Restrictive Covenants; are your business interests protected?
DENTAL BULLETIN, ISSUE 16
Every dental practice knows that it can take years to build up a loyal patient following but a matter of days for this to be destroyed by an ex-associate. Normally, a practice seeks to protect its goodwill by adding restrictive covenants into an associate, or even an employee, contract.
However, will your covenants stand up in court if you need to enforce them further down the line?
Most practice owners are under the impression that if a covenant is in the contract and the ex-associate breaches that covenant then they will be able to enforce the agreement. However, this is simply not the case.
In order for a restrictive covenant to be enforceable you must show that:
- You have a legitimate business interest that needs protecting; and
- The protection is no more than necessary in all the circumstances.
A patient base is more than likely to be a legitimate business interest, as it provides the main income for any dental practice. However, you must remember patients are free to choose who treats them and so you cannot completely restrict an associate from treating those patients.
When determining if a covenant is necessary a court will consider the reasonableness of it taking into account factors such as; the duration; the geographical area covered; the patients it refers to and the seniority of the person who is subject to it. This is not an exhaustive list. Given that the courts will consider each case on its own merit, it is difficult to provide specific advice in this article on each of these points.
The courts are very wary when it comes to enforcing restrictive covenants, as they do not want to restrain trade and prevent a person from being able to earn a living. Therefore, if a clause is drafted too widely, without consideration for the business interest you are seeking to protect, it is unlikely that it will be enforceable.
It should be noted that a court will not amend a clause to make it more reasonable and therefore enforceable; they will simply reject it altogether, leaving you totally unprotected.
You therefore need to carefully consider which covenants are required to protect your business interest, and that the scope of those covenants are neither too wide nor too narrow.
4 Main types of Covenants
The 4 main types of restrictive covenants are:
This prevents a positive act by the associate of contacting former patients of the practice, or making an initial approach, with a view to obtaining their business. Merely informing a patient that they are leaving, and even providing their new address, is unlikely to be seen as solicitation.
This prevents an associate working for a direct competitor. Such clauses are harder to enforce than non-solicitation clauses, given the courts reluctance to restrain trade. However, one must bear in mind the skills of a dentist and the time it takes to build up the goodwill of a practice. We would therefore recommend adding such a clause to a contract, providing it is well drafted.
This prevents an employee dealing with any customer or potential customer of a business. Given that a patient is free to choose who treats them such a clause is likely to be unenforceable in an associate contract.
This prevents an associate from taking staff with them to a new practice. The idea behind this covenant is to ensure a stable workforce. In the dental industry, a practice will want to ensure that Specialist Dentists are not enticed to a new practice by a member of staff who is leaving.
You can use just one restriction or you can use a combination, depending on the business interest you are trying to protect.
5 Practical Tips
1. The most important piece of advice we can give you is not to use standard clauses for all staff members no matter what their position and situation; this is giving no consideration to the test ‘necessary in all the circumstances’.
2. You can create standard clauses for each level of staff, but you also must ensure that when you offer a new contract to a new employee or associate you consider whether the covenants are reasonable in their circumstances. For example, if you know an employee cannot drive and you live in a small town with no public transport, stating that this employee cannot work in that town is unlikely to be reasonable; especially if a non-solicitation clause could be used in the alternative.
3. You need to be able to explain why the covenants are for a certain period, cover a specific geographical area or are in relation to a set of patients. It is also worth periodically reviewing the covenants to ensure they are still fit for purpose (although see below in relation to seeking to amend a contract whilst it is still in force).
4. Normally, restrictive covenants will be contained within the contract. This means an associate has to agree to them in order to secure work. Consider instead having a separate document containing the covenants and paying for the associate to obtain legal advice on them. If an associate has been advised as to the effect of the clauses and signs to confirm their agreement, this is likely to make them more enforceable. However, you will still need to bear in mind the above tests and ensure the covenants are necessary; this will not give you carte blanche to insert anything into the contract.
5. If you seek to change the covenants part way through employment, recent case law has confirmed that unless you give some consideration to the other party for signing the new covenants, such as a pay rise, the covenants may not be enforceable even if signed.
No article can ever replace legal advice, and this is even more true in the case of restrictive covenants, which are highly specific to the facts and circumstances at hand. If you are considering using restrictive covenants, we strongly recommend that you seek legal advice. As the text above demonstrates, merely having them in place will not necessarily protect you.
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Laura Pearce, Senior Solicitor