By Daniel J. Schulte
MDA Legal Counsel
Published in the June 2006 issue of the Journal
Question: I am hiring an associate dentist and want to include a covenant-not-to-compete in her employment agreement. My practice consists of two offices. My plan is to have my associate work in one office, and I will work in the other. Can the covenant-not-to-compete prohibit my associate from starting or joining a dental practice near either office? Will a 10-mile radius be enforced? I have heard that even if a covenant-not-to-compete is clearly breached it can be difficult to prove damages and can result in expensive litigation. Can I simply include a penalty amount that my associate will have to pay if she breaches?
Answer: These and other issues were addressed by the Michigan Court of Appeals in St. Clair Medical, P.C., vs. Christopher Borgiel, a published opinion dated March 14, 2006. St. Clair Medical had two offices, one in Yale, Mich., the other in Port Huron, Mich. Dr. Borgiel worked almost exclusively at the Yale office. Dr. Borgiel has agreed in his employment agreement that he would not "embark on a medical practice within seven miles of either office for at least one year after" the termination of his employment with St. Clair Medical and that he would "reimburse the corporation $40,000 if" he breached this covenant-not-to-compete. Dr. Borgiel then terminated this employment agreement and went to work for a medical practice located within seven miles of St. Clair Medical’s Port Huron office.
Here are some additional questions and answers based on this case:
Can the covenant-not-to-compete apply to two offices when the employee primarily works at one?
Yes, if this is expressly stated in the agreement. The Court of Appeals in St. Clair Medical, P.C. held that the covenant-not-to-compete prohibited Dr. Borgiel from practicing at his new location. This location was within seven miles of the Port Huron office, where he admittedly provided little or no services at during his employment with St. Clair Medical.
Is a 10-mile radius from every practice location enforceable?
Probably Dr. Borgiel in the St. Clair Medical, P.C. case argued that the seven-mile radius from the two offices was unreasonable. The Court of Appeals disagreed, relying on the Michigan Antitrust Reform Act, MCL 445.71 et seq. and prior Court of Appeals’ decisions. It is a commonly understood proposition that a covenant-not-to-compete will be deemed reasonable if tailored to protect an employer’s reasonable competitive business interests and the protection provided to the employer in terms of the convenant-not-to-compete’s duration, geographic scope and the type of employment or line of business prohibited are reasonable. The Court of Appeals went on to explain that in a medical practice setting, a covenant-not-to-compete can reasonable protect against unfair competition from the departing employee resulting from the loss of patients following the departing employee to a new practice location. The Court of Appeals also recognized as reasonable the protection of the employer’s investment in the training of the employee and protecting the employer’s patient lists.
The reasonableness of a specific geographic restriction will depend on the facts and circumstances of each case. However, the Court of Appeals confirmed the reasonableness of a common approach to determining a reasonable geographic restriction to be used in medical practice covenant-not-to-compete agreements. This method involves determining where the medical practice’s patients are located and basing the geographic restriction on that particular area.
Is the covenant-not-to-compete unenforceable if it violates a professional code of ethics?
No. Dr. Borgiel in the St. Clair Medical, P.C. case also argued that the covenant-not-to-compete he had voluntarily entered into was unenforceable because the American Medical Association’s Principles of Medical Ethics in some cases deem a covenant-not-to-compete to be unethical. The Court of Appeals disagreed, holding that the American Medical Association’s ethical rule (when read completely) merely restated Michigan’s common law rule of reasonableness for determining whether a covenant-not-to-compete will be enforced. You should also know that the courts will enforce binding contractual obligations even if compliance with the obligation by6 a party would conflict with the ethical rules of an organization in which that party is a member.
Will a penalty clause be enforced?
No, but a liquidated damages clause may be. The $40,000 liquidated damages provision contained in Dr. Borgiel’s contract was enforced by the Court of Appeals. A liquidated damages provision will be enforced if the amount is reasonable in relation to the possible injury suffered by the employer upon the employee’s breach of the covenant-not-to-compete. Liquidated damage or "excessive" and therefore are merely penalties will not be enforced. The amount of a liquidated damages provision in a medical practice covenant-not-to-compete must bear some reasonable relation to the expected loss of patient revenue arising from the employee’s breach of the covenant-not-to-compete.