What are the reasonable restrictive covenants for an associate? I’ve heard of five miles for three years, but I’m guessing that’s not what is used in big cities. Am I right?
TIMOTHY G. GIROUX, DDS
First, let me preface my answer by saying that you need to speak with a dental attorney in your area because this is a legal matter. Different states have different laws regarding this situation. In California and a few other states, the covenant not to compete as stated in this question would be considered unenforceable. Instead, associates are normally asked to sign an agreement not to take “trade secrets or proprietary information” when they depart from an office. California and other states believe that it is wrong to inhibit a person from gainful employment.
Keep in mind that the covenant laws for associates are not the same as the covenant laws for dentists who are selling their practices. The covenant not to compete for any seller is enforceable because the person has accepted money for the goodwill of the practice he or she has sold. Covenants for employees differ from state to state.
No matter where an associate practices, the rule of thumb is not to sign anything that the associate feels is too restrictive, even if he or she believes it cannot be enforced. By signing a document, an associate can still be brought to court in an employer’s attempt to enforce that document. Good sources have told me that the usual covenant in a large city that allows covenants with associates is two years and three to five miles. The courts might enforce anything that seems reasonable or agreed to between two consenting parties. The mileage part of the equation is usually greater in rural areas.
Unfortunately, there have been instances where associates have taken contact information of patients and staff from their prior place of employment and set up an office virtually next door, at great harm to the owner of the original practice. Therefore it is important for an owner to protect his or her practice in some reasonable fashion. Most states are moving away from simple mileage and time restrictions to nonsolicitation and proprietary information protections for two to three years after the termination of an employee.
BRANDON S. COLLIER, JD, LLM
Good question, and probably not surprisingly, the answer is, “It depends.” The big issues are time and geographic scope. In both cases the language has to be reasonable.
The typical time period is two years, though some states permit three. As for geography, the employer should determine where 80% of his or her patients or referral sources come from and try to protect that area. This is often a radius around the office, and it can vary broadly based on a rural versus urban or suburban location. It might be 50 miles in rural Texas but only 10 blocks north and south and two avenues east and west in Manhattan. To help ensure that the geography isn’t overbroad (and unenforceable in court), different boundaries might be used that are more appropriate under the circumstances. For example, 12 miles north, seven miles south, west to the highway, and east to the county line, or a prohibition from working in town and in the adjacent towns.
California does not permit noncompetes for associates, and it shouldn’t be in the contract, even as a scare tactic. Its mere presence can invalidate the other restrictions an employer will want, such as nonsolicitation of patients and staff, nondisclosure of confidential information, and nontreatment of practice patients.
Finally, if the practice is hiring a doctor who is returning to his or her hometown, then there may not be a noncompete for the first few months. The new doctor may not sign the employment contract if there is a risk that he or she could be kicked out of the area for two years after a one-week stint in the practice. A short honeymoon period will give the associate a chance to decide whether or not the practice is a good fit, and it will be short enough that it can’t threaten the senior doctor’s practice.
TIMOTHY G. GIROUX, DDS, graduated from Creighton University in 1983. He established a highly successful dental practice in Scottsdale, Arizona, where he and his wife, Mona Chang, DDS, practiced. Dr. Giroux, a member of ADS, is now the owner/broker of Western Practice Sales, a dental practice brokerage firm in the western United States. Contact Dr. Giroux at (800) 641-4179; (888) 419-5590, ext. 530; or [email protected].
BRANDON S. COLLIER, JD, LLM, is a dental attorney. He provides tax and business planning services to the dental profession through Collier & Associates Inc., a law and consulting firm representing doctors in all phases of practice transitions and appraisals, retirement plan services, and tax-deductible CE seminars. He is the editor of the biweekly Collier & Associates Doctors’ Newsletter, which has provided tens of thousands of doctors with timely and practical wealth-building advice for 45 years. For more information, visit CollierAdvisors.com or call (216) 765-1199.