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When is an Agreement Not an Agreement?

Susan H. Hargrove
11.27.2013

A business hired an employee and made a deal. All parties understood the terms, which were clear and concise, and everyone agreed to them. The agreement was written down, signed by both parties and filed away. The business moved forward, provided hours of training and even introduced the new employee to several patients. The business lost money for a while, but believed it was investing in the future of the company. 

Fast forward a few years. Having had the benefit of stepping into a thriving practice in a good location with an up-to-date facility, the employee has become busy and has built up a patient base. But in discussions about a possible buy in, several sources of disagreement arise between the employer and employee. At what pace should a business target their growth? Should another office be opened? How do businesses see the role of physician extenders in its environment? What is the fair price/time line for the employee to buy into the practice? Different philosophies on these business issues cause tension in the relationship and it is agreed that perhaps the two should go their separate ways. The employer is disappointed it did not work out, but feels confident that the agreement entered into a few years ago will protect it from unfair competition and the erosion of the practice.

Two weeks after the effective date of the employee’s resignation, the employer reads an announcement in the local paper, “Meet Our Newest Doctor,” the headline reads. “Call for an Appointment.” The smiling face of the former employee appears beneath the logo of a large practice just down the street. Feeling angry and betrayed, the employer finds the agreement and contacts a lawyer, only to be told that there may be challenges to enforcing the agreement and that it may cost a significant amount of money to get a judge to prevent the former employee from breaching the agreement. 

Why is it that a perfectly clear contract, agreed to by reasonable, intelligent professionals, will not be swiftly and effectively enforced? 

The short answer to the question can be found in one of the briefest state statutes on the books, enacted in 1913. The employer's contract is sliced down by one sentence: “Every contract . . . in restraint of trade or commerce in the State of North Carolina is hereby declared to be illegal.” N.C. Gen. Stat. Sec. 75-1. An agreement inhibiting a party from doing business is a restraint of trade. Therefore, the starting premise under North Carolina law is that a non-compete agreement is illegal.   

This is not the end of the story, however. North Carolina courts have recognized that a business or professional practice has a legitimate interest in protecting itself from unfair competition. A purchaser of a business can require the seller not to set up a competing business. An employer can prohibit a former employee from joining a competitor and taking its customers. However, the party seeking to enforce a non-competition agreement has to be prepared to prove that the non-compete meets the requirements to merit exception from the general rule: “An individual’s voluntary contractual restraint on his right to carry on his trade or calling is prima facie illegal and must be shown to be reasonable by the party seeking to enforce it.” Rose v. Vulcan Materials Co.,  282 N.C. 643, 194 S.E. 2d 521 (1973). 

What then are the keys to crafting a non-compete agreement that a business can promote as an exception to the general rule? 

  1. The contract must be in writing. It must be a straightforward requirement, but one that requires careful and consistent recordkeeping. It is not uncommon for a client to recall having entered into a non-compete agreement years ago with a former employee, but have difficulty producing a written contract that the client knows to be the final version of the agreement with original signatures of all parties;
  2. The employee must have received consideration for the agreement not to compete in the future. The offer of employment is adequate consideration if the non-compete is executed at the time the employment begins. To enter a non-compete with an existing employee, or to alter the terms of the non-compete, additional consideration must be given to the employee. Often a bonus payment, increase in salary or extension of the contract term is given in exchange for the non-compete agreement entered into later in the employment relationship;
  3. The agreement must not violate public policy. This has a particular application in the health care context. Even if all of the other requirements are clearly met, a non-competition agreement that deprives the public of access to health care will not be enforced. If enforcement of a non-competition agreement means that patients will be required to travel an unreasonable distance to obtain an appointment in a reasonable time or to have access to a particular specialty, the non-compete agreement may be struck down. A practice operating in a medically under-served area or employing physicians having narrow sub-specialties can meet this defense to non-compete enforcability if it can show the court that it will be replacing the departing physician; and
  4. The non-competition agreement must be no broader than what is necessary to meet the reasonable business interests of the enforcing party. This really consists of three requirements:
          • The period during which competition is prohibited must not exceed that required to protect the practice. This requirement is scrutinized particularly closely in the employment context, where an individual is being foreclosed or limited in the practice of his trade or profession;
          • The territory covered by the non-competition agreement must be reasonable. Practically speaking, a medical practice should be prepared to show that it draws patients from the entire area covered by the non-compete agreement and that the departing employee had the opportunity to interact with patients throughout the non-compete area. If a practice has three locations and the non-compete covers a ten mile area around each of the three locations, it will be difficult to enforce against an employee who has only worked at one of the locations. In addition, time and territory restrictions are considered in tandem. A non-compete with a broad territory is more likely to be enforced if the time restricted period is briefer and vice versa. Furthermore, the scope of restricted activities must be tailored narrowly. A non-compete contained in the employment agreement of a physician who specializes in orthopedic surgery, whose practice with the employer has been limited to orthopedic surgery, will not be enforced if it is written broadly to prohibit the practice of medicine; and
          • Finally, in evaluating reasonable parameters, it is important to remember that it is the scope of the agreement itself that is being evaluated, not the intended conduct of the former employee. An agreement that prohibits an orthopedic surgeon from practicing medicine east of the Mississippi River for a period of ten years will not be enforced, even if the employee is actually opening an orthopedic surgery practice across the street on the day after he leaves your employment. 

Thus, every non-compete agreement in North Carolina is subject to a judicial determination that it fails to meet one of these requirements; therefore, is not an enforceable agreement. There is, however, a way to construct an agreement which discourages a departing employee from competing with a former employer and yet avoid scrutiny for reasonableness of time, territory and scope. North Carolina Appellate Courts have held that contracts requiring a departing employee to forfeit an amount otherwise owing to him, or to make a “cost sharing” payment to the practice, if they compete with the practice after they leave are not actually non-compete agreements, and therefore, not subject to the strict scrutiny as to reasonableness required with a non-compete. The trade off is that the employee may decide the price is right and write a check or forfeit the payment, so you cannot rely on these agreements to prevent post-termination competition. And raising the cost to elevate the disincentive risks having the payment be determined an unreasonable penalty and therefore unenforceable. 

In short, there are ways to protect a practice from unfair competition by a departing employee, but it is important to avoid naivety in this area, to understand the potential landmines, and to be aware of the options available. Additionally, the viability of any agreement in this area is only as good as the most recent appellate court decision; therefore, there is no substitute for obtaining legal counsel when confronted with the need to draft, evaluate or enforce a non-compete agreement.  

Professionals

Media Information

Jamie Greene
jgreene@smithlaw.com
T: 919.838.2045

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