April 19, 2021

Unreasonable Non-compete and Damages Provisions in Employment Contracts

Question: A dentist employee recently left my practice. His employment agreement had a three-year, 50-mile non-compete agreement. It also had liquidated damages provision providing that he had to pay the practice $25,000 for each patient of the practice who he treated at his new employer’s practice following termination. He breached the agreement. I sued, but the court refused to enforce both the non-compete and liquidated damages provision. How can this be? Do contracts not mean anything anymore?

Answer: The employer has an interest in and the right to protect its business from competition, especially when the competition is from a former employee. This is commonly done via non-compete and liquidated damages provisions in employment agreements. These provisions must be limited to be enforceable. Being enforceable, however, is no guaranty and a court will enforce them.

A non-compete provision will be enforceable if it is reasonably limited both as to the restricted demographic area and its term. Generally, courts have held that a tern of two years or less is reasonable for a non-compete in an employment agreement (longer periods are deemed reasonable in purchase agreements.) The restricted geographic area will generally be deemed enforceable if limited to the area where patients of the employer’s practice reside.

I would need further information to fully assess this, but unfortunately your noncompete provision does not sound reasonable or enforceable. Three years is just not what courts generally deem enforceable. It also seems very unlikely that your patients reside 50 miles away and travel that distance (passing every dental office along the way) to be treated by you.

I believe the same is very likely true for your liquidated damages provision. The purpose of this provision is for the parties to establish in advance what the damages will be deemed to be in the event of a breach. This is necessary when the damages from a breach are difficult to measure for some reason. This is usually not the case for a dental practice, where the lost profit on a dental service provided to a patient treated by a former employee in breach of a noncompete is known. It is very unlikely that your $25,000 liquidated damage amount per patient was deemed to have a reasonable relationship to the amount of your actual damages.

Read the complete Q&A in the Journal of the Michigan Dental Association on page 20.

About the author:

Daniel J. Schulte answer questions about health care lawDaniel J. Schulte has more than 25 years of experience helping clients solve tough problems and capitalize on opportunities that require a blend of business and legal expertise. His practice focuses on addressing the legal, business, licensing, and regulatory challenges of health care professionals, organizations, and facilities. Dan understands how legal issues impact business objectives and, as a result, offers his clients practical, results-oriented advice. He is a Certified Public Accountant, former managing partner and current executive committee member of the firm. Dan also serves as co-chair of the firm’s Health Care Practice Group.

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