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 cautiouscan work to the disadvantage of both parties to such an agreement.

This month, I have included some general drafting guidelines for bothemployers and employees to consider in reviewing a proposed document. Naturally,anyone considering entering into a non-competition document of any typeis strongly advised to have a qualified attorney review the draft priorto signing.

The average non-competition agreement includes a prohibition on professionalpractice within a certain distance of a specific clinic and does so fora 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 withveterinary training in today's world.

If a non-compete provides a blanket prohibition on practice, it mayeither unduly limit the activities of the party burdened by the agreementor it may be so unduly broad as to be subject to being held invalid by acourt. A non-competition provision stands the best chance of surviving judicialscrutiny if it is narrowly drafted. It should provide the competitive protectionsought 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 associatefrom visiting practices in the area as a professional consultant to a drugor pet food company? Does it prevent a former associate from working foran emergency clinic which, though 11 miles away, serves practices withinthe radius of prohibition? What happens if an associate accepts an offerto work at an equine practice when his former employer practiced only smallanimal medicine and surgery?

Distances, radii of prohibited practice

As we saw in the example non-competition agreement at the beginning ofthis series, it may not be specific enough to simply provide that an associateor practice seller not practice or own a hospital "within five miles"of a certain veterinary practice. Rather, it makes more sense to specifythat the prohibition is for the desired set of miles as a radius, and notas determined by any land or water route.

Additionally, it is very helpful to provide the center of the non-competitionzone as an identifiable office location, not a hospital, clinic or practice.There have been instances where an associate has signed a non-competitioncontract prohibiting practice within five miles of the Supervet Clinic P.C.only to find later that the prohibited region went from circular to ovalwhen Supervet opened a satellite clinic four miles from the original practicelocation.

Practice owners may be well advised to specify that the center of sucha non-competition radium may change during the employment agreement. Ifbusiness at Maxivet Clinic begins to drop off as the surrounding neighborhooddeclines, it may decide to move to a better side of town. The non-competitionagreement can be drafted to provide for such a contingency, perhaps by includinga potential non-compete radius for any alternative location to the original,but while reducing the time period during which an associate is prohibitedfrom practicing in the old neighborhood.

Injunctive relief vs. liquidated damages

The two most common remedies sought in non-competition agreements fora 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 ofa practice is entitled to obtain a court order demanding that an associateor seller cease practicing in violation of the terms of the agreement. Statecourts are often sympathetic to applications for such injunctions and theevidence required to obtain such an order is much, much easier to collectthan proof as to the financial value of business lost due to prohibitedpractice.

Liquidated damages, however, are less likely to be received warmly bycourts. Liquidated damages clauses specify a set amount of money which aparty agrees to pay in the event it is proven that a violation of the non-competitionagreement occurred.

Very often, a doctor will set a high figure for liquidated damages. Inthe hope that the figure will scare the other party into following the contractprovisions to the letter. The hope is that by providing for a specific amountof damages, it will alleviate the difficulty and expense of determiningand proving actual lost business attributable to the proscribed businessactivity.

The use of a liquidated damage clause can backfire in two ways. Manycourts simply don't like such clauses in personal service contracts, andmay be inclined to require proof of pecuniary or financial loss anyway.Secondly, while some veterinarians may insert a high damages figure in anagreement under the pretense of attempting to strongly dissuade the otherparty from a violation, a court may easily interpret the clause as an effortby the drafting doctor to orchestrate a potential windfall. As a result,the court could look with disfavor on the entire document. This could causethe aggrieved party to encounter unnecessary difficulty in getting a favorablemoney judgement of any amount.

Distance, time provisions reasonable

There is no guidebook to look to in trying to establish a reasonableperiod of time or a reasonable distance for purposes of drafting a non-competitionagreement. We can look, however, to the sorts of criteria courts might lookto 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-milenon-compete radius would be so generous it might not even be worth writingdown. In New York City, such a distance might be considered excessive.

2. Is the distance so far that the employee would have to leave townin order to carry out his or her profession? If a non-competition clausewould force a former employee to move, or even to take a job with a longcommute, it could be interpreted as reaching too far and a court might refuseto enforce it.

3.What is the region from which the practice seeking to enforce the agreementrealistically draws its clientele? Courts may reason that it is not reasonablefor an employment agreement to arbitrarily prevent an employee from workingwhere he or she would pose no legitimate competitive threat. This is trueeven if the actual distance may not seem that far.

For example, it is pretty unlikely that pet owners in the neighborhoodsnear Wall Street would travel to New York's Greenwich Village just to followan associate who decided to move on. The distance isn't all that far, butthe logistics of traveling that distance in a town where most people don'tdrive, probably make it unreasonable to draft a non-compete covering bothneighborhoods.

4. Is the agreement between associate and practice owner or buyer andseller? Non-competition agreements between employee and employer are elementsof a contract for personal service. Consequently, courts tend to look outto protect the person who is relinquishing the right to work as a negotiatedconcession in order to secure employment. Practice sellers, on the otherhand, are offering non-competition agreements as an element of a sale; thepromise not to compete is more a practice asset akin to goodwill than anythingelse. As a result, courts tend to be much less strict in interpreting theterms of such agreements. The basic theory: "You sold your businessfor a lump sum and the non-compete promise was part of the package."