Everything dentists need to know about non-compete clauses and restrictive covenants

Many dental employment agreements include a non-compete clause. Also known as a restrictive covenant, this mechanism purportedly prevents an employee from engaging in similar business, whether independently or for another employer, after leaving the current employer.

In order to be valid, a non-compete clause is almost certainly limited to:

  • A certain period of time 
  • A certain geographic area

The employer wants to protect the practice from an employee-dentist who utilizes the contacts and experience gained through the employment to establish a competing practice. The justification for requiring the post-employment restriction is that the employer has invested energy, time, and money in building the practice and therefore needs the restriction to preserve its business and avoid helping “create” a competitor through the employment.

Depending on the duration, the geographic scope, and the reason for termination of the employment relationship (which may be at the whim of the employer), a non-compete can pose a substantial constraint on a dentist’s future career options — and even limit where you might live. See What Went Wrong: My Restrictive Covenant Was Too Restrictive for more details and two scenarios.

Considerations for a dental non-compete agreement

If you are presented with a contract with a non-compete clause, be sure to examine every element. Remember that you can negotiate these terms.

What is the substance of the prohibition? (i.e., what exactly does the agreement prohibit?)

Geographic scope
What is the geographic area/scope of the restriction? Consider how the radius may differ in a densely populated urban area compared to a rural area. A five-mile radius may be reasonable in the former, while a 25-mile radius might be acceptable for the latter.

Important Note: Does the restriction apply only to one single location (dental office), or does the employer have additional locations around which the same geographic restrictions would also apply? What if the employer opens — or subsequently acquires — additional office locations — would these be covered? 

How long does a non-compete limitation last? Does the clock stop for any periods of violation, and begin again?

Length of employment
Is there a probationary period during which, if the employment was terminated, the post-employment restrictions would not take effect? Be sure to consider:

  • Are the post-employment restrictions in effect immediately upon the start of the relationship? 
  • If the employee is employed for only a brief time (for whatever reason), a significant post-employment restriction might be unfairly burdensome when weighed against limited competitive advantage gained by the employee. Similarly, should the restrictive covenant be conditional upon the length of the employee’s actual service?
  • Is the covenant progressively more restrictive during the beginning term of the employment?

Potential liability/damages/remedies
What are the consequences if the employee violates this agreement? Does the agreement attempt to define the  damages for which the employee would be responsible if he/she violates the agreement? Does the agreement specify the remedies available in case of a breach of the provision?

Dental specialties
Where restrictive covenants are enforceable, an employer with a specialty practice may urge that the covenant should be permitted to encompass a greater geographic area than those used for general dentists.

Because there are usually fewer specialists in a particular region than there are general dentists, the geographic pool from which the general dentist may acquire patients is necessarily larger.

Moreover, fewer patients need to see dental specialists than general practitioners, so that a court may see the logic of enforcing a larger geographic radius for a non-compete agreement with respect to dental specialists.

State law/enforceability issues
Courts have generally determined that non-competes are enforceable to the extent necessary to protect the employer’s legitimate interests. Because the law does not favor restrictions on an individual’s ability to earn a living, however, a non-compete provision is generally only enforceable to the extent that it is reasonably limited in time and geographical scope. The rules of enforceability vary from state to state.

Some courts will weigh (i) the interests of the employer (in protecting its investment, its legitimate business interests and/or confidential information) (ii) the burden of restriction on the employee-dentist’s freedom to work in the field and location of his/ her choice, and (iii) the impingement on the public’s interest in receiving the services of its preferred provider. In such jurisdictions, the more limited the restriction, both in duration and territory, the greater the likelihood that a court will enforce it.

One should not execute an employment agreement on the assumption that a court will not enforce the restrictive covenant, even though there seems to be a legislative and judicial trend disfavoring enforcement of non-competition agreements. If properly limited in scope, a court might enforce it, or may even elect on its own to modify the scope or duration if it finds the covenant overly burdensome.

A further danger from agreeing to a covenant not to compete, even one that is ultimately held to be unenforceable, is that the existence of such an agreement might cause concern on the part of a potential employer. That potential employer, upon learning (whether through the interview process or through receipt of a “lawyer letter” from the prior employer) of the restrictive covenant (even if ultimately unenforceable) may be “chilled” from making an offer, (wishing to avoid the potential complications with this candidate), or even rescinding an offer.

For more discussion of non-competes in dentistry, see Non-Competes are irrelevant (in a perfect world). You can also review sample contract language in chapter 4 of Dental Employment Agreements: The Devil’s In the Details.

Learn more about negotiating and understanding dental employment agreements and contracts. Check out the full list of clauses and topics and download the ebook, which is full of sample language, examples and in-depth explanations.