Non-Competition Agreements
Edward J. Guiducci, J.D.

The purpose of this session is to examine current trends in state laws relating to non-competition agreements. Many veterinarians are required to sign an employment agreement containing a non-competition agreement or a separate covenant agreement. It is a common belief by many in our industry that non-competition agreements are not enforceable and that it doesn't matter whether or not they sign an employment agreement that contains a non-compete. Our session will focus on non-competition agreements and whether or not they are enforceable.

What are Covenants Not to Compete?
A covenant not to compete prohibits a terminated associate from operating a competing practice within a geographic area for a set period of time. This is distinguished from non-solicitation provisions that prohibit an associate from soliciting specific existing clients or co-workers regardless of where the former associate is located.

Are Covenants Not to Compete Enforceable?
Under most states laws, employment non-competition agreements are enforceable only if the geographic location that the employee is prohibited from practicing and the length of time that the non-compete applies is reasonable. The employment non-competition agreement cannot be too broad in defining the area that the associate is prohibited from competing. Courts commonly will consider the area around the practice that the practice draws clients from in determining whether or not the geographic area is reasonable.

The reasonableness of the length of time is also subject to review. Most state courts will focus on the length of time that a practice reasonably needs to have a new veterinarian establish a relationship with the clients of the practice. Many courts do not look favorably upon employment non-competition agreements because they restrict an individual's choice of employment and ability to earn a living. Ultimately, what are reasonable geographic and length of time restrictions will depend on the location of the practice and the facts relative to each transaction. 

Certain states, including California prohibit non-competition agreements for associate (non-owner) agreements. In fact in California it is a violation of law to include a non-competition agreement in an employee's employment agreement subjecting the practice to penalties. Texas prohibits non-competition agreements when part of an at-will employment agreement.

Although there have been very few veterinary non-competition cases that have been ruled on by state appellate courts, there are a few notable veterinary cases ruling on what is a reasonable geographic area and length of time. The Supreme Court of Wyoming ruled in 1993 that a veterinarian's employment agreement that prohibited him from competing for 3-years was unenforceable. A Texas Court of Appeals case held that an employment agreement that prohibited a veterinarian from competing within 12-miles was unenforceable.

It is important to keep in mind that most courts measure the geographic area limitation radius as a bird flies as opposed to measuring based upon the distance it takes to drive the roads to a particular competing location. This rule is very relevant when an owner attempts to enforce a covenant not to compete against a former employee who had set up a practice in a location close to the outside distance of the non-competition agreement. In this scenario, one or both of the veterinarians may measure the distance by driving between the employer's location and the employee's new location.

What happens if a Covenant Not to Compete is unreasonable?
If a court determines that the non-competition agreement is unreasonable in geographic location or length of time the court may void the entire non-competition agreement or judicially modify the length of time or geographic location by rewriting it to make it reasonable. Courts around the country differ on their preference when faced with this issue.

Can Covenants Not to Compete be imposed on existing employees?
Another important issue is whether or not non-competition agreements are enforceable if required to be signed after the individual has already been employed by the veterinary practice. Owners of practices frequently hire associate veterinarians to operate their practices without a non-competition employment agreement until they realize that the lack of a covenant could impact their ability to sell their practices, at which time they will want all of their existing associates to sign non-competition agreements. This creates questions as to the enforceability of otherwise enforceable non-competes against the associates that have been employed for a period of time. Courts in different states vary on their opinion as to the enforceability of non-competition terms signed by associates and practice managers after they were already employed. Oregon law prohibits all non-competition agreements unless they are entered into upon the initial employment of the employee. Many other states require that the employer provide the employee with consideration (or money) for their entering into a non-compete agreement after already being employed. What is adequate varies from state to state. In some states $100.00 would be adequate but in other states it requires a larger sum of money or consideration. 

 An issue that frequently arises on the sale of a veterinary practice is whether or not the buyer of the practice is assigned the right to enforce a non-competition agreement against the practice's associates and practice managers. 

