General guidelines offer protection in non-compete agreements
In the first two articles in this series on non-competition contracts, we saw the extent to which failing to be specific or failing to be cautious can work to the disadvantage of both parties to such an agreement.
This month, I have included some general drafting guidelines for both employers and employees to consider in reviewing a proposed document. Naturally, anyone considering entering into a non-competition document of any type is strongly advised to have a qualified attorney review the draft prior to signing.
The average non-competition agreement includes a prohibition on professional practice within a certain distance of a specific clinic and does so for a set period of time. While the set of parameters may seem fairly straightforward, a number of ambiguities may arise.
What constitutes professional practice?
There are myriad employment opportunities available for individuals with veterinary training in today's world.
If a non-compete provides a blanket prohibition on practice, it may either unduly limit the activities of the party burdened by the agreement or it may be so unduly broad as to be subject to being held invalid by a court. A non-competition provision stands the best chance of surviving judicial scrutiny if it is narrowly drafted. It should provide the competitive protection sought by the parties and nothing additional.
For example, where an agreement proscribes "professional practice" within a 10-mile radius of a clinic, does this prohibit a former associate from visiting practices in the area as a professional consultant to a drug or pet food company? Does it prevent a former associate from working for an emergency clinic which, though 11 miles away, serves practices within the radius of prohibition? What happens if an associate accepts an offer to work at an equine practice when his former employer practiced only small animal medicine and surgery?
Distances, radii of prohibited practice
As we saw in the example non-competition agreement at the beginning of this series, it may not be specific enough to simply provide that an associate or practice seller not practice or own a hospital "within five miles" of a certain veterinary practice. Rather, it makes more sense to specify that the prohibition is for the desired set of miles as a radius, and not as determined by any land or water route.
Additionally, it is very helpful to provide the center of the non-competition zone as an identifiable office location, not a hospital, clinic or practice. There have been instances where an associate has signed a non-competition contract prohibiting practice within five miles of the Supervet Clinic P.C. only to find later that the prohibited region went from circular to oval when Supervet opened a satellite clinic four miles from the original practice location.
Practice owners may be well advised to specify that the center of such a non-competition radium may change during the employment agreement. If business at Maxivet Clinic begins to drop off as the surrounding neighborhood declines, it may decide to move to a better side of town. The non-competition agreement can be drafted to provide for such a contingency, perhaps by including a potential non-compete radius for any alternative location to the original, but while reducing the time period during which an associate is prohibited from practicing in the old neighborhood.
Injunctive relief vs. liquidated damages
The two most common remedies sought in non-competition agreements for a breach (practice carried out in violation of the terms of the non-compete) are injunctive relief and liquidated damages.
Non-competition agreements frequently state that the owner or buyer of a practice is entitled to obtain a court order demanding that an associate or seller cease practicing in violation of the terms of the agreement. State courts are often sympathetic to applications for such injunctions and the evidence required to obtain such an order is much, much easier to collect than proof as to the financial value of business lost due to prohibited practice.
Liquidated damages, however, are less likely to be received warmly by courts. Liquidated damages clauses specify a set amount of money which a party agrees to pay in the event it is proven that a violation of the non-competition agreement occurred.
Very often, a doctor will set a high figure for liquidated damages. In the hope that the figure will scare the other party into following the contract provisions to the letter. The hope is that by providing for a specific amount of damages, it will alleviate the difficulty and expense of determining and proving actual lost business attributable to the proscribed business activity.
The use of a liquidated damage clause can backfire in two ways. Many courts simply don't like such clauses in personal service contracts, and may be inclined to require proof of pecuniary or financial loss anyway. Secondly, while some veterinarians may insert a high damages figure in an agreement under the pretense of attempting to strongly dissuade the other party from a violation, a court may easily interpret the clause as an effort by the drafting doctor to orchestrate a potential windfall. As a result, the court could look with disfavor on the entire document. This could cause the aggrieved party to encounter unnecessary difficulty in getting a favorable money judgement of any amount.
Distance, time provisions reasonable
There is no guidebook to look to in trying to establish a reasonable period of time or a reasonable distance for purposes of drafting a non-competition agreement. We can look, however, to the sorts of criteria courts might look to in order to help us know what might and might not be considered acceptable.
1. How dense is the population center? In central Kansas, a one-mile non-compete radius would be so generous it might not even be worth writing down. In New York City, such a distance might be considered excessive.
2. Is the distance so far that the employee would have to leave town in order to carry out his or her profession? If a non-competition clause would force a former employee to move, or even to take a job with a long commute, it could be interpreted as reaching too far and a court might refuse to enforce it.
3.What is the region from which the practice seeking to enforce the agreement realistically draws its clientele? Courts may reason that it is not reasonable for an employment agreement to arbitrarily prevent an employee from working where he or she would pose no legitimate competitive threat. This is true even if the actual distance may not seem that far.
For example, it is pretty unlikely that pet owners in the neighborhoods near Wall Street would travel to New York's Greenwich Village just to follow an associate who decided to move on. The distance isn't all that far, but the logistics of traveling that distance in a town where most people don't drive, probably make it unreasonable to draft a non-compete covering both neighborhoods.
4. Is the agreement between associate and practice owner or buyer and seller? Non-competition agreements between employee and employer are elements of a contract for personal service. Consequently, courts tend to look out to protect the person who is relinquishing the right to work as a negotiated concession in order to secure employment. Practice sellers, on the other hand, are offering non-competition agreements as an element of a sale; the promise not to compete is more a practice asset akin to goodwill than anything else. As a result, courts tend to be much less strict in interpreting the terms of such agreements. The basic theory: "You sold your business for a lump sum and the non-compete promise was part of the package."
Dr. Allen is a partner in Associates in Veterinary Law, P.C., a law practice specializing in business and legal counsel for veterinarians and their families. The former owner of two multi-doctor animal hospitals, Allen currently writes and speaks on topics in veterinary medical law and serves as a regional director of the American Veterinary Medical Law Association. He can be reached at www.veterinarylaw.com or call (877) 645-6113.