Nicole Snyder is a partner at Holland & Hart, where she advises clients on mergers, acquisitions and complex employment matters. She is a member of the American Veterinarian Medical Law Association and co-chairs the firm’s Animal Health and Pet Products Industry Group.Read Articles Written by Nicole Snyder
Nearly every industry uses employee noncompete agreements, and veterinary practices are no exception. Whether you’re a veterinarian or an administrative professional who has been presented with a noncompete agreement as a condition of employment, or a practice owner considering how to protect your business, you need to know the types of agreements in play, the pros and cons of each, and the issues of enforceability. And you should understand that alternatives exist to help protect business interests.
Know the Difference
There are two general types of noncompete agreements: a covenant not to compete and a nonsolicitation covenant.
A general covenant not to compete prevents someone from providing competing services similar to those performed during employment for a period of time after the employment ends and typically within a specified geographic area. For example:
“During employment and for a period of one year following termination of employment, employee will not practice small animal veterinary medicine anywhere within 30 miles of employer’s clinic located at 888 Main St., City, State.”
A covenant of nonsolicitation differs in that the employee is not prevented from taking a job with a competitor but is prevented from soliciting the employer’s clients. For example:
“For a period of one year following termination of employment, employee will not solicit any clients whom employee served while working for employer for the purpose of offering the clients veterinary care services.”
It is not uncommon for an employee to agree to be bound by both covenants. Additionally, some employees are asked to sign nonsolicitation agreements that prohibit encouraging a former colleague to leave his or her employment. For example:
“For a period of one year following termination of employment, employee will not solicit any of employer’s employees for the purpose of encouraging the individual to terminate employment with employer to pursue alternate employment.”
Employers often say that enforcing an employee noncompete agreement is difficult. It’s also typical for them to be surprised to learn that their agreements might be unenforceable or even unlawful. The truth is that many factors determine whether a noncompete is enforceable.
First, state laws regarding employee noncompete agreements vary greatly. For example, what might work in Colorado (a carefully crafted noncompete that is restricted to duration, types of services and geographic area) will not work in California, where employee noncompete agreements are prohibited. While most states permit some form of a noncompete agreement, several factors will determine whether the agreement is enforceable:
Most states have statutes or established case law regarding how long a restriction on competition can last after employment ends — typically a period of months up to a few years. If an agreement creates a restriction that lasts too long under applicable law, the agreement may be unenforceable.
2. Scope of Prohibited Activities
Employers typically have to detail the types of services that are prohibited, and those services usually need to be the same or closely related to the employee’s job responsibilities during employment. For example, it may be difficult to prevent a veterinarian who exclusively treated animals from joining a competing practice where she provides only administrative and managerial support.
3. Geographic Area
Though state laws differ, a rule of thumb is that an employer cannot prohibit an employee from competing in geographic areas that extend beyond those where the employee provided services or had influence during employment.
4. Consideration Received by the Employee
“Consideration” is a legal term that refers to what someone receives in exchange for agreeing to be bound by a noncompete agreement. In some states, noncompetes can be signed only at the beginning of a new job or at the time of promotion unless a payment is provided to the employee. In other states, the promise of continued employment — even at-will employment — serves as adequate consideration for the agreement. This means that it is sometimes permissible for an employer to present an employee with a noncompete and explain that she must sign it as a condition to remain employed.
5. Whether the Employee was Discharged or Left Voluntarily
In some states, enforceability of a noncompete depends on whether the employer or the employee terminated employment. If an employee can show that she did not engage in any type of misconduct or other wrongdoing, the noncompete may not be valid.
Pros and Cons
Before asking every employee to sign a noncompete agreement, a practice owner or manager must consider the pros and cons.
On the positive side, a noncompete can be an important tool for protecting a veterinary practice. It can be devastating to spend time and resources recruiting, training and integrating an employee only to have the employee leave and take clients and information that can be exceptionally valuable when starting or joining a competing practice.
Noncompetes also have their downsides. They can interfere with the recruitment of qualified talent and limit the candidate pool, since some people will not join a practice if required to sign a noncompete agreement. Even if an employer is willing to waive the requirement for an exceptional candidate, the employer might create ill will with employees not given the option.
Additionally, noncompete agreements can be difficult to enforce. Litigation can be very expensive, and the damages caused by an employee can be hard to prove. Even if an employer has a carefully drafted noncompete agreement and successfully sues a former employee, the actual damages could be far outweighed by the litigation costs. For that reason, a practice owner should:
Consider how much a breaching employee actually damaged the business.
Weigh the significant time and costs likely to be expended to enforce the noncompete.
A noncompete agreement is not the only tool an employer can use to protect a practice. Here are a few alternatives:
1. Confidentiality Agreement
Employees who sign a confidentiality agreement agree not to use or disclose the confidential information of an employer, including customer lists, prices, business plans and any other sensitive financial or business data that isn’t known to the public. Employee confidentiality agreements are fairly common and are not nearly as controversial as noncompete agreements.
2. Assignment of Proprietary Rights
Particularly for employees who fill technical positions and do any kind of software development or writing of manuals, treatment plans or customer materials, an employer might ask the employee to assign any intellectual property rights in the materials to the employer so that it is clear the materials belong to the employer when employment ceases.
3. Reliance on Trade Secret Laws
Although state and federal trade secret laws are generally not as protective as a carefully drafted confidentiality or proprietary rights agreement, the laws still provide important protections that every employer can rely upon if a former employee is misusing the employer’s sensitive and valuable information.
4. Limited Nonsolicitation Agreements
In some cases, a simple alternative to a broad noncompete agreement is a narrow nonsolicitation agreement. For example, the employer might prohibit the employee from working for a certain key competitor named in the agreement but allow other forms of competition.
Get Legal Advice
If drafted properly, noncompete agreements are often enforceable and can provide a powerful tool for protecting a practice’s investment in employees. Given the variance in state noncompete laws, a practice owner should work with legal counsel to draft, review and negotiate these agreements.
Even if a noncomplete agreement is permissible, remember to consider the practicalities and potential issues of using and enforcing the agreement. After weighing the advantages and disadvantages, the employer might want to consider alternatives for protecting the practice or negotiating with a potential employee.