Second in a three-part series: Non-competes hinge on 'rational terms'

Second in a three-part series: Non-competes hinge on 'rational terms'

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Feb 01, 2001

As we discussed last month, in this series covering issues relating to non-competition agreements, there are almost always hidden issues involved when a veterinarian agrees to limit the scope or location of his or her right to practice his or her profession.

As was explained last month, there is no body of state or federal law which 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

In the interest of clarity, let us return to last month's example in which an associate, 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 instances. 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. Enforcement of such covenants is now routinely denied by courts 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 which 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 may fairly expect strict compliance. A court may, however, treat Dr. B differently from a 150-practice veterinary corporation. So while Dr. B may realistically 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, there has developed a doctrine in many jurisdictions which places the onus for contractual specificity on the party who actually writes or drafted 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 which 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 which 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 which provides for liquidated damages should make it a point to seek qualified legal guidance prior to agreeing to any such term.

Next month, I will offer some guidelines for veterinarians to consider in reviewing potential non-competition agreements, both in the context of selling a practice and in agreeing to work for an employer who requires such a term in the employment agreement.

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.