Many businesses want to protect themselves from competition from a former employee. And the more important the employee, the stronger they feel about protection. Most often, this protection comes in the form of a Restrictive Covenant (RC) or Non-Compete Agreement.
A RC will be a factor when you sign an associate contract and when you purchase a dental practice. Your employer will want protection against you competing and, as a Buyer, you will want protection from the Seller competing with you after the sale.
Are Restrictive Covenants Legal?
Well, we are not attorneys, but we’ve been told that in most cases (note: laws vary state-to-state) a RC is enforceable if it is “reasonable.”
Of course, what is reasonable may be debatable and, in some cases, the term reasonable may be determined by a judge or a jury. However, the legal process is often very lengthy and always very expensive, so that option may not be feasible in many cases.
While the concept may be interpreted differently in different states, a common way to define “reasonable” is to relate it to the locality of the employer/seller and the size of the area from which he or she draws most of the patients.
In the Greater St. Louis area, it is generally thought that a Restrictive Covenant for 5 years and a 10-mile radius is considered “reasonable.” In a rural area, where practices draw from a larger region, a 15 or even 20-mile radius may be considered reasonable.
In the case of the sale of a private practice, the age of the dentist may play a part. If he or she is younger, say 60 or so, the Buyer may insist on a time restriction of more than 5 years. A period of 7 to 10 years may be requested as protection against the Seller being able to return to compete.
Is a Restrictive Covenant Really Necessary?
In almost all cases, the fear of the selling dentist returning to private practice are probably overblown. However, it does happen occasionally, and the banks providing financing want to be protected against this possibility as well.
As we discussed in this article, the majority of the value of a dental practice is the “Goodwill” of the Seller. The RC protects that Goodwill and is a vital part of the transaction.
Special Considerations for Dental Restrictive Covenants
It is important to note that the RC should only prevent the Seller from the “private” practice of dentistry. The Seller should be able to work for a dental school, insurance company or prison system within the timeframe and radius limitations of the RC.
If considering employment with a multi-office practice or a DSO, some other considerations may apply. Be careful of a RC that applies to every office of the organization where you may or may not actually work.
This could end up being a very large restricted area that could keep you from other employment anywhere in the area should you choose to leave. Also, if you are just filling in or working part-time for a DSO or a private practice, you should avoid being required to sign a RC.
As an employee, there may be a chance to negotiate the terms of the RC, so always try to reduce the radius and/or timeframe if you can.
The basic rule is that a Restrictive Covenant is probably enforceable and that the cost to contest it is probably beyond your ability to afford. Please pay close attention to the terms of any RC that you are asked to sign.