What does a non-competition agreement mean?
There are usually three scenarios when non-competition agreements or as some refer to as, restrictive covenants come into play.
- A non-competition agreement prevents an employee of the dental practice--usually another dentist--from engaging in a competing business within a reasonable geographic area. In short, this means that when the employment relationship with the current practice is terminated, one dentist cannot simply open another practice down the road from the initial one.
- Additionally, these types of agreements are typically signed when one dentist is selling their practice to another.
- Another scenario is when dentists enter into partnership with one another. This agreement may also be signed when you bring a dentist into your practice who will be working for you, rather than joining as a partner.
Who Benefits from Non-Competition Agreements?
In a non-competition agreement, the beneficiary is the dentist who remains behind in the practice after another dentist leaves. Thanks to the non-competition agreement, they:
- Don't have to worry about lost patients--and therefore lost income--if a dentist who has joined the practice chooses to leave, opening their own practice somewhere close. This is especially true of specialty dentists, who may not have enough patients in the area to justify the opening of a second practice.
- Can rest easy with regards to their office staff, who can't be poached from that office for the new practice when it opens.
- Don't have to worry about a new dentist's motivations when they join the practice: they're there to work, learn techniques, and expand their job experience, not to potentially take patients away with them.
Writing a Non-Competition Agreement
Working with an experienced dental lawyer is the most effective way to create a solid non-competition agreement that is enforceable and will work for everyone involved. There are several key things to keep in mind when drafting your non-competition agreement.
How wide a geographic area do you need to cover? A bustling city can support more dental practices in a closer area than, for example, a rural town. Specialty dentists may also need to enforce non-competition in a wider geographic area than general dentists.
How long does the agreement apply? A dentist selling a practice, for example, might decide to come out of retirement 5-10 years down the road, especially if they decided to retire early. A dentist who loved working in a specific area, but not working for your practice, might want to come back into town in the future. How long will the non-competition agreement apply?
Are there circumstances that will negate the agreement? If the original practice is sold, relocated, or closed, does it negate the non-competition agreement?
How do you factor in going to work for a competing dentist? If a dentist who has been a member of your practice moves to another dental practice, they aren't opening a new practice that will be directly in competition with you, but they may end up stealing patients anyway. Knowing that their preferred or familiar dentist is right down the road, even if they're working for another practice, can be enough incentive for patients to switch. Do you want to include this possibility in your non-competition agreement? Keep in mind that in many cases, a partner leaving the practice isn't happy when they do so, which may impact the way you want to handle this section of the agreement.
Do you want to include staff in your agreement? Do you want to ensure that your new partner can't simply take your office staff with them when they go, or is the office staff free to go where they will? Considering this when you're writing your non-competition agreement can help prevent significant problems down the road.
Who gets to take your patients or referral sources if you split the practice? There may come a point in time where you decide that you simply don't want to work with a dental partner anymore. In this case, who gets to keep your current patients? What about your referral sources? Knowing who will, legally speaking, be able to keep these pieces of the business will make it easier to determine how to proceed moving forward.
How much is too much? You don't necessarily have to have a non-competition agreement signed by every intern, hygienist, or receptionist who comes through your practice. In most cases, these agreements are unenforceable, which means they aren't worth as much as the paper they're written on. You should also consider what restrictions are reasonable for dentists joining your practice and what restrictions are unfair to everyone involved.
How California is Different
In the state of California, as well as several other states, non-competition agreements are considered unenforceable in most cases. If a dentist comes into your practice as an associate, then when they leave, they are free to open their own practice or to join another practice anywhere they like--even if that means they take your patients along with them.
There are, however, some cases under which California will enforce non-competition agreements. One instance is when you've purchased a practice from someone else. In this case, California law assumes that you're selling the goodwill built up in the practice as part of the business, which means you can't open a competing practice just a few streets over. Another example is when dentists who come on as partners can mutually decide that the entire partnership in a limited liability arrangement will be legally bound not to compete with one another. This applies to the case of dentists who work as partners, not dentists who have hired others to come in under the umbrella of their practice.
If you're ready to sell your dental practice, buy a new dental practice, or bring on a partner in your dental practice, make sure you fully understand the legal paperwork that needs to go along with it. If you're struggling to draw up your non-competition agreement, contact us today to learn more about how we can help you create that vital paperwork for your dental practice.