Non-Compete Agreements

One of the most common questions I get day in and day out is whether or not a particular non-compete agreement is fair or enforceable, or whether the employer should even have one. While the ultimate answer to these questions will vary according to the particular facts and circumstances and the law of the state where you are working, an understanding of general principles concerning non-compete agreements can be very helpful, whether you are an employer asking your employees to sign such an agreement, or an employee being asked to sign one.

Keep in mind that non-compete agreements are generally seen in three different contexts:

• employment agreements
• partnership/shareholder agreements, and
• purchase/sale agreements.

The terms, uses, and enforcement can vary depending on the situation. 

Caveat: The comments below are general in nature. You should always check with an attorney in your state to be sure you can legally have a non-compete agreement and that the one you are proposing will be legal and enforceable. Recently non-compete agreements have become wrangled in politics with the Federal Trade Commission issuing a ruling invalidating non-compete agreements in employment contracts, but then pulling that ruling back. 

What Are Non-Compete Clauses and Agreements?

Generally speaking, a non-compete agreement, also known as a covenant not to compete, restricts your ability to practice optometry within a geographic area for an agreed upon period of time.

Typically the time in which you are restricted from competing begins to run after some event occurs in the future, such as your employment or partnership ending. The restriction can be narrow (e.g. you can't own a practice in the area during that time) or broad (you can't have any direct or indirect relationship with any optometry practice in the area during that time).

Related, though slightly different, are non-solicitation agreements. These don't necessarily stop you from competing, but they can prohibit you from soliciting or providing services to any former patient from the prior practice. Non-compete agreements can also be defined with specific exceptions, such as you can not compete except you can work up to two days per week at a Costco location or in an HMO, or you can do "fill-in" work so long as you're not listed as a VSP provider. Of course, the scope of these "carve-outs" is limited only by your needs and the agreement you reach. Thus, there is no one form of non-compete agreement, and these are often negotiated to create exceptions that apply to a particular person's needs.

Are Non-Compete Agreements and Clauses Valid?

Non-compete agreements are significant restraints on trade. Nonetheless, in most, but not all states, non-compete agreements are enforceable.

California, in particular, allows them in only limited circumstances (such as the sale of goodwill), and virtually never in employer-employee situations. One Ohio Court has noted that they are particularly disfavored among doctors because of the public interest being adversely affected by them.

Because of these kinds of laws and rulings that can vary around the country, in the context of employment, though most state laws do allow a non-compete agreement where it is reasonably necessary to protect the interests of the employer, they are valid only so long as they don't create an undue hardship on the employee. Many courts will decline to enforce a harsh non-compete. For instance, an optician should not have to move to another city, or an optometrist to another state, in order to not violate a non-compete provision. 

There is an important exception to their validity that arises on occasion. Like any contract, they are valid and enforceable only if supported by "consideration." What that means, in practical terms, is that the person agreeing not to compete must get something in return, and that must be something he or she doesn't already have. This problem arises where an employer decides to add a non-compete provision to an existing employment agreement. To make a new non-compete agreement binding, the employer must give something to the employee, and it can't be the promise of continuing employment. A typical provision might provide that, in exchange for this agreement, the employee shall be entitled to a one-time bonus, or perhaps a raise, or a week of paid time off.

Are Non-Compete Agreements Enforceable?

The enforceability of an otherwise valid non-compete agreement depends on two things: both the geographic area in which one cannot compete and the time limits must be reasonable under the circumstances.That is a vague concept and so there is rarely certainty in the answer to the question. 

In terms of time, restrictions of 1 to 3 years are generally considered reasonable in optometry. Moving beyond 3 years increases the risk that the provision will be deemed unreasonable.

The more difficult limitation is the geographic scope of the restriction. What is reasonable depends very much on the location of the particular practice. In a large city like Los Angeles or Chicago, the geographic limitation must be narrowly defined, typically to the reasonable drawing area of the practice. Often the limit will be stated in terms of miles, such as within 6 miles of the practice, for instance. Or it may be defined by streets. In a smaller community it can be more difficult to define a reasonable restriction. Courts often find a restriction that would effectively require the employee to move, because he or she is precluded from working in the community and the next closest community is far away, to be unreasonable.

To be reasonable and ensure enforceability, geographic limitations should be as narrow as necessary to protect the interests of the employer. Restrictions that extend into areas that the practice has few patients are likely to be found excessive.

What Does a Non-Compete Clause Look Like?

Here is a typical form of a non-compete provision between an employer and an employee that might be found in an employment agreement:

Alternatively, a comprehensive separate non-compete agreement may be utilized. Here is a model (sample) non-compete agreement which you may use at no charge. The agreement is designed to be used to prohibit a doctor employee from competing with the employer after termination of the employment relationship (this can be modified to be used with an independent contractor relationship).

Remember -- these agreements may or may not be enforceable in your situation. Always consult with an attorney licensed in your state to be sure these agreements may be lawfully used.

• Non-Compete Agreement, Employer-Employee

How Do I Make a Non-Compete Most Effective?

If you are an employer or a buyer of a practice and want to be sure there is a non-compete agreement with some teeth-in-its-bite, it is essential that your agreement have an enforcement provision built into it. There are two ways to enforce a non-compete: an injunction and damages. Obtaining an injunction can be difficult because if a Court determines that you could obtain damages (i.e., there is a "remedy at law" available to you) it may decline to issue an order barring the conduct. The problem with damages are that they can be very difficult to prove in the context of an optometry practice. How do you prove the economic loss from a former employee opening up a mile down the street? 

The solution is to incorporate a "liquidated damages" provision into the agreement. Liquidated damages provisions will be enforced so long as they are a "reasonable estimate of the actual damages", the actual damages are difficult or impossible to ascertain, and the amount is not a "penalty." So, in an optometric context, a $1,000,000 liquidated damages provision would not be enforced because it would clearly be a penalty. But a $50,000 provision may stand up, while being a powerful disincentive to an employee. 

Should I Have One or Should I Sign One?

If you are an employer and you practice in a state that permits these agreements, it is certainly in your best interest to include a non-compete clause (along with confidentiality and non-solicitation clauses) in a written employment agreement with your professional staff. Whether you need one with your non-professional staff is more questionable. First, they don't really "compete" with you because they are not optometrists. Moreover, requiring employees to agree to a non-compete will discourage good employees from working with you. But if you have a realistic concern that a key employee such as an office manager may go to a competitor and bring a lot of patients with his or her coattails, you may want to consider a non-compete provision in that persons written employment agreement.

As an employee, a non-compete agreement can never be in your best interest unless you are being paid well for agreeing to one. If your employer or prospective employer requires one, negotiate its terms to limit, in particular, the geographic region. Also consider asking for exceptions for businesses that don't truly compete such as non-dispensing ophthalmology practices or an HMO.

In terms of Buy-Sell agreements, rarely, if ever, will a buyer agree to purchase a practice unless the seller agrees to a reasonably broad non-compete agreement, and all seller's should expect to have one. Sellers, however, should think about any applicable "carve out" which they may want or need, and be prepared to negotiate reasonable limits on the non-compete provision.