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Navigating Non-Compete Agreements in the O&P Industry

The sole purpose of a non-compete clause is to protect the business interests of an employer - not to prohibit a fleeing employee from earning a living.

By Joe Sansone

December 1, 2003

Consider this scenario. You are an owner/practitioner of five O&P facilities in a large city where you enjoy a good reputation. One day you receive the dreaded phone call. One of your orthotists calls to glibly inform you that three of your five practitioners are quitting and beginning work for a competitor the next day. The competitor has opened offices in the vicinity of three of your satellite offices, and your practitioners have been hired toimage staff these offices.

The next day you further discover that your employees have contacted your largest accounts and most of your longstanding customers have decided to continue to use the practitioners they are familiar with - leaving you out in the cold, 50 percent of your revenue lost. What words echo in your head? Why did I trust my employees? Why didn't I require a non-compete like everyone suggested?

Also, consider this scenario. You are an orthotist and although you have been working for the same O&P facility for eight years, you haven't received a raise in the past four years. Upon your annual evaluation, rather that receiving the long-promised raise, you are informed that you will take a decrease in pay of $5,000 per year and be relocated to an undesirable location 20 miles away from your current location and even further from your home. To add insult to injury, you are also reminded that you are bound to a non-compete agreement that you signed eight years ago.

Your wife has accepted a new position in the city in which you reside. You have just purchased a new house and your children are tied to their schools and friends. You are faced with a decision to either:

• Violate the non-compete agreement and face economically disastrous legal expenses
• Uproot your family and move to a new geographical location, or
• Stay with the current undesirable employer and accept less money.

What words echo in your head? Why did I sign the non-compete agreement? How will I support my family?

These are yet two exaggerated examples of what can happen when employment relationships go badly. The previous examples illustrate the problems that both parties face when a covenant not to compete, often referred to as a non-compete agreement, is used.

Misconceptions

A long-standing, albeit untrue, misconception is that non-compete agreements simply are not enforceable. Many fledgling entrepreneurs have lost their life savings discovering that their interpretation of the enforceability of non-compete agreements was wrong. The fact is that in most states non-compete agreements are absolutely enforceable. When addressing a non-compete issue, it is first important to note that state laws take precedence. For example, many states are quick to uphold and enforce non-compete agreements, while other states have passed legislation prohibiting non-compete agreements in situations other than for the sale of a business.

It brings to bare the all-important question - Will a non-compete agreement hold up? In most states, the answer is "absolutely."

More or Less Enforceable

An employer with the integrity to work with his employees to make sure that the non-compete clause is not overly burdensome should be rewarded with the best employees. The O&P companies with the best employees should prosper.

The following are different aspects of a non-compete agreement that may make a non-compete agreement more or less enforceable:

The employer must have a protectable business interest. In ensuing legal battles many employers lose sight of the fact that the sole purpose of a non-compete clause is to protect the business interests of an employer - not to prohibit a fleeing employee from earning a living. For example, if a non-compete agreement states that after termination a practitioner cannot work in an entire state, yet this employer only has one office in one small corner of the state, then it may be construed that the business owner is not protecting his interests.

The non-compete should be clear, concise and not overly restrictive in its geographical limitations. In general terms, a non-compete clause is more enforceable if it covers a smaller geographical area, such as within a specific mile radius of a facility, as opposed to an entire state or region.

A non-compete clause cannot be overly restrictive in its duration. When drafting a non-compete, an employer may want to consider that a two-year non-compete agreement may be impossible to enforce, a one-year non-compete agreement difficult to enforce, a six-month non-compete agreement easy to enforce, while a three-month non-compete agreement may be considered absolutely enforceable.

A non-compete clause cannot be overly restrictive in its scope of services covered. A non-compete clause should be specific in regards to what activities are prohibited. Some options are the fitting of products, marketing O&P services, fabrication of products and managing an O&P facility. A restriction that a practitioner cannot service any customers of their previous employer in any manner is likely to be considered overly restrictive.

Grounds for termination. Judges and juries oftentimes look at the reason for termination when deciding the enforceability of a covenant not to compete. If an employee is terminated for cause (with good reason), then a non-compete agreement may be viewed differently than if an employee has been a long-time employee in good standing with their employer and was laid off for lack of work.

Consideration. In many states, a non-compete agreement is not enforceable unless consideration is received by the employee. Depending on the state in which you reside, the following may suffice as consideration:

• Continued employment
• Payment by the employer for the signing of the non-compete agreement
• Highly specialized training (such as that given during a residency program)

Violations do not void a contract. Oftentimes, I encounter practitioners that are under the impression that their non-compete agreement is no longer enforceable because the employer violated some aspect of their employment contract. The violation of one or more aspects of an employment contract by one of the parties does not void a non-compete agreement. If an employer violates a portion of their employment agreement, an employee's recourse is to seek a legal remedy for the breech, not to violate the non-compete agreement.

Ancillary agreement. In many states, a covenant not to compete must be ancillary to an otherwise enforceable agreement (part of an employment contract where both parties are giving or receiving value).

Choose Carefully

So where do the two sides meet? First and foremost, employers and employees must choose carefully. Prospective employees should make certain that they spend ample time not only interviewing with management but also with their future coworkers, office personnel, etc. Employers should make certain that they spend time with the applicant observing patient skills, fabrication skills and overall demeanor.

There are several ways that an employer can draft an equitable non-compete agreement:

• Offer some sort of consideration or pay the employee to sign the non-compete agreement
• Narrow the scope of the agreement to a period of three months
• Establish the geographical limitations of the non-compete to be within 15 miles of where a practitioner worked as opposed to an entire city
• If an employer is truly concerned that an employee will leave and steal physicians, then the employer may carve out a list of physicians that cannot be serviced after termination of employment
• The scope of practices could be narrowed to enable a practitioner to fabricate or at least manage an O&P facility after termination
• The non-compete agreement could be enforced only if the employee is terminated for cause, or
• The employer may waive a non-compete in lieu of notice of termination.

Working With Employees

It is obvious that in an employment arrangement, the employer is almost omnipotent and "holds most of the cards" in regards to a non-compete agreement. An employer with the integrity to work with his employees to make sure that the non-compete clause is not overly burdensome should be rewarded with the best employees. The O&P companies with the best employees should prosper. When in comes to non-compete issues, companies that are fair and reasonable should be steps ahead of their competitors.

For more information:

* Sansone, J. Employer vs. employee: advice and options. Presented at the National Assembly of the American Orthotic & Prosthetic Association, Oct. 23, 2003, Reno, Nev.

Note: The author offers no advice and any questions need to be directed to an attorney.