Peter H. Tanella
Legal Lingo columnist Peter H. Tanella chairs Mandelbaum Barrett’s National Veterinary Law Center. He earned his JD from Quinnipiac University School of Law and served as a deputy attorney general with the New Jersey Office of the Attorney General’s Division of Law, where he was general counsel to numerous state agencies. He has advised hundreds of veterinarians on practice acquisitions, sales, mergers, partnerships, joint ventures and associate buy-ins, the structuring of management service organizations, and the development of practice succession strategies. He may be emailed at firstname.lastname@example.orgRead Articles Written by Peter H. Tanella
A veterinarian’s sale of a practice is a life-changing and multifaceted event. More often than not, the seller is overwhelmed by the numerous considerations suddenly in play. In addition to continuing to run a successful hospital, the seller must give careful thought to a potential purchaser’s fit and culture and whether to work for the buyer, retire or go elsewhere. The seller also must review and negotiate complex documents with the assistance of legal counsel. A 2011 Ohio appellate court decision is an excellent example of how legal issues can arise in a practice sale.
The conflict here arose after a veterinarian agreed to sell her small animal hospital to a major corporate network for $480,000. The primary documents that both sides signed — an asset purchase agreement, non-competition agreement and employment agreement — contained clauses requiring the parties to arbitrate any subsequent disputes or claims. The non-competition agreement forbade the seller from competing with the buyer within 15 miles of the practice for five years. The seller also agreed not to solicit the buyer’s clients during that period. Additionally, the veterinarian consented to work at the hospital for four years after the closing.
Before executing the transactional documents and finalizing the sale, the seller expressed concerns about the terms. First, she suggested adding language to the asset purchase and employment agreements to clarify that any arbitration would occur under the rules of the American Arbitration Association. The buyer agreed to the change. The seller also suggested adding a provision that would allow her to terminate the employment agreement upon written notice. She was concerned that the employment agreement overly restricted her ability to terminate the relationship before the end of the four-year term. The buyer rejected the requested modification and, through its attorney, explained:
“In the grand scheme of things, we cannot force you to work for us if you don’t want to. In addition, we also have a business interest in not bullying people to work for us. We want to maintain our reputation in the veterinarian field and provide for smooth operations at our practices. No matter what the employment agreement says, you can quit whenever you want [because] there is no such thing as indentured servitude. So the question is, what are the penalties for doing so? I suppose we could come after you to try to get purchase price money back from you, but in the course of acquiring 400 animal hospitals, we have never pursued this course of action. We have learned the lesson that if we give a seller a 30-day out for no reason, they might just use it the day after closing, leaving us paying hundreds of thousands of dollars for a list of clients who won’t visit us [because] their vet isn’t there anymore. If something like that happens, then we very well might pursue the potential penalties.
“Therefore, we feel it is necessary to protect ourselves from this risk by not providing such an easy out from the employment agreement, and this is the reason we don’t provide for a termination right such as the one [you] requested in any of our seller employee contracts.”
The seller then abandoned her request to modify the employment agreement, signed the contracts and closed the deal.
A Short Stay
After working less than a year for the buyer, the veterinarian submitted her resignation. The company then demanded arbitration through the American Arbitration Association and leveled several allegations, including:
- The seller breached the employment agreement by resigning early.
- The seller breached the non-competition agreement by misappropriating confidential information and encouraging clients of the practice to go elsewhere.
In contrast, the seller claimed she suffered a stress-related disability, which she claimed the buyer refused to accommodate. She also asserted claims for disability discrimination, retaliation, breach of contract and fraud.
Subsequently, the American Arbitration Association advised the parties that two deposits totaling $47,685 were needed to proceed with the case. The seller then sued, alleging the “excessive” cost of her share rendered the agreements’ arbitration provisions unconscionable.
The appeals court affirmed that the provisions were enforceable and said the clauses should not be severed from a contract in the absence of fraud, duress or unconscionability. In holding that the arbitration provisions were not unconscionable, the court considered these facts:
- The seller had plenty of business experience as a veterinary practice owner.
- The seller had the opportunity to review the contracts with her attorney and request modifications. In fact, she revised the same arbitration provisions that she later tried to render unenforceable.
Four Key Points
Potential practice buyers and sellers can take away several points from the case. My four recommendations will pave the way for a more successful transaction.
1. Contracts routinely contain arbitration provisions because arbitration is generally considered a faster, less expensive alternative to court litigation. The arbitrator and the tactics of the opposing parties can influence the efficiency of the process. Before inserting an arbitration provision in an agreement, the parties should understand what arbitrating a dispute means and the potential advantages and pitfalls. After all, a decision is only “bad” if it is misinformed.
2. Fairness is a principle that permeates the U.S. legal system. Like the litigants in the Ohio case, most parties bring a dispute to court when they believe they were wronged unjustly. However, many people fail to recognize equally important principles that the legal system was built to uphold. One is freedom of contract. Courts and other tribunals are interested in ensuring that contracts are enforced, so one party believing an agreement is unfair isn’t enough to rescind or disregard it.
To be sure, the legal concept of unconscionability is intended to stop gross overreaching and prevent one party from using its greater influence or power to craft an agreement with unconscionable terms. However, proving it is a tough row to hoe. As the Ohio case demonstrated, if both parties had an equal chance to negotiate an agreement, a court is unlikely to find anything unconscionable. This is especially true if both parties are sophisticated businesspeople represented by counsel. The lesson is, take the time to carefully review agreements during negotiations and ask questions of your legal counsel.
3. Breaching an employment agreement isn’t taken lightly. In the Ohio case, the selling veterinarian was concerned about being bound to a corporate employer for four years without an out. On the other hand, the buyer’s interest in avoiding payment of several hundred thousand dollars to a veterinarian who walks away is equally compelling.
The takeaway is that before entering into any employment agreement with a buyer, a veterinarian should confirm with legal counsel the likely consequences and options if either party breaches the terms.
4. Don’t rely on the oral statements of the other party when negotiating a contract. What most likely matters to a court or arbitrator are the words in the contract and nothing else. For example, in the matter above, the court did not care about the buyer’s representation that it was unlikely to go after the seller if she terminated her employment early. Rather, the court focused on the four corners of the contracts and the built-in arbitration provisions.