What Went Wrong Wednesdays: My Restrictive Covenant Was Too Restrictive

Posted by Dr. Suzanne Ebert, ADA Advisor on 9/4/19, 7:05 AM
Dr. Suzanne Ebert, ADA Advisor

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Welcome to “What Went Wrong Wednesdays,” a series in which we explore common problems of practice transitions – and offer tips to help you avoid them.

Many dental contracts include some version of a restrictive covenant, also called a non-compete clause. These clauses prohibit an employee from practicing within a specific geographical area (typically a defined radius) for a certain period of time after leaving a practice. These covenants generally also have a non-solicitation clause that will bar an associate from directly soliciting the employer’s patients or other employees.

This clause helps protect an owner dentist from competition – but it can also limit an associate’s career movement.

However, restrictive covenants are sometimes unenforceable, particularly if a court decides that they are “not reasonable.” What makes a non-compete clause reasonable or unreasonable?

If a non-compete clause is challenged in court and is determined to be unreasonable, there are two options available to the court. The clause can be completely nullified or the court can rewrite the specifics. Consult a local attorney to discuss your state’s particulars.

In general, a restrictive covenant may be deemed “not reasonable” if:

  • The geographic restriction is too tight. For example, if 90% of an urban practice’s patients live within two miles of the practice, a 25-mile restrictive covenant may be considered too restrictive.
  • The time restriction is too lengthy. If an associate works for the practice for six months, a 5-year non-compete may be deemed unreasonable. In this case, the associate would not have had time to build much patient loyalty, so their leaving the practice would not cause the owner dentist undue harm.
  • The restrictive covenant may harm the public. If an area is already underserved, a 50-mile restrictive covenant may further reduce access to care. Particularly in a rural area, the court may weigh the effect on the public against the effect on the owner dentist’s business.

That said, it is reasonable – and smart – for an owner to include a non-compete clause in associate contracts. The goal is to write the clause with the intent to protect the business without harming the local community.

Two common scenarios illustrate the need to strike this balance.

Scenario 1: I want to start my own practice but I can’t open it in my town.

Problem:

Dr. Alice has spent five years gaining valuable experience in a suburban practice where patients request her by name. After years of planning, she is ready to open her own practice in the town where she resides, about ten miles away.

However, the 25-mile restrictive covenant in her employment contract does not allow her to open a practice in her preferred location for a period of three years.

Dr. Alice must choose between three alternatives, none of which is particularly appealing:

  1. She can go to court to claim that the clause is unreasonable – and hope that the clause is nullified or altered.
  2. She can move farther away, beyond the 25-mile radius, and restart both her personal and professional life.
  3. She can try to “buy out” the contract with her current employer. In a buyout, lawyers can negotiate to make the terms of the non-compete clause acceptable for both parties without going to court. For example, they could agree to reduce the radius from 25 to five miles, or the associate dentist may pay the owner a fee to nullify the non-compete. While the costs associated with buying out the contract can be quite high, it can offer a more certain outcome than taking the case to court.
Solution:

Since Dr. Alice knew she wanted her own practice, she should have been upfront with her intentions during the hiring process. She may have asked where the practice’s patients lived, and if the majority lived within, say, seven miles, negotiated to set the radius at 10 miles rather than 25. This would have protected the owner as well as allowed her the freedom to establish a practice near her current home. She could also have established herself in a town that was outside the non-compete, thereby avoiding the situation entirely.

Dr. Alice should also make sure to ask what happens if patients “find her” at her new practice, even if it is located outside the non-compete area. The restrictive covenant may specify monetary penalties for patients that jump ship, regardless of whether Dr. Alice actively solicited their business.

As always, make sure to have your lawyer review all the particulars of the employment contract so you completely understand how your future can be affected. 

If you do not yet know what your future career path holds, strive to keep your options as open as possible with a less-restrictive clause that gives you room to grow while providing the owner some peace of mind.

Scenario 2: I don’t want my associates poaching patients.

Problem:

Dr. Bob owns a busy urban practice with three associates, located near a dental school. Nearly all of his patients live within two miles of the practice. He has always enjoyed mentoring young dentists and helping them build successful careers. Last year, one of his associates opened a new practice just four miles away – and many of his long-time patients followed.

Years ago, Dr. Bob read that he should always include a 25-mile restrictive covenant clause in associate contracts. He recently engaged his attorney to try to enforce this clause for his current situation, but a court threw it out as “unreasonable.”

Dr. Bob does not want to discourage his associates from advancing their careers – but he also must protect his own business.

Solution:

To address the immediate problem of clients leaving, Dr. Bob really has no recourse since the courts elected to throw out the non-compete completely. He should work with his attorney to ensure that all future associates sign a contract that will stand up in court.

A "reasonable" restrictive covenant may be three miles, five miles, ten miles, or more – it depends on the local market.

To achieve this, Dr. Bob and his attorney should determine what a more “reasonable” restrictive covenant might be in his densely populated urban area. Since his standard 25-mile radius has been found too broad, an attorney can help identify a radius that will protect the practice without causing undue harm to the associate or the community. That could be three miles, five miles, or ten – it depends on the local market.

Dr. Bob should also ask potential hires about their long-term plans, and work with them to help develop their skills while protecting his business. If he knows that the potential associate definitely wants to purchase a practice someday, they should discuss how he can be a mentor while the associate helps to build Dr. Bob’s practice and they can part ways at the right time on good terms.   

In both scenarios, state laws will dictate what may be enforceable or reasonable, so engaging a local attorney is a must.

Need help planning your own practice transition and protecting your interests? ADA Practice Transitions can help you think through your short- and long-term goals. Start your profile today!


Topics: incoming dentist, retiring, owner, associateship, purchase a practice, what went wrong


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