When it comes to restrictive covenants, the veterinary industry is rapidly evolving. Many successful practices are adapting to these changes and taking a progressive approach when it comes to recruiting new DVMs. Employers are evaluating whether the traditional terms and conditions of a DVM employment agreement are still relevant. One of the most significant questions practice owners are asking is whether non-compete agreements are still beneficial and necessary. This is particularly so considering the Federal Trade Commission’s (“FTC’) unsuccessful attempt to prohibit non-compete agreements that are ancillary to employment relationships.
Introduction
On April 23, 2024, the FTC voted to finalize a rule that would have prohibited employers from enforcing non-compete agreements against workers (“the FTC Rule”). However, given the question of whether the FTC has the legal authority to promulgate such a rule, the FTC Rule is the subject of multiple lawsuits, including in the United States District Court in Texas. On August 20, 2024, in Ryan, LLC v. Federal Trade Commission, (Civil Action No. 3:24-CV-00986-E, Northern District of Texas Dallas Division), United States District Judge Ana E. Brown set aside the FTC Rule, stating that the FTC Rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.” Therefore, non-compete agreements remain enforceable. However, there appears to be an erosion of restrictive covenants given the uncertainty of the FTC Rule as well as the current economic climate. Accordingly, it is important for veterinary practices to understand the viability of restrictive covenants when negotiating Associate Employment Agreements. This blog examines how to balance the enforceability of restrictive covenants with fairness, and looks at recent trends in restrictive covenant law.
Balancing Enforceability With Fairness
Although it varies depending on the jurisdiction, non-compete agreements are generally enforceable if they are reasonable in view of the circumstances of a particular case. In general, a non-compete agreement is reasonable when it protect the employer’s legitimate business interests, imposes no undue hardship on the employee, and does not injure the public. For example, under New Jersey law, in cases where the employer’s interests do not rise to the level of a proprietary interest deserving of judicial protection, a court will conclude that the restrictive covenant “merely stifles competition,” and thus, is unenforceable. See Ingersoll Rand Co. v. Ciavetta, 110 N.J. 609, 635 (1988). In New Jersey, a non-compete agreement imposes an undue hardship on a former employee if it erodes an employee’s ability to earn a living after leaving a place of employment. See Coskey’s T.V. & Radio Sales v. Foti, 253 N.J. Super. 626, 636 (App. Div. 1992). In determining whether a non-compete agreement imposes an undue hardship on the former employee, courts generally look at the scope of the non-compete agreement, including the temporal and geographic scope of the agreement. In light of the above, it is important to prepare narrowly tailored non-compete agreements that would survive judicial scrutiny, if necessary.
Additionally, employers can utilize non-solicitation agreements as a measure of protection. There are two common types of non-solicitation protections: (1) non-solicitation of customers and (2) non-solicitation of employees. Thus, non-solicitations agreements provide vital protection for the preservation of customer and employee relationships.
Recent Trends
Despite the judicial rejection of the FTC Rule, there are limits on non-compete agreements in many states as result of legislative or judicial actions. Currently, California, Minnesota, North Dakota, and Oklahoma prohibit non-compete agreements that are ancillary to the employment relationship. This distinction is important because, if a practice is sold, the buyer can still impose a non-compete agreement on the seller.
Colorado prohibits non-compete agreements for all but “highly compensated employees.” This permits non-compete agreements to be imposed on most veterinarians, but not necessarily on practice managers or other staff. Illinois, Oregon, Washington, Virginia, Maryland, Rhode Island, New Hampshire, Maine, and the District of Columbia have income limits that govern the imposition of non-compete agreements, and Nevada bars the imposition of non-compete agreements on hourly employees. While Massachusetts permits non-compete agreements, they are limited to one (1) year in duration and the employee must be paid 50% of their base salary during that period or the employee must have been provided some other type of adequate compensation.
We have also seen more states impose profession specific limits. For example, Massachusetts, and most recently Pennsylvania, have prohibited non-compete agreements for physicians. In Pennsylvania, this is due to the expansion of large corporate hospital groups. We expect that this trend will continue and potentially expand to other professions.
In addition, given that the viability of non-compete agreements as a measure of protection for employers is on shaky grounds, another recent trend is for employers to put more of an emphasis and focus on non-solicitation agreements. The FTC has stated that non-solicitation agreements are permissible because they do not, on their face, prevent employees from seeking subsequent employment or starting competing businesses. However, employers need to be mindful that an overly broad non-solicitation agreement may function as a de facto non-compete agreement if it has the effect of preventing an employee from accepting subsequent employment or starting a competing business following the employee’s separation of employment. Therefore, employers need to prepare narrowly tailored non-solicitation agreements that do not have the effect of limiting a separated employee’s ability to work or perform services for competing businesses.
