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Buying A Veterinary Practice

What To Know About A Restrictive Covenant When Selling A Veterinary Practice

Jan 22, 2015 11:27:00 AM

non-compete-confidentiality-agreement-litigation1-200x300Your perception of a restrictive covenant depends on your perspective. If you are an owner about to employ an associate veterinarian and introduce them to your clients, you may think the idea of a restrictive covenant is outstanding. If you are that same owner and you have just sold your practice to your former associate, who wants you to sign a restrictive covenant, you may not think it is that good of an idea.

From an employer’s perspective, a restrictive covenant is valuable because it can prohibit unfair competition by a former associate luring away clients and referral sources. The overall purpose of the restrictive covenant, whether you are coming or going, is to protect the assets of the business. If you are an employer who has made a new hire, you are trying to make sure that the new hire will never make off with the assets of the business (patients, client list, charts, and staff) without buying them.

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 covenant not to compete 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 a competent 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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