Non-compete agreements: First IN A three-part series

Non-compete agreements: First IN A three-part series

Jan 01, 2001

For many years, conjecture has run rampant among veterinary school applicants as to why it has traditionally been so difficult to gain admission to veterinary schools.

The problem, the story goes, is that there has been an unspoken conspiracy between veterinary practitioners and their alma maters to limit the practitioner pool.

The goal, the story goes, is to perpetually depress the supply of graduating doctors. Consequently, there would be an almost inexhaustible supply of clients for the honored few who managed to get into and through a veterinary program.

This legend of the profession silently manipulating the laws of supply and demand may or may not have any validity. What is certain is a more overt technique aimed at market control faces nearly all new veterinary school graduates-the non-competition covenant.

Unlike a veterinary school admission conspiracy, non-competition provisions in an employment contract are legal and expected. But very much like the concept of artificially limiting the supply of veterinarians, non-competes can become a double-edged sword.

A veterinarian who blanches early in her career at having to sign a covenant may, a few years later, take great comfort in the protection a non-compete provides when she hires her first associate.

I can think of no area of veterinary law that is less clear-cut and contains more shades of gray than the non-competition issue.

Our office has run across covenants prohibiting practice within one mile of the place of employment, which are likely unenforceable. At the same time, we have reviewed restrictive covenants prohibiting competition in the entire continental United States, which almost certainly would hold up in court.

This probably means drafting a valid non-competition clause is more of an art than a science. The drafter's skill will be judged differently depending on where the agreement is interpreted in the event of an alleged breach.

This article is the first in a three-part series exploring the concept of restrictive covenants. The series will attempt to provide some insight for the veterinarian attempting to draft a non-competition clause as well as the doctor being asked to sign such a commitment.

Before beginning this review of the law, however, let me clearly advise any veterinarian planning to enter a contract containing a non-competition agreement to seek qualified legal counsel prior to signing.

Non-competes have a place

Initially, it is important to realize that non-competition agreements have their place in professional practices. Simply because a potential new employer includes such terms in a proposed employment agreement doesn't make him a bad person.

Many young doctors have asked me, "How in the world can the owner of the practice believe he also owns the clients or their business?"

The answer is that the practice does not own its clients any more than the author of the Harry Potter series owns the words printed in the books or any more than the pharmaceutical company that developed Vioxx owns the molecule that constitutes its active ingredient.

Rather, contractual non-competition terms simply provide a legal avenue for businesses to derive a certain, but limited, amount of protection for the fruits of effort, which has been expended in the pursuit of a good name and a flow of client patronage.

Businesses, including professional practices, make certain future plans and financial commitments based on historical income information. If employees were permitted, unchecked, to "walk away" with a significant source of that historical revenue base, it would be difficult for businesses to realistically plan for additional payroll, building expansions and other business costs.

Non-competition law is similar to copyright protection (which prevents unauthorized use of the Harry Potter text) and patent law (which protects the makers of Vioxx) in that protection must be asserted by an author and the text must specifically indicate the copyright. Patents expire after a specified period.

Limited rights

Rights provided to businesses and business owners by non-competition covenants also are limited. Establishing what those limits are, however, is the complex and unpredictable part of non-competition law. It would help to understand where non-competition comes from to better understand why it is so mercurial.

Unlike copyright and patent laws, which are products of federal legislation, non-competition law is, for the most part, a product of state case law. That means no state legislature ever passed a bill giving physicians or veterinarians the right to prohibit a doctor from seeing clients within a certain distance or a certain practice.

Instead, the protection comes from general contract law, which our country inherited, mainly from England.

Case law differs from statutory law in this way: A statute states specifically what may or may not be done under certain specific instances. For example, state statutes say if you want to practice medicine, you must have a license. Case law, on the other hand, provides that you are generally allowed to do something unless or until it becomes unreasonable or unfair.

You can provide in a contract that an employee must give you two weeks notice, but court cases (case law) have established that your contract cannot provide that the owner has the right to physically force that employee to work the remaining two weeks.

What's enforceable?

Where a right or obligation is based on contractual case law, you often don't know whether that right or obligation is legally enforceable until a dispute arises between the parties to the contract.

When the parties disagree, a lawsuit ensues and a judge is called upon to interpret the term in the contract precedent, or contract cases that have come before other judges in the past, for guidance. The problem is each new case is unique and there may not be any good, similar appellate cases for a judge to refer to when deciding a disagreement.

Let's say, for example, Dr. A hires Dr. B and the two agree to a non-competition clause prohibiting Dr. B from practicing within five miles of the hospital facilities.

Dr. B quits and sets up a practice six miles down curvy state Route 10. However, even though it takes a six-mile trip to get there, the new clinic is only 4.95 miles away from Dr. A's hospital.

Two months later, Dr. A is hiking with his friend who is a licensed surveyor. His friend mentions this fascinating new hand-held global positioning satellite (GPS) surveying unit that can measure distances on earth with amazing precision.

Dr. A, who was livid when his associate "abandoned" his practice, never thought the new clinic might be in violation of the non-compete. Sure enough, the GPS reveals Dr. B is 300 feet inside Dr. A's turf.

Does Dr. A have a case? He revels in the notion that Dr. B spent $500,000 on his new building. Maybe he can make him abandon it and move.

The problem? There is no statutory law to look to see if this particular non-compete, under these specific circumstances, is enforceable. You could look all day long in the case reports at the local law library, and you would be unlikely to uncover a single case that is close to the example.

Even if you did, it would be unlikely that it was decided in the appropriate jurisdiction.

In part two of this series, I will review some of the key issues raised by non-compete agreements, which courts often must wrestle with in deciding cases illustrated in this example. The following month, I will provide some hints for veterinarians who are preparing to enter into a non-competition agreement in order to help avoid misunderstandings after the agreement is finalized.

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. He can be reached at or call (877) 645-6113.