Noncompete Clauses

It’s the business version of a prenuptial agreement. Noncompete clauses or contracts catch some off guard during the courtship called interviewing.

May 1st, 2007
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It’s the business version of a prenuptial agreement. Noncompete clauses or contracts catch some off guard during the courtship called interviewing. Dental associates and those contemplating buying a practice should be familiar with these agreements, which have increased in popularity during the past decade.

What is a noncompete agreement, noncompetition clause, covenant not to compete, and restrictive covenant? Each of these is an interchangeable term for agreements that allow employers to limit a former employee from working for a competitor or starting his or her own business that directly competes with the former employer. A noncompete provision can be a paragraph within a larger employment agreement or a separate document that is signed typically at the beginning of an employment relationship.

Many employers use noncompete agreements or clauses to protect sensitive information, trade secrets, and technologies, and to limit employees from working for competitors. Generally, noncompete agreements, although not favored in the law, are enforceable. Laws vary from state to state, so you must consult with an attorney with business- or employment-law experience. General principles apply in most states. They include:

Reasonableness

In order to be valid, the agreement must be reasonable. Courts acknowledge that many businesses, including dental professionals, have legitimate interests in protecting the time and investment they make in a new employee. Nevertheless, that interest must be balanced by an employee’s right to job mobility in our free-market society.

Duration

Courts generally require that these types of agreements have specific time limits. The longer the period of time, the more suspect the clauses. Courts may allow for a longer time frame in a sale of a business when the new owner insists the old owner refrain from starting another similar business. Agreements of one to two years in length can be valid in many jurisdictions.

Distance

There also must be reasonable geographic limits for valid noncompetes. Courts may refuse to enforce agreements that extend beyond an employer’s particular market area.

Independent consideration

A noncompete agreement is typically valid if it is entered any time after the employment relationship begins. But some states require “independent consideration,” meaning something given in exchange for signing the agreement. For example, the agreement would only be valid if signed when you start your job or if you are given additional benefits such as a promotion or salary increase.

Blue-pencil rule

Many courts will use this rule to modify a contract that may be too restrictive, but then enforce it with changes. In states where blue-penciling is not allowed, the agreement must be upheld as valid or invalidated in its entirety.

So, what should a prospective practice purchaser, employer, and new associate keep in mind when encountering these agreements? Check out the following scenarios.

Scenario 1

Dentist Joe hires a young associate, but fails to include a legally enforceable noncompete in his contract with his young associate. The associate quits in a year, taking the majority of the patients and key employees with him.

Solution: Dental professionals should seek legal counsel before hiring and obtain assistance in drafting employment contracts to incorporate a noncompete agreement or clause with reasonable limits on time and geographic scope.

Scenario 2

Dentist Kelly agrees to purchase a dental practice from Dentist Sam. The purchase price includes the “good will” or patient base of the practice. Dentist Sam sells and takes his proceeds and opens another practice two blocks away.

Solution: Dental purchases should contain a restrictive covenant, drafted and reviewed by an attorney, that prevents the seller from competing with the buyer for a specified time and in a designated geographic area.

Scenario 3:

A young associate eager to start her dental career signs an employment agreement with her new employer that contains the following noncompete clause, “... associate is prohibited from working for, managing, or owning any other dental practice within a 100-mile radius of this dental office for a period of five (5) years.”

Solution: Prospective employees should carefully consider all contract components and implications. They must be cognizant that often more favorable terms may be negotiated, or they should consider alternative employment. As with any legal document, prospective employees should consult with an attorney familiar with their applicable state laws before entering into any employment contract.

If you have a noncompete agreement or a noncompete clause within an employment contract, you should inform any new employers that you might be subject to a noncompete agreement. In some states, a new employer can be held liable for hiring an employee who violates a noncompete agreement with a previous employer. Dentists should always consult with legal counsel when drafting employment documents, contemplating signing an employment agreement, or buying a practice. “Noncompete” can be a costly legal question.

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Tammera E. Banasek, JD
Banasek is an associate with Alholm, Monahan, Klauke, Hay and Oldenburg LLC., in Chicago. She graduated from The John Marshall Law School in 1993 and has defended dental professionals for more than 13 years. She may be reached at tbanasek@illinois-law.com.

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