Wednesday, June 1, 2011

How Specific Should Your Non-Compete Clause Be?

When drafting a non-compete clause from the perspective of the employer, it is important to ensure that it is tailored for each employee or contractor. One size does not fit all. The time restriction, i.e. two years, can generally be the same across the board, but the territory must be carefully considered. Most importantly, keep in mind that where a restrictive covenant is not limited to an area where an employee worked, it will generally be considered overly broad per se, unless a strong justification exists for such a restriction.

Take, for example, a doctor's contract with a particular practice. The law is well established in Georgia that non-competition covenants in employment contracts for physicians will be upheld. However, the provisions must be narrowly tailored and reasonable. The restriction should not operate to force the doctor to abstain from practicing the profession during a particular time or in a particular place when such a restriction would not have a corresponding benefit on the practice.

Recently, the Georgia Court of Appeals ruled on an issue dealing specifically with the territorial restriction in a physician's contract (Peachtree Fayette Women Specialists LLC v. Turner). Dr. Turner is a physician who had an employment contract with Peachtree Fayette Women Specialists. The restrictive clause states:

Non-Competition. Employee acknowledges that Employer has expended and will expend considerable time, effort and capital to develop its medical practice, including its patient base and referral sources.   Employee further acknowledges that Employer has a legitimate business interest in protecting its medical practice.   In furtherance of the foregoing, Employee agrees that she will not, during the Restricted Period, provide obstetrical and gynecology medical services (either for his [sic] own account or benefit, or for or on behalf of any other person, firm, partnership, association, corporation, business organization or entity other than Employer), within the Restricted Territory.
“Restricted Territory” is defined as a two year period and to mean (1) a five (5) mile radius from Employer's office located at 1267 Hwy 54 West, Fayetteville, Georgia, (2) at Piedmont Fayette Hospital, Fayetteville, Georgia, and (3) at Piedmont Hospital, Atlanta, Georgia. ..  Employee acknowledges that she will provide services on behalf of Employer during the term of this Agreement at each of the locations described in clauses (1), (2), and (3) of this subsection.
At first glance, one would think the above non-competition clause would be upheld because it is very specific and narrowly tailored to the particular doctor. However, the key problem with the covenant is that it is too specific. Dr. Turner never performed services at Piedmont Hospital in Atlanta while employed by Peachtree Fayette Women Specialists. The Court concluded that the above clause is overreaching; the restrictions are not reasonably necessary to protect the business interest of the practice because the doctor is prohibited from working in a territory in which she never treated patients during her employment.

What to do? Ensure that the person responsible for your contracts is well trained in the area of restrictive covenants and well aware of the particular employee's duties. Restrictive covenants should be clear, but not overly specific. The covenants should be drafted to include territories in which the employee performs services, but the definition of "territory" should not be so specific that you have to amend the agreement with every change in the employee's duties. In addition, it is helpful to draft the language in such a way that the employee understands and agrees that the restrictive covenant is subject to change with the employment duties. A annual review of such contracts may also be helpful with the addition of an amendment, as necessary, to include territories that may not have been considered when the contract was signed.

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