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I knew him when
LITIGATION, LEGISLATION, AND ETHICS
I knew him when Laurance Jerrold, DDS, JD Massapequa Park, NY
O
n several occasions, this column has dealt with covenants not to compete, also known as restrictive covenants. An oft-touted myth about these agreements is that they are unenforceable. Although generally disfavored by the courts, these paper tigers do have teeth when properly drafted. In short, they must protect a valid business interest and be reasonable in terms of time and geography. Often these covenants have several clauses reflecting the specific assets seeking to be protected, such as patient lists, hiring away of employees, and working for a local competitor. Com-Co Insurance Company v Service Insurance Agency, Ill App 2001, depicts a scenario commonly encountered in the dental community. Com-Co hired Abplanalp (hereinafter called the agent) as an insurance agent. He signed an employment agreement that included the following provision: The agent agrees that for the duration of this agreement and for a period of three (3) years thereafter: (a) He will not . . . divulge . . . any lists of names of customers or clients of the company, nor make any use thereof for himself in any manner.
…
(c) If employed by a company in a similar business, [he will not] render services directly or indirectly to or for that company in connection with the sale or promotion of its services or products to customers or clients of Com-Co.
It is easy for us to replace customers or clients with patients. In the typical restrictive covenant applicable to our little world, where an orthodontist works for either another orthodontist or a general dentist, the employee dentist covenants that he will not “steal” the employer doctor’s patients, and also that he won’t compete with the employer within a restricted area for a certain period of time. Returning to the case at hand, after being employed by Com-Co for 5 years, the agent left and went to work for Service, the defendant-appellee. The agent, true to his contractual agreement, refrained from rendering services to Com-Co’s clients except for relatives and friends he Program Director, Postgraduate Orthodontics, New York University College of Dentistry. Am J Orthod Dentofacial Orthop 2002:121:236-7 Copyright © 2002 by the American Association of Orthodontists. 0889-5406/2002/$35.00 + 0 8/8/122108 doi:10.1067/mod.2002.122108
236
had known before he began working for Com-Co. In good faith and fairness, he refrained from selling insurance to Com-Co’s former clients who sought his services after he had departed, and he would not even sell insurance to his wife because he had met her while working for Com-Co. The agent’s position was that his former employer had a reasonable interest in protecting its client base. However, this protection did not extend to people the agent knew before his employment with Com-Co because they were in reality his potential clients, and Com-Co was just the beneficiary of his prior relationship. Obviously, Com-Co took exception to the agent’s interpretation of who was and who wasn’t a Com-Co client. Com-Co sued for $36,000 in actual damages ($1000 for each client) and $100,000 in punitive damages. Returning to our analogous situation, if our young orthodontist leaves his first employer and, while practicing in his new venue, whether for himself or someone else, begins treating former patients of the first employer’s practice who were also the young orthodontist’s relatives or friends before his first employment, how would you rule? On one hand, the agreement says the employee can’t compete against the employer with his own patients; on the other hand, the employee says these patients were his friends and relatives before his relationship with the employer, and they would have come to him for treatment regardless of where or for whom he was working. In other words, is there a loophole in the covenant that would allow this “taking” of another’s protectable interest? The court noted that the general proposition governing whether a protectable interest exists is based on the following premise: Whether a restrictive covenant is enforceable is a question of law. An employer’s interest in its customers will be deemed proprietary if, by the nature of the business, the customer relation is near-permanent and but for his prior employment, the defendant would not have had contact with the client in question. . . . Conversely, a protectable interest in customers is not recognized where the customer list is not secret, or where the customer list relationship is short-term and no specialized knowledge or trade secrets are involved. Under these circumstances, the restrictive covenant is deemed an attempt to prevent competition per se and will not be enforced. (cits omit)
American Journal of Orthodontics and Dentofacial Orthopedics Volume 121, Number 2
Is an orthodontist/patient relationship a nearpermanent one? We all have some cases that seem to take forever, but that’s not what the court means. Obviously, this can be argued both ways, and many examples can be cited for each side, but this question must be answered if one is to find the existence of a protectable interest in the form of a client/patient. As for the second part of the test, the court addressed this point through a decision in another case, noting: The mere potential to become a long-standing customer is not sufficient. . . . We again emphasize the transient nature of insurance policies in general. It was uncontested that insurance customers are frequently approached by competitors and that the customers willingly give the competitor information regarding their premiums in hopes of obtaining a better deal. . . . As most of the clients . . . were brought in via “cold calls,” we cannot say that defendant would not have had contact with them but for his employment with the plaintiff, since most of these customers could be found in the phone book and randomly contacted by any insurance agent. (cit omit)
