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

Article

Covenants never clear-cut, but give practice owners limited protection

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 conspiracybetween veterinary practitioners and their alma maters to limit the practitionerpool.

The goal, the story goes, is to perpetually depress the supply of graduatingdoctors. Consequently, there would be an almost inexhaustible supply ofclients for the honored few who managed to get into and through a veterinaryprogram.

This legend of the profession silently manipulating the laws of supplyand demand may or may not have any validity. What is certain is a more overttechnique aimed at market control faces nearly all new veterinary schoolgraduates-the non-competition covenant.

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

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

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

Our office has run across covenants prohibiting practice within one mileof the place of employment, which are likely unenforceable. At the sametime, we have reviewed restrictive covenants prohibiting competition inthe entire continental United States, which almost certainly would holdup in court.

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

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

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

Non-competes have a place

Initially, it is important to realize that non-competition agreementshave their place in professional practices. Simply because a potential newemployer includes such terms in a proposed employment agreement doesn'tmake him a bad person.

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

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

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

Businesses, including professional practices, make certain future plansand financial commitments based on historical income information. If employeeswere permitted, unchecked, to "walk away" with a significant sourceof that historical revenue base, it would be difficult for businesses torealistically plan for additional payroll, building expansions and otherbusiness costs.

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

Limited rights

Rights provided to businesses and business owners by non-competitioncovenants also are limited. Establishing what those limits are, however,is the complex and unpredictable part of non-competition law. It would helpto understand where non-competition comes from to better understand whyit 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 orveterinarians the right to prohibit a doctor from seeing clients withina certain distance or a certain practice.

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

Case law differs from statutory law in this way: A statute states specificallywhat 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 todo something unless or until it becomes unreasonable or unfair.

You can provide in a contract that an employee must give you two weeksnotice, but court cases (case law) have established that your contract cannotprovide that the owner has the right to physically force that employee towork the remaining two weeks.

What's enforceable?

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

When the parties disagree, a lawsuit ensues and a judge is called uponto interpret the term in the contract precedent, or contract cases thathave come before other judges in the past, for guidance. The problem iseach new case is unique and there may not be any good, similar appellatecases 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-competitionclause prohibiting Dr. B from practicing within five miles of the hospitalfacilities.

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 clinicis 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. Sureenough, 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 $500,000on 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 particularnon-compete, under these specific circumstances, is enforceable. You couldlook all day long in the case reports at the local law library, and youwould 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 appropriatejurisdiction.

In part two of this series, I will review some of the key issues raisedby non-compete agreements, which courts often must wrestle with in decidingcases illustrated in this example. The following month, I will provide somehints for veterinarians who are preparing to enter into a non-competitionagreement in order to help avoid misunderstandings after the agreement isfinalized.

Dr. Allen is a partner in Associates in Veterinary Law,P.C., a law practice specializing in business and legal counsel for veterinariansand their families. He can be reached at www.veterinarylaw.com or call (877)645-6113.

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