A non-competition agreement (Agreement) provides the dentist shall not compete or practice dentistry for a certain time period within a certain geographic area. Such an Agreement arises when purchasing or selling a practice, entering partnerships or cost-sharing arrangements, and when entering associate agreements, whether as a principal or associate. This article will deal only with points to consider in the non-competition aspects and not with the non-solicitation of patients and staff. These comments are intended only for general practitioners since there are different rules that may apply for specialists.
The public policy starting point is that such Agreements are considered a restraint on a person’s ability to earn a living within his or her chosen profession. On that basis such Agreements are viewed as undesirable in a free market system. Therefore courts of law do not like supporting such Agreements, unless the Agreement is reasonably necessary for the protection of the recipient in that particular fact situation. If the Agreement is determined to be not appropriate in the specific circumstances, the courts could strike down the Agreement and determine the Agreement to be invalid and unenforceable in law.
An Agreement will only be enforced if it is reasonable both as to the area of non-competition and to the amount of time the Agreement will be in force. That area may be only a few kilometres in a densely urban practice or 15 kilometres or more in a rural setting.
The amount of time the clause remains in effect is important. In the case of new associates, they are very likely no threat at all if they leave within a trial period of three months, and generally only a minor threat if they leave within one year. For an associate agreement, consider a “phased-in” approach where the non-competition clause will not apply if the associate agreement is terminated within the first three months, will apply for one year after the associateship ends if the termination occurs within one year, and two years thereafter. After a year or two away from the practice, a departing associate dentist will not likely be any real threat to the principal. Therefore, a two year covenant in most cases is usually adequate for an associate agreement.Unfortunately a common situation is when a principal dentist hires an associate but has no written associate agreement. The associate works at the practice for years, develops loyalty of patients, and then departs to work at another nearby dental practice. Naturally such loyal patients leave the practice and follow the associate to his/her new practice. A properly drafted agreement, which would include a non-competition covenant, could prevent such situation and protect the principal dentist’s goodwill.
The courts tend to permit a longer period of time where the dentist giving the non-competition covenant has sold the practice for a substantial sum of money, versus a shorter time period where the dentist was solely an associate. Typically five years is the maximum time, but only to be used in cases where the dentist is selling the practice.
The most valuable asset a dentist has is goodwill, being the intangible value of a dental practice including the patient list and files. In almost every purchase and sale transaction for a dental practice, the value of goodwill exceeds the combined value of all other practice assets.
Imagine the scenario where a dentist purchases a large dental practice for $2,000,000, and goodwill is valued at 75 per cent of such purchase price. As part of the typical transaction, the vendor dentist signs an Agreement not to compete. A dispute arises and the vendor successfully challenges the validity of the Agreement. The courts rule the Agreement is invalid and unenforceable in law against the vendor dentist. In other words, the vendor dentist is not bound by the Agreement.
In such a situation there is nothing to prevent the vendor dentist from opening up a new dental practice nearby the practice just sold. If the sold practice has been established for many years and patients are loyal to the vendor dentist, patients may gravitate back to the vendor dentist at his newly established practice nearby. The result for the purchaser is the value of the goodwill just purchased from the vendor for $1,500,000 diminishes rapidly.
The Agreement, whether a stand-alone agreement, or as part of an associate or other agreement, will be enforceable if it is reasonable in the particular circumstances. Consult your lawyer to ensure the Agreement is drafted properly and reasonably.