When employing an associate, most chiropractors realize that in time this associate will leave, go elsewhere or establish his or her own practice.
When employing an associate, most chiropractors realize that in time this associate will leave, go elsewhere or establish his or her own practice. The concern then becomes: What will the associate take with them? This could be in the form of patients, files that contain confidential information or some of the goodwill of the chiropractic practice. Similarly, should the practice be sold, a buyer will potentially have this same concern – principally, that the seller will not set up in the next block or community and take along several patients.
For this reason, employing chiropractors and chiropractic practice buyers should have a non-competition agreement that protects the employer or buyer against potential loss.
The purpose of the covenant – usually a part of the buy-sell agreement or employment contract – is to protect the investment and goodwill of the chiropractic practice that has been built up over the years. With the well-established practice, goodwill has a marketable value that is entitled to legal protection.
Recruitment of younger associates is good for the growing chiropractic firm. However, it is expected the relationship will be terminated after a few years and the associate will most likely move on or establish his or her own practice elsewhere. Some of these associates will want to continue their practice in the same community, often in the same neighborhood. In this case, the employer has a legitimate interest in protecting its patient roster.
There are many what ifs and considerations relative to the determination of loss – time element, geographical limitations, ethical considerations and, most importantly, that one cannot deny another the right to earn a living at his or her chosen profession. The problem is further compounded in that court decisions relative to this matter in Canada and the U.S. are inconsistent. Most provisions of these non-competition covenants are not codified or established by statute or case law. They are seldom iron clad and many leave substantial room for dissent or misinterpretation. Claims are judged by the court on a case-by-case basis, and although case history may provide some guidelines, it also includes conflicting testimonies and judicial opinions. In addition, the courts will not allow the claim if the covenants are too broad in scope, too vague, too lengthy or contains a fixed sum penalty. In general, the Canadian courts do not like non-competition covenants and will likely shoot them down. Thus, if a reasonable measure of protection is to be gained, agreement drafting is most essential.
Employment lawyers report that litigation over these clauses is rapidly increasing, with what is retained in the head often of greater value than anything material. Chiropractic practices are not immune from this continuing trend. In both Canada and the U.S., these contracts are not as iron clad as many employers and sellers would like you to believe. Enforcing a non-competition contract is an uphill battle. The win-lose percentages tend to favor the losing side.
Before prosecuting a claim, the offended party must establish that he/she had a proprietary interest in the chiropractic practice that has been partially lost. Still, all covenants must meet the test of fairness and reasonableness. They cannot bring about an unnecessary hardship for the departing associate or the seller of the practice. The courts will take every measure to equalize the interest of both the employer and the departing employee or seller and buyer. This involves balancing the freedom of the associate to practice in a new setting, to earn a living in a competitive market, the proprietary interests of the employer or seller and the public interest as reasonable.
To be enforceable, the covenant must be specific, relative to time and place or in terms of specific patients. In drafting the covenants, employers or buyers should only take into consideration what they would lose should the contract be violated. Damages must be reasonable, anticipated and blanket only a protected interest in the geographic area where the agreement is signed. Time limitations must be clearly defined.
Restricting the associate’s or seller’s ability to compete for two years may be overly restrictive under certain circumstances and the court could reduce this and other restrictions. A covenant stating that the employee may not work for a competitor, open a competing chiropractic practice or service existing patients within a prescribed radius is equally questionable. The courts will generally throw out such a limitation where the radius is too wide or the time element too long, unless the employer or buyer can prove that his or her practice would be materially damaged.
It is important that the covenant does not restrict the lifestyle or create a hardship for the associate or seller. A duration of one year or less will most times be enforceable if within or linked with a specific narrower geographical area. The penalty for not observing a non-competition covenant is usually a percentage of the receipts from the new location, payable by the violating associate or seller. On a sale, the covenant is usually considered as part of the sell-buy price with that price adjusted as a compensating factor. The consideration is seldom spelled out in these covenants.
There are many problems with non-competition covenants, not only with professional practices but businesses of all types. The limiting factor that applies to both is that patients and customers must be left free to choose any chiropractor or business that they wish to patronize, and domiciled chiropractic patients may move with the associate or a seller should they choose to.
This article is not intended to provide legal advice but only point out some of the problems with these covenants. And, never assume that a boiler plated agreement you can purchase from some publishing company or in a stationary store will suffice. There are too many “what ifs.” Consult a knowledgeable lawyer.
Lloyd R. Manning is a semi-retired commercial estate and business appraiser and financial analyst. He can be reached at lloydmann@shaw.ca
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