Craft the perfect covenant: Evaluating non-compete clauses and other restrictive contract agreements

Craft the perfect covenant: Evaluating non-compete clauses and other restrictive contract agreements

Whether you're a business owner or associate, don't get sewn up in an ill-fitting restrictive covenant.
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Mar 01, 2012

Mention the word "non-compete" in a group of veterinarians and you'll most likely get a heated response. A non-compete agreement is a type of restrictive covenant used to limit a veterinarian's activities once he or she leaves a practice. While they're often viewed with disfavor, restrictive covenants can also be a valuable practice management tool. The key is to custom-tailor an agreement that balances the needs of the practice and affected veterinarians, maximizing the benefits and minimizing the pitfalls of their use.

There are three general types of restrictive covenant agreements used in veterinary practice: non-disclosure, non-competition, and non-solicitation. These agreements can stand alone or be included within other contracts, such as employment, partnership, or practice sale agreements. In a few states (such as Alabama, California, Montana, North Dakota, and Oklahoma), restrictive covenants aren't enforceable. So if you practice in one of these states, you can stop reading right now. For the rest of you, it's essential to understand the role restrictive covenants play.

If you're a practice owner and are looking to hire an associate, bring a partner into your ownership structure, or sell your practice, you may be thinking of using a restrictive covenant. Or if you're a veterinarian looking to join a practice as an associate or partner, you may be asked to sign an agreement containing restrictive covenants. No matter what category you fall into, understanding how restrictive covenants can help (or hurt) your interests will help you negotiate a favorable agreement.

LAYING OUT THE PATTERN

First, let's define the three types of restrictive covenants.

Non-disclosure agreements. Non-disclosure (or confidentiality) agreements seek to protect a practice against a current or former employee's unauthorized disclosure of proprietary information, such as details about its clients, fee schedules, referral sources, marketing strategies, business operations, finances, and prospective business opportunities. Some jurisdictions consider this information, including client lists and client contact information, to be "trade secrets" that are entitled to additional protection under the law.

Non-competition agreements. Non-competition agreements restrict a former employee of a practice from working in competition with that practice for a specific period of time or within a certain geographic area. For example, a veterinarian formerly employed by Practice A may be prohibited from establishing a practice or working for a competing practice within five miles of Practice A for one year after the employee's resignation or termination of employment.

Non-solicitation agreements. Non-solicitation agreements prohibit a former employee of a practice from soliciting the practice's contractually protected relationships—such as those with patients, clients, vendors, and referral sources—but otherwise don't hinder the former employee from establishing or working for a competing practice. These agreements can prohibit the former employee from soliciting or hiring the original practice's employees, advertising the establishment of a new practice or announcing a new practice affiliation, and even communicating with former or prospective clients of the first practice. These agreements are limited in duration and can be limited geographically as well.

TRIMMING AWAY MISCONCEPTIONS

A common—and potentially costly—misconception about restrictive covenants is that they "aren't worth the paper they're printed on." That's simply not true. Most courts won't hesitate to enforce a non-disclosure agreement. They'll also enforce a reasonably drafted non-solicitation agreement. While non-competition agreements can be more difficult to enforce, courts in many states do regularly enforce them.

As a rule, agreements that contain shorter time restrictions and are limited to a practice's actual clients (as opposed to former or prospective clients) or geographical area are easier to enforce than agreements not specifically tailored to a practice's actual needs. In addition, each state has its own laws and policies governing enforceability. You must consider these guidelines carefully when drafting or evaluating a restrictive covenant. If they're designed to protect only the reasonable, legitimate business interests of the practice and to conform to state parameters, a restrictive covenant will typically be enforced.


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