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Buying A Veterinary Practice

What To Know About A Restrictive Covenant When Associating Or Buying

Jan 16, 2015 1:29:00 PM

non-compete-confidentiality-agreement-litigation1-200x300One's perception of a restrictive covenant depends on their perspective. If you are about to be an associate, you may view a restrictive covenant negatively - since it may limit your options in the future. However, if you are buying a veterinary practice, you may view a restrictive covenant positively - since it decreases the chance of the seller stealing your business by starting up again nearby. 

From an associate’s perspective, a restrictive covenant should be carefully negotiated, so that your freedom to practice your profession is not overly restricted. If you have just purchased a practice, a restrictive covenant can make sure that the seller can’t take the clients that you just bought by starting up again nearby. The overall purpose of the restrictive covenant, whether you are coming or going, is to protect the assets of the business.

Our traditional notions of freedom make it difficult to legally restrict a party’s freedom to choose where, and for whom, they work.  However, among healthcare professionals “restrictive covenants” are commonly utilized, and, when properly drafted, are often enforced in court.  Restrictive covenants often appear in employment agreements, shareholder agreements, and contracts for the sale and purchase of professional practices.

The three areas that govern enforceability of a restrictive covenant is scope, geography, and time. In its scope, the covenant must be very precise as to what the people involved can and can’t do. The geographic area must be reasonable. The length of time the covenant is enforced is also a critical consideration. Typically, restrictions must be no broader than the employer's legitimately protectable business interests. Those covenants not to compete that are overly broad, overreaching, or lack necessary consideration are often not enforceable.

Normally, the burden is on the party that wishes to enforce the covenant to demonstrate that the restraint is no greater than necessary to protect their legitimate interest, and that such interest is not outweighed by any hardship to the signor or the public.

The general idea of a restrictive covenant is to protect the employer’s legitimate business interest. If you are Coca-Cola, you have legitimate business interest worldwide.  If you are a veterinarian, your legitimate business interests may only be the county in which your practice is located as that is the area where the vast majority of your patients reside.  Therefore, if the restrictive covenant covers the entire state instead of just the county, it may be considered overly broad and therefore unenforceable. Although the  enforceablility varies from state to state, restrictive covenants that cover a period in excess of three years are often considered to be overly long  and therefore unenforceable. However, restrictive covenant clauses must be looked at with great discrimination by a competent professional who has vast experience with professional employment relations.

Covenants given in connection with the sale of a business are viewed with greater favor because courts recognize the need to protect business goodwill.  However, all of the aspects of scope, time, and distance also apply in these cases as well. Contracts containing restrictive covenants will also typically provide an option to go to court and seek injunctive relief (which makes you stop doing whatever you are doing that violates the agreement) to the injured party should the party be in violation of the restrictive covenant. If the injured party has to spend money on attorney’s fee’s to enforce the restrictive covenant, there is usually a provision to make the violating party reimburse you for those fees.

The laws regarding restrictive covenants vary from state to state and attorneys with training in the field should be consulted for all legal advice. This article and its contents are not to be construed as legal or financial or contract advice.

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