Tightening the Shackles: Non-competition Clauses in Agreements of Purchase for Dental Practices
By Paul Martin
In our last post, we discussed the general prohibition against the enforceability of non-competition clauses in agreements between associates and principals. However, as alluded to in that post, non-competition clauses are also used in agreements of purchase for dental practices, and the Courts have, in contrast, displayed a willingness to enforce non-competition clauses in such transactions.
The prototype of a justifiable restraint on trade is the situation of the sale of a business, including its goodwill (patient base), where in order for the vendor to attract purchasers, the vendor may need to agree not to compete against his or her former business. This reasoning has been used to validate non-competition clauses used in the sale of businesses, such as dental practices. The rationale for upholding such a clause in an agreement of purchase is that the purchaser, in purchasing the goodwill of the dental practice, has a legitimate proprietary (“ownership”) interest in that goodwill, that can truly only be protected through a non-competition clause.
For instance, if a dentist bought a practice from another dentist, who owned the practice for 20 years, and the vendor-dentist was then allowed to set up a new practice across the street, the reality is that the majority of patients would start going across the street to seek treatment from the same dentist they have been seeing for years. Patients would simply think that the vendor-dentist had moved, and not that the practice was sold. Further, it is unlikely that they would care whether the business was sold, as patients are free to see the dentist of choice, and are not bound to any one practice.
The vendor-dentist would not need to actively solicit patients for this to happen, and a non-solicitation clause would therefore be inadequate. If the non-competition clause was not enforced, the purchasing dentist would not receive the goodwill they bargained for, but would rather be stuck in a situation where the practice they bought for a substantial sum is rendered nothing more than a start-up.
However, when a vendor-dentist is precluded from competing within a defined geographic zone, for a specified period, then it is much more likely that patients will continue to attend at the purchased practice, as they will not want to be inconvenienced by attending for treatment further away. This will allow the purchaser-dentist an opportunity to establish a relationship with his or her new patients.
Simply put, where a properly-worded non-competition clause is used in an agreement of purchase, the vendor-dentist will be bound by the clause.
It is not uncommon for vendor dentists to remain as associates within the practice post-sale. In these circumstances, a non-competition clause contained in the vendor dentists’ associate agreement will almost always be upheld, as it is really a non-competition following the sale of a business.
The case law has routinely held that non-competition clauses will be upheld where “the nature of the relationship will likely cause customers (patients) to perceive an individual employee (associate) as the personification of the company or employer.” Without such a clause being enforceable, then theoretically, the vendor-associate could associate with the purchaser-principal for a short period of time, and then leave and open a competing practice across the street. This would deprive the purchaser of the very thing they purchased, being the goodwill (patients) of the practice.
Our advice is to ensure that both the agreement of purchase, and the new associate agreement, contain mirror non-competition clauses.
It should be noted that while the Courts will allow non-competition clauses in purchase agreements, those clauses must still be drafted properly. The spatial (geographical) and temporal (time) aspects of the clause must be properly restrained. If the purchaser insists on a non-competition clause that is too broad, then the purchaser runs the risk of the clause not being enforceable. This would have disastrous consequences for the dentist who has spent a significant sum of money to purchase the patient base of the vendor dentist.
*The foregoing is not intended to be legal advice and is provided for educational purposes only. You should retain a lawyer to seek advice prior to taking any legal steps.