Most dentists who own their practice will consider hiring an associate at some point. Hiring an associate can allow the owner to have flexibility in her hours while growing the practice and generating additional income. However, because the owner has established the practice, developed long-term relationships with patients, and built a strong reputation in the local community, the owner should consider how to ensure that her company’s clientele and goodwill are protected from associates whose ultimate goal is to establish their own practice. Thus, dentists commonly require associates to sign a non-compete agreement as a condition of employment. A non-compete agreement prohibits the employee from practicing within a specific geographical area for a certain period of time so that the employee is restricted from competing with the employer once he leaves the practice. Further, these agreements often also prohibit the associate from soliciting the employer’s clientele directly for a certain period. It is critical that the employer have the associate sign a well-drafted agreement that protects the practice. Otherwise, the employer has little repercussions against its former employees if they decide to open a competing business nearby. Similarly, an associate should strongly consider having an attorney review his employment agreement in order to understand the terms and determine how his future employment opportunities may be limited.
To determine whether a non-compete agreement is enforceable, Washington courts utilize a three-part test to determine the reasonableness of the non-compete’s restrictions:
- Was the restraint necessary to protect the employer’s business or goodwill? When an employee joins an established business, he or she gains access to the employer’s customers and acquires valuable information as to the nature and character of the business. Emerick v. Cardiac Study Ctr., Inc., P.S., 170 Wash. App. 248, 255, 286 P.3d 689, 692 (2012), as amended (Aug. 8, 2012). Accordingly, equity allows the employer to require the employee to sign a non-compete agreement. Id. For example, if the dentist spent 20 years developing goodwill in the community before hiring the associate and the associate later starts working at another office in close proximity to the former employer, it poses a risk to the first office. The restraint in the non-compete would most likely be necessary to protect initial employer’s interest from the potential competition.
- Does it impose a greater restraint on the employee than is reasonably necessary to secure the employer’s business or goodwill? Generally, a court determines the reasonableness of a covenant by analyzing its geographic and temporal restrictions. Emerick v. Cardiac Study Ctr., Inc., P.S., 170 Wash. App. 248, 256, 286 P.3d 689, 693 (2012), as amended (Aug. 8, 2012). For example, if the dentist has the associate sign an agreement with a five year temporal term with a twenty mile geographical restriction, a court could find that the non-compete imposes a greater restraint than necessary.
- Does enforcing the covenant injure the public through loss of the employee’s service and skill to the extent that the court should not enforce the covenant? Public policy requires a court to consider possible harm to the public from enforcing the covenant. Such harm may include restraint of trade, limits on employment opportunities, and denial of public access to necessary services. Organon, Inc. v. Hepler, 23 Wash.App. 432, 436 n. 1, 595 P.2d 1314 (1979); McDaniel, 37 Wash.App. at 370, 680 P.2d 448. But the court must still balance these concerns against the employer’s right to protect his business. Emerick v. Cardiac Study Ctr., Inc., P.S., 170 Wash. App. 248, 257, 286 P.3d 689, 694 (2012), as amended (Aug. 8, 2012). For example, if the non-compete would force the patients to travel unreasonable distances to continue seeing the associate dentist or the noncompete includes a clause restricting the associate from ever practicing dentistry on his former patients, a court may find that the restrictions result in a denial of public access to necessary services.
If the employee agrees to a non-compete restriction when he or she is first hired, the employment may be sufficient consideration. However, in a recent case the Court of Appeals held that the non-compete clause in an employment agreement was unenforceable because the at-will employee agreed to a non-compete restriction sometime after being hired and the employer did not provide independent consideration at the time the noncompete was signed. McKasson v. Johnson, 178 Wash. App. 422 (2013). The court reasoned that there is no consideration when “one party is to perform some additional obligation while the other party is simply to perform that which he promised in the original contract”. Labriola v. Pollard Grp., Inc., 152 Wash. 2d 828, 834, 100 P.3d 791, 794 (2004). Examples of independent consideration for a non-compete restriction include increased wages, a promotion, a bonus, or access to protected information. Id.
Noncompete agreements may also include a liquidated damages clause in order to simplify the calculation of damages. The general rule is that such damage clauses are favored and are enforceable if they do not constitute a penalty. Courts allow such liquidated damage clauses because harm to a business from the competition of another business is difficult to ascertain. Washington courts will uphold the liquidation clause if the following two part test is satisfied: First, the amount fixed must be a reasonable forecast of just compensation for the harm that is caused by the breach, and second, the harm must be such that it is incapable or very difficult of ascertainment. Watson v. Ingram, 124 Wash. 2d 845, 850, 881 P.2d 247, 249 (1994).
If certain terms of the covenant are unreasonable, the entire covenant does not fail. The court will enforce the covenant to the extent reasonably possible to accomplish the contract’s purpose. It is also important to note that if the contract contains any mistakes or ambiguity, the contract will be construed against the employer and not the employee.
This blog contains general information and is not intended to provide specific legal advice or establish an attorney client relationship. This blog should not be used as a substitute for legal advice from a licensed attorney in your state.