Breaching a non-compete clause has consequences


Breaching a non-compete clause has consequences

Much more is at stake than enforceability; your career is at risk
Aug 01, 2009

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.)