Fred Heppner, Transitions Consultant, Arizona Transitions
Dentists often ask me what they need to do to protect themselves after an employee or an associate leaves the practice. One problem with that question is the term “after.” What dentists should actually be thinking about is how to protect themselves against solicitation of patients before an employee leaves.
Here is what happens when a dentist doesn’t have a restrictive covenant in place.
I was hired by a dentist who wanted to buy a practice from a clinician who lost his license due to substance abuse. During the 9 months the selling dentist was suspended from the practice, his hygienist had been treating patients. Naturally, she formed close bonds with these patients. When the buyer dentist came on board, she indicated she was happy to stay on with the practice. But within weeks of his arrival, she left for another office where she promptly called all the patients she had been seeing to tell them about her new office. Although the buyer dentist now owned those patients’ records, she thought she could contact those patients anyway.
The new owner dentist spent considerable resources (polite language for “Legal Fees”) demanding the hygienist “cease and desist” from soliciting patients who were not “owned” by her, but rather owned by the dentist who purchased the records and is now the legal custodian.
What is a restrictive covenant?
There are two basic types of restrictive covenants.
- “Noncompete” covenants prevent a former employee from working in the same business as the employer for a certain period of time and within a certain distance from the original office.
- “Non-solicitation” covenants restrict the former employee from soliciting customers of his or her former employer or from providing services to those customers.
Noncompete Covenants
So, will having a restrictive covenant prevent a bad employee from harming you or your business?
A covenant not to compete for an employee/associate will provide some protection and legal recourse but is difficult to enforce. First, you have to prove damages; second, the covenant cannot be too overreaching or so broad that it is unreasonable.
On the other hand, restrictive covenants connected with the sale of a business are valuable in that they are set up to protect the legitimate business interests of the new owner. Courts of law recognize the need to protect business goodwill and therefore are viewed more favorably towards the new owner of the business. But there is an exception to this. If it is determined that the public will suffer by the restraint of competition, then the covenant may very well be enforced.
For example, an oral surgeon (employee) may be restricted from practicing oral surgery in the geographic area surrounding the previous employer’s practice, but the oral surgeon (employee) may still provide hospital-based services as a public service in the ER where he or she has privileges, even though it is within the geographic area, when the services are not directly connected with the employer’s oral surgery practice.
Best Practices for a Noncompete Covenant
A covenant not to compete is enforceable if it is reasonable in intent and there is a legitimate business reason to enforce it, such as protecting customers or confidential information. To determine if a covenant not to compete is enforceable, three aspects must be considered:
- SCOPE. The covenant must be very precise as to what the people involved can and cannot do.
- GEOGRAPHY. The geographic area must be reasonable, and what must be studied is where the employer’s patient base comes from and where the employee works.
- TIME. This portion of a covenant is litigated often due to its being the most misunderstood. In essence, the covenant must be in force only long enough to get a replacement employee up and running. However, the replacement employee could in fact be the owner where the business cannot sustain an extra employee for whatever reason. Circumstances often dictate the time period. It likely will be different for an employee (shorter) than for a seller (longer).
Non-solicitation Covenants
In cases where a contract has a non-solicitation clause, the clause must be reasonable and must clarify “What is solicitation?” If people want to seek out a health-care provider of their choice, then a contract with a non-solicitation clause cannot limit these people’s desire to seek care with whomever they wish.
A good illustration is a grade school dance. On one side of the gym are the boys, and on the other side are the girls. One asks the other to dance. Who is soliciting? The person who initiated the contact is soliciting. Tying this back to dentistry, if an employee or dentist leaves a place of employment and contacts patients to come see him/her at their new location, then this would be a clear violation of a non-solicitation agreement.
Best Practices for Non-Solicitation Covenants
When preparing an employment agreement, make sure you have good legal representation. A smart dental attorney will put together a solid contract that will protect your legitimate business interests and build an understanding of this issue from the get go!
In closing, restrictive covenants through employment and business purchases or sales are a complex legal matter and must be handled with care. Consult a good attorney who works closely with dentists.
