently from a large practice corporation. So while Dr. B realistically might allege that he didn't have the resources for a thorough legal review of his non-compete to explore every remote eventuality, a similar claim by SuperVetCo Inc. might fall on deaf ears.

3. Ambiguity. Drs. A and B would not be the first pair of veterinarians who got into trouble acting as their own attorneys. Veterinarians and plenty of others do this all the time. Consequently, a doctrine has developed in many jurisdictions that places the onus for contractual specificity on the party who actually writes or drafts the document in dispute. Simply stated, the law often construes any ambiguity in a contract against the drafting party. This is a way to discourage people like Dr. A from failing to define what the five miles means, then attempting to take advantage of the ambiguity later on.

4. Substitution of terms. It could be theoretically possible for a contract to be rendered null and void by a court because of a single term that a court considers unreasonable. Doing so would be particularly harsh, so in more recent times courts have seen fit to substitute more reasonable terms in place of those which it feels to be outside the limits of fairness or legality. In the Dr. A/B instance, the court could order that the contract properly calls for a circular region of non-competition. It could say, however, that the circle's radius must be determined using Dr. A's hospital as the center and a point five miles down the curvy road between the two practices as the outside limit of the non-competition zone.

5. Liquidated damages. Liquidated damages are a specific provision in a non-competition agreement that entitle the party seeking to enforce the agreement to a set amount of money for any violation. The theory behind such a provision is that it is too difficult to prove the exact amount of financial damage a practice would suffer if a party practiced within the proscribed region. Therefore, the parties agree to a specific amount of money, which would compensate the aggrieved party should a violation occur. Liquidated damages are a risky term for anyone to include in a non-competition agreement, and any doctor considering entering into a contract that provides liquidated damages should make it a point to seek qualified legal guidance prior to agreeing to any such term.

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