Protecting the Value of Your Practice: Non-Compete and Trade Secret Agreements

Veterinarians are often concerned about how to best protect their patient base when an associate veterinarian leaves the practice.  Owners of a veterinary practice want to ensure that an associate can not take the practices’ patient base [or employees] with them when they leave.  To prevent this devastation, each associate should be required to sign an employment agreement, which contains certain restrictive covenants.

Non-Compete Agreements

The owner of a veterinary practice may be familiar with various terms that are used in the protection of important practice assets, such as: non-compete agreement, non-compete clause, covenant not to compete, and restrictive covenant. These are all different terms used to essentially describe a non-compete agreement.  A non-compete provision is typically a paragraph inserted into an employment agreement.   However, a non-compete agreement may be a separate document which may be signed by the employee.  These agreements are usually signed when an employee begins his or her job.  A non-compete agreement allows the owner of a practice to limit a former employee or associate from starting his or her own business that competes with the former employer or from working for a competitor. 

A non-compete agreement must be reasonable in that it protects legitimate interests of the veterinary practice.  The veterinarian’s interest in protecting the time they put into training a new employee must be balanced by the employee’s freedom to work where they choose and the public’s interest in seeing a particular veterinarian.

A non-compete agreement must meet certain requirements before a court will uphold its validity. First, the court will look to the scope of a restriction, or the type of activity that is restricted.  If a veterinary practice only treats small animals, then in some cases, the non-compete may only prohibit the practice of small animal medicine for a specified period of time, leaving the former employee free to practice large animal medicine. 

The second requirement for an enforceable non-compete agreement is that it have a specific time limit.  The shorter the period of time, the more likely it will be enforced.  Typically, an agreement of two years or shorter will be considered valid.  Again, the interests of the parties must be balanced, allowing an employee freedom to continue to work and protecting the public’s interest in selecting a veterinarian. 

The third requirement for a valid non-compete agreement is that it contain a reasonable geographic limit.  When determining the geographic restraint, the employer should consider the number of clients that come from a five mile radius, ten mile radius, twenty mile radius, or other geographical area.  If a former employee moves to a veterinary practice within a ten mile radius of their previous employer, for example, and a non-compete agreement was in place prohibiting competition within a ten mile radius, the court would likely uphold the agreement as valid and issue an injunction against the former employee.  However, if the former practice purports to restrict the employee from practicing anywhere within a fifty mile radius, this non-compete would likely not be enforceable, as it is not reasonable. 

Should a court find that a requirement for a non-compete agreement is not met, the court may utilize the “blue pencil rule”.  This rule allows a judge to modify a contract that may be too burdensome on one party, and then enforce the remainder of the contract to make the agreement more reasonable. 

Non-compete agreements may be used not only when an employer/employee relationship exists, but also when a veterinarian practice is sold. If a veterinarian purchases a veterinary practice, the purchase price typically includes the “goodwill” and client patient base, of the practice.  However, without a prudent non-compete agreement, the selling veterinarian may open another veterinary practice across the street, which would be detrimental to the purchaser of a practice.  A non-compete agreement would prevent the seller from competing with the buyer in a specified geographic area for a limited period of time, which would allow the purchaser to establish his or her new practice.  

Additionally, when hiring a new employee, the owner of the practice should always ensure that the new employee is not subject to a non-compete agreement with his or her previous employer.  In some cases, a new employer may be held liable for hiring an employee who violates a non-compete agreement with a former employer. 

In order to maintain the financial stability of the practice, the owner of a veterinary practice should have an associate veterinarian sign an employee agreement which contains a non-compete and non-solicitation clause. In addition, all associates should be required to sign an employment agreement when they start their employment.  Without an employment agreement in place, the owner of a veterinary practice is exposed to unwanted risk and potential financial instability.