Business Advisor
Are They Worth It?
How much do you know about noncompete agreements?

By Jerry Hayes, O.D.

With the growing prevalence of group practice in optometry, one of the most misunderstood components of any good associate or partnership contract is a "covenant not to compete." Commonly called a "noncompete agreement," the purpose of this contract is to protect the established practitioner from losing business to an associate or partner who leaves and becomes a direct competitor.

I think it's a legitimate position, as most practice owners would suffer financial loss if they invested the time and money to integrate a new O.D. into their practice only to have him leave and open his own office in a nearby part of town. This month, I'll explain noncompete agreements in detail, including the components of this type of agreement, and other major issues.

What's in a noncompete?

The terms of noncompete agreements vary, but most include these three basic components:

1. Distance -- How far away the associate has to move if he leaves the practice

2. Duration -- How long the associate has to stay away before he can see patients near the practice

3. Financial compensation -- The penalty the associate has to pay if he violates the noncompete.

Are noncompetes enforceable?

The narrower you define the terms of the noncompete, the more enforceable it is. For example, you'd have trouble defending an agreement that an associate leaving your practice couldn't see patients within 100 miles of your office for 10 years at a penalty of $500,000.

However, most courts would enforce an agreement prohibiting the associate from seeing patients within 1 mile of your office for 1 year at a penalty of $5,000.

The specific terms that are right for you depend on your practice situation and on the laws of your state. However, the mere presence of a noncompete agreement can serve as a deterrent to an associate or partner who wants to move across the street, even in a state where they are legally weak.

Noncompete vs. nonsolicitation

You can take other approaches to protect yourself as a practice owner. An article in the May 28 issue of Fortune revealed that courts in most states now favor nonsolicitation agreements over noncompete agreements.

A nonsolicitation agreement wouldn't prevent an ex-associate from opening up across the street, but it would prohibit him from contacting any of the patients he saw at your office. Although perhaps not as desirable as a noncompete agreement, nonsolicitation agreements are quite binding.

What to watch out for

Remember: Don't word the terms of a noncompete so broadly that it's unenforceable. Another important fact to note is that an employer can't force someone who's currently working for him to sign a noncompete or fire the employee for not doing so. It's best to get a new employee to sign a noncompete before she starts work or in conjunction with her raise, bonus or promotion.

Everything is negotiable

As an owner, use noncompetitive and nonsolicitation agreements to protect yourself to the fullest extent of the law. As an associate, don't be surprised if your employer asks you to sign a noncompete when you enter her practice. And don't hesitate to negotiate the terms if they're not to your liking.

Both parties need to be comfortable with the contract. When properly worded, it does have bite.

A FREQUENT WRITER AND SPEAKER ON PRACTICE MANAGEMENT ISSUES, DR. HAYES IS THE FOUNDER AND DIRECTOR OF HAYES CONSULTING. YOU CAN REACH HIM AT (800) 588-9636 OR JHAYES@HAYESCONSULTING.NET.