If one agrees that a patient can stand in the shoes of an insurance client, then the employer doctor has a protectable interest in his patients only to the extent that the employee doctor could not have treated those patients but for his association with the employer doctor. Therefore, to be safe, when it’s time for 2 doctors to get divorced, if the departing one wants to take some of the practice’s patient base with him, when the employer doctor says, “Hey, these are my patients, and we have a covenant that says you can’t take them,” it would be nice if the employee doctor could say, “Yes, but I knew him when.” COMMENTARY
Restrictive covenants are nasty business. It behooves both parties to adopt a nonpersonal perspective regarding this issue. First and foremost, we don’t own our patients. We refer to them as our patients, and the original codes of ethics of our American Association of Orthodontists considered them to be little more than property but, in today’s society, try to convince a jury that you own your patients. It ain’t gonna happen. Patients are free to be treated by whomever they choose. For this reason, covenants include geographic and temporal restrictions. It’s based on the theory that if I can’t
Litigation, legislation, and ethics 237
own them, then you can’t use them within a certain area for a given time. The other side of the coin is that it might have taken me years to develop a good professional reputation in my community. I went to countless parties, lunches, dinners, social functions, and meetings, subjecting my family to much of it, all in the hope of developing a thriving patient base predicated on stimulating internal patient referrals and external professional referrals. It is this asset that I seek to protect with a covenant. If you look closely at what we are really talking about, you’ll see that it is the development of personal contacts. Sure, these primary contacts generate and spin off second and third generation contacts, but it is still these interpersonal relationships that develop one’s referral base, whether patient or professional. If we agree to this premise, then both parties must mutually respect the other’s relationship bases. I won’t invade yours or those I met because I worked for you, but you can’t usurp the ones I brought with me when I came to work for you. Those of us who have either white hair or the memory of it thrust out our chests when we tell of patients we treated who now bring their children to us as patients. Occasionally, you’ll get to treat a third generation in a family. When that happens, you will come to believe in the near permanence of the doctor-patient relationship. That feeling will last only until the first patient leaves you for any of a hundred stupid reasons having nothing to do with your competency. Wait until the first time you treat child number 1, only to have mom and dad take child number 2 to someone else because he’s a few dollars cheaper. Is the doctor-patient relationship near permanent? It depends on the day. In summary, to obtain the protection that both parties believe they deserve, draft a covenant that is reasonable in terms of time and geography, and let the chips fall where they may. If you have a good relationship with your patients, they won’t leave to go with your ex-employee, particularly if they have to travel to do so. As the employer, do you really believe that you have the right to prevent your employee, when he leaves, from treating his niece or next-door neighbor merely because he started their treatment in your office? Think again. Employees who are treated well and mentored better won’t steal their employer’s patient base. In today’s orthodontic marketplace, there are plenty of patients to go around and far more valuable assets to be concerned about.
Information pertaining to litigation, legislation, and ethics will be reported under this section of the American Journal of Orthodontics and Dentofacial Orthopedics. Manuscripts for publication, readers’ comments, and reprint requests may be submitted to Laurance Jerrold, DDS, JD, 82 Laurel Dr, Massapequa Park, NY 11762.
I knew him when Laurance Jerrold, DDS, JD Massapequa Park, NY
O
n several occasions, this column has dealt with covenants not to compete, also known as restrictive covenants. An oft-touted myth about these agreements is that they are unenforceable. Although generally disfavored by the courts, these paper tigers do have teeth when properly drafted. In short, they must protect a valid business interest and be reasonable in terms of time and geography. Often these covenants have several clauses reflecting the specific assets seeking to be protected, such as patient lists, hiring away of employees, and working for a local competitor. Com-Co Insurance Company v Service Insurance Agency, Ill App 2001, depicts a scenario commonly encountered in the dental community. Com-Co hired Abplanalp (hereinafter called the agent) as an insurance agent. He signed an employment agreement that included the following provision: The agent agrees that for the duration of this agreement and for a period of three (3) years thereafter: (a) He will not . . . divulge . . . any lists of names of customers or clients of the company, nor make any use thereof for himself in any manner.
…
(c) If employed by a company in a similar business, [he will not] render services directly or indirectly to or for that company in connection with the sale or promotion of its services or products to customers or clients of Com-Co.