Can Covenants Not to Compete be enforced by a new owner?
Whether or not a non-competition agreement can be enforced by a buyer of a veterinary practice depends on whether or not the agreement with the employee is assignable or not.  A practice owner that wants the right to assign the employment agreement to a buyer should insist that there be language in the employment agreement permitting its assignment. Depending on the law of the state that the practice is located in, if there is not specific language permitting an assignment there is an argument that the covenant cannot be assigned. Another issue is whether or not the practice sales agreement provided for a transfer of the contract rights.  If the sales contract does not expressly provide for an assignment of the employment agreement containing the non-competition agreement then the contract may not be enforceable by a buyer.

Do Covenants Not to Compete prohibit former associates from
soliciting clients and existing employees?
Whether or not a former employee can solicit the veterinary practice's clients is an important issue because valid non-competition agreements are frequently ineffective if the former employee can go to work outside of the non-compete geographic area and solicit the clients to let them know where the associate is working.  I have seen practices lose a large portion of their practices to this type of scenario.  The answer to the question is based on two areas of the law. First, the applicable state trade-secret laws.  In most states, there are common law trade secret laws that prohibit the theft of trade secrets by a former employee even if there is not a prohibition in an employment agreement.  A veterinary practice's client list is generally considered to be a trade secret if the practice has taken steps to maintain the confidentiality of the client list.  However, veterinary practices frequently don't take the necessary steps to be considered to have maintained the confidentiality of the client list.  If the client list is not protected as a trade secret then the practice must have a contract with the employee prohibiting the employee from soliciting the clients.  The language of the prohibition on solicitation is very important.  The former employee can be limited from direct solicitation of the clients i.e. letters and telephone calls, or a more broad prohibition against direct and indirect solicitation i.e. neighborhood newspapers and coupons to an entire area. This is an issue that is frequently negotiated between the employer and employee for inclusion into the employment agreements.

 Are Covenants Not to Compete enforceable against a Practice Seller?
Every state (including California and Texas) permit the enforcement of non-competition and non-solicitation contracts against a seller of a veterinary practice. However, as with employment agreements, for these non-competition agreements to be enforceable they must be reasonable in geographic area and length of time. Courts across the country have shown a willingness to permit non-competition terms to be more aggressive as far as geographic area and length of time when it involves a sale of a business. 

This exception to the enforceability of non-competition agreements permitting enforceable agreements where it wouldn't be permitted otherwise (California and Texas) has created situations where practice owners have tried to obtain the benefits of a non-competition agreement by selling a small ownership interest to an employee and forcing a buy-back when the employee ceases to work for the practice. The enforceability of this type of a non-competition agreement was litigated in the landmark California case Bosley Medical Group v. Abramson. In this case, a California appellate court voided a non-competition contract term because the sale of ownership interest was a sham transaction intended to avoid the prohibition against a covenant not to compete. The employees were required to sell their stock back to the owner when they quit working for the practice and the court ruled that there was not a transfer of goodwill with the sale of ownership interest.

How should employees negotiate Non Competition terms?
Employees should insist that the non-competition terms in their employment agreement be no broader than necessary in length of time and geographic scope. If the owner is not reasonable an associate should consider working elsewhere. Before you sign away your freedom to find other work, make sure that you receive favorable compensation and benefits.  If the exchange for the restriction on your right to compete is not fair, find other employment.

Can an Employee get out of the legal obligations of a Non-Competition agreement.
What if an associate signed a non-compete employment agreement and now wants out of the legal obligation? Can the associate get out? Not if it is otherwise valid, as we have discussed. The lesson here is that you must negotiate a non-competition agreement before you start your employment, not when you are ready to end it. Otherwise, you may not be able to make your next career move.

Keep in mind that the law of non-competition agreements tries to do what is fair:  restrict the employee's freedom to compete just enough to enable the employer to protect its business interest. In other words, if it would not be fair for you to take advantage of an employer's training, investment and client relationships; a court will allow the employer to protect that interest.

What should a practice owner do to have an enforceable non-competition agreement against their associates.  An owner should do the following:

* Have your agreement drafted by an attorney with experience drafting non-competition agreements. If you ever have to enforce this document, the courts will closely scrutinize it.

Make sure that it follows applicable state law.

Have it drawn as narrowly as possible. Generally, only those restrictions that are reasonably necessary to protect a company's legitimate or "protectable" interests will be upheld.

Define the company's legitimate or protectable interest. Be specific in terms of equipment, information, technology, strategy, sales prospects, and other pertinent proprietary information. Even though you specify it, it will be up to the courts to determine if it is confidential.

• Reasonably relate the restrictions to what the company seeks to protect. For example, if the time and geographic restrictions are too long or too broad, the agreement will not be enforceable.
  
  
• Structure the agreement with an eye toward partial enforcement. Even if a court finds the restrictions too broad, you can include a clause saying that if one part of the agreement is held invalid, the remainder of it should still be enforced. This may give you some protection, even though it is not everything you required in the agreement.
  
  
• Do not selectively utilize or enforce such agreements. Make all similarly situated employees sign them, and make sure all employees comply with the agreements they sign.

What are Covenants Not to Solicit?
In most situations a practice is more concerned about a former associate soliciting clients than setting up a competing practice. Under most states laws a practice’s client list can be protected as a trade secret even if there is not an enforceable non-compete/non-solicitation agreement. However, to protect the practice the owner must show in a court of law that the practice took steps to protect the client list as confidential information. It also requires under most states laws that the practice establish in a court of law that the associate utilized the client list to solicit clients that he or she has became acquainted with while employed.  This is equally true for an associate who that solicits co-workers and other employees of the hiring veterinarian. Accordingly, it is extremely important that the Associate Agreement contain language prohibiting the Associate from soliciting clients and co-workers. Contrary to popular belief, there is no common law protection from this type of solicitation for the hiring veterinarian after the Associate leaves his or her employment. There is however a remedy for a hiring veterinarian that learns that his or her Associate is or was soliciting the clients of the practice while still employed by the hiring veterinarian. Further, under most states laws it is a breach of the employee’s duty of loyalty to solicit clients of the hiring veterinarian’s practice prior to leaving his or her employment and there is a specific remedy available for the hiring veterinarian.

PRACTICE OWNERS’ REMEDIES AGAINST AN ASSOCIATE
WHO VIOLATES A COVENANT NOT TO COMPETE
Your associate of two years unexpectedly terminates his employment with your veterinary practice. Prior to going to work with your practice the associate executed an employment agreement containing non-competition terns. You are shocked to learn a short time later that your former associate has set up a practice within the geographic area of your covenant not to compete and is soliciting your clients and employees. What are your remedies against your former Associate?

A hiring veterinarian with an enforceable and properly drafted associate agreement has several remedies. The first remedy is injunction. An injunction will take care of the immediate need of stopping the former associate from continuing to damage your practice by soliciting your clients and employees and competing with your practice. A properly drafted associate employment agreement will waive certain legal requirements to make obtaining a temporary injunction more probable until the case can be taken to trial. The second remedy for the hiring veterinarian is the remedy of monetary damages. If the associate employment agreement contains a liquidated damage provision, you may be entitled to recover the amount that was agreed upon. If the associate employment agreement did not contain a liquidated damage provision, you may be able to recover the damages that you have incurred based upon the profits that you lost as a result of the actions of your former associate. If you are able to prove that the former associate solicited your clients prior to leaving your employment, you may be entitled to recover the compensation that you paid the associate for the period of time that he or she was soliciting clients while in your employ. In addition to the above, if you have included an attorneys’ fees provision in the Associate Agreement you will be entitled to recover your reasonable attorneys’ fees if you prevail.