Chapter 08: Restrictive Covenants

Restrictive Covenants and Practice Buy-Sell Agreements

[Avoiding Feelings of Anger and Betrayal]

By David Edward Marcinko

By William “Duffy” LaCava

The buyer needs a hundred eyes; the seller but one – Italian proverb

The angriest individuals we’ve ever met in our consulting practice are parties to litigation over restrictive contractual covenants not to compete.

Not medical malpractice cases, not even divorces, produce the fury, the expense, the feelings of betrayal and fraud that infect doctors fighting over whether, if, and how a paragraph in what was once a friendly business deal should be interpreted.  The anger and grief probably spring from a failure of the parties to achieve mutual understanding at the time that the agreement is negotiated.  These covenants are still necessary, but over-reaching by one side or the other leads to terrible legal conflicts.

Introduction

The covenants in question are agreements that in certain circumstances one of the parties is committing himself or herself not to practice his or her profession for a period of time within a geographical area or with members of a defined population.

They arise in two sets of circumstances:  sale of a practice or as a term of an employment agreement.  The law treats the two types quite differently, favoring agreements as part of the sale of a practice, and entertaining challenges to covenants in employment contracts.

A covenant not to compete is legally based on preservation of a protectable interest in good will.  Though good will is an intangible property right, it is very much a real one.  Accountants and the IRS have recognized methods of quantifying it.  The federal government’s Fraud and Abuse enforcement arm is very interested in it to make sure that it is not in fact a disguised kickback, and divorce lawyers love it when divorce prompts an evaluation of marital property. 

Good will is the value attributed to an on-going practice’s name recognition, location, telephone numbers, business names and all those things which would make a potential patient come to one doctor’s office rather than another’s.  The law recognizes that a practitioner has the right to protect that value from a competitor who unfairly tries to appropriate it.

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One thought on “Chapter 08: Restrictive Covenants

  1. More on Restrictive Covenants and Related Issues

    Many physicians in private group practices are alarmed by news of health care reform and other developments affecting their practice finances.

    Some physicians have responded by abandoning private practice in favor of hospital employment.

    Other physicians still want their autonomy, and are committed to private practice.

    But they all wonder: are the documents that they signed years ago are still reasonable in light of all that is happening in health care? Will they remain reasonable if reimbursements go down, or expenses go up, or both? What do you think?

    Learn more here:
    http://www.physiciansnews.com/2010/02/11/group-practice-buy-outs-what%E2%80%99s-fair-what%E2%80%99s-affordable/

    Ann Miller; RN, MHA

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