It is easy for us to replace customers or clients with patients. In the typical restrictive covenant applicable to our little world, where an orthodontist works for either another orthodontist or a general dentist, the employee dentist covenants that he will not “steal” the employer doctor’s patients, and also that he won’t compete with the employer within a restricted area for a certain period of time. Returning to the case at hand, after being employed by Com-Co for 5 years, the agent left and went to work for Service, the defendant-appellee. The agent, true to his contractual agreement, refrained from rendering services to Com-Co’s clients except for relatives and friends he Program Director, Postgraduate Orthodontics, New York University College of Dentistry. Am J Orthod Dentofacial Orthop 2002:121:236-7 Copyright © 2002 by the American Association of Orthodontists. 0889-5406/2002/$35.00 + 0 8/8/122108 doi:10.1067/mod.2002.122108
236
had known before he began working for Com-Co. In good faith and fairness, he refrained from selling insurance to Com-Co’s former clients who sought his services after he had departed, and he would not even sell insurance to his wife because he had met her while working for Com-Co. The agent’s position was that his former employer had a reasonable interest in protecting its client base. However, this protection did not extend to people the agent knew before his employment with Com-Co because they were in reality his potential clients, and Com-Co was just the beneficiary of his prior relationship. Obviously, Com-Co took exception to the agent’s interpretation of who was and who wasn’t a Com-Co client. Com-Co sued for $36,000 in actual damages ($1000 for each client) and $100,000 in punitive damages. Returning to our analogous situation, if our young orthodontist leaves his first employer and, while practicing in his new venue, whether for himself or someone else, begins treating former patients of the first employer’s practice who were also the young orthodontist’s relatives or friends before his first employment, how would you rule? On one hand, the agreement says the employee can’t compete against the employer with his own patients; on the other hand, the employee says these patients were his friends and relatives before his relationship with the employer, and they would have come to him for treatment regardless of where or for whom he was working. In other words, is there a loophole in the covenant that would allow this “taking” of another’s protectable interest? The court noted that the general proposition governing whether a protectable interest exists is based on the following premise: Whether a restrictive covenant is enforceable is a question of law. An employer’s interest in its customers will be deemed proprietary if, by the nature of the business, the customer relation is near-permanent and but for his prior employment, the defendant would not have had contact with the client in question. . . . Conversely, a protectable interest in customers is not recognized where the customer list is not secret, or where the customer list relationship is short-term and no specialized knowledge or trade secrets are involved. Under these circumstances, the restrictive covenant is deemed an attempt to prevent competition per se and will not be enforced. (cits omit)
American Journal of Orthodontics and Dentofacial Orthopedics Volume 121, Number 2
Is an orthodontist/patient relationship a nearpermanent one? We all have some cases that seem to take forever, but that’s not what the court means. Obviously, this can be argued both ways, and many examples can be cited for each side, but this question must be answered if one is to find the existence of a protectable interest in the form of a client/patient. As for the second part of the test, the court addressed this point through a decision in another case, noting: The mere potential to become a long-standing customer is not sufficient. . . . We again emphasize the transient nature of insurance policies in general. It was uncontested that insurance customers are frequently approached by competitors and that the customers willingly give the competitor information regarding their premiums in hopes of obtaining a better deal. . . . As most of the clients . . . were brought in via “cold calls,” we cannot say that defendant would not have had contact with them but for his employment with the plaintiff, since most of these customers could be found in the phone book and randomly contacted by any insurance agent. (cit omit)
If one agrees that a patient can stand in the shoes of an insurance client, then the employer doctor has a protectable interest in his patients only to the extent that the employee doctor could not have treated those patients but for his association with the employer doctor. Therefore, to be safe, when it’s time for 2 doctors to get divorced, if the departing one wants to take some of the practice’s patient base with him, when the employer doctor says, “Hey, these are my patients, and we have a covenant that says you can’t take them,” it would be nice if the employee doctor could say, “Yes, but I knew him when.” COMMENTARY
Restrictive covenants are nasty business. It behooves both parties to adopt a nonpersonal perspective regarding this issue. First and foremost, we don’t own our patients. We refer to them as our patients, and the original codes of ethics of our American Association of Orthodontists considered them to be little more than property but, in today’s society, try to convince a jury that you own your patients. It ain’t gonna happen. Patients are free to be treated by whomever they choose. For this reason, covenants include geographic and temporal restrictions. It’s based on the theory that if I can’t
Litigation, legislation, and ethics 237
own them, then you can’t use them within a certain area for a given time. The other side of the coin is that it might have taken me years to develop a good professional reputation in my community. I went to countless parties, lunches, dinners, social functions, and meetings, subjecting my family to much of it, all in the hope of developing a thriving patient base predicated on stimulating internal patient referrals and external professional referrals. It is this asset that I seek to protect with a covenant. If you look closely at what we are really talking about, you’ll see that it is the development of personal contacts. Sure, these primary contacts generate and spin off second and third generation contacts, but it is still these interpersonal relationships that develop one’s referral base, whether patient or professional. If we agree to this premise, then both parties must mutually respect the other’s relationship bases. I won’t invade yours or those I met because I worked for you, but you can’t usurp the ones I brought with me when I came to work for you. Those of us who have either white hair or the memory of it thrust out our chests when we tell of patients we treated who now bring their children to us as patients. Occasionally, you’ll get to treat a third generation in a family. When that happens, you will come to believe in the near permanence of the doctor-patient relationship. That feeling will last only until the first patient leaves you for any of a hundred stupid reasons having nothing to do with your competency. Wait until the first time you treat child number 1, only to have mom and dad take child number 2 to someone else because he’s a few dollars cheaper. Is the doctor-patient relationship near permanent? It depends on the day. In summary, to obtain the protection that both parties believe they deserve, draft a covenant that is reasonable in terms of time and geography, and let the chips fall where they may. If you have a good relationship with your patients, they won’t leave to go with your ex-employee, particularly if they have to travel to do so. As the employer, do you really believe that you have the right to prevent your employee, when he leaves, from treating his niece or next-door neighbor merely because he started their treatment in your office? Think again. Employees who are treated well and mentored better won’t steal their employer’s patient base. In today’s orthodontic marketplace, there are plenty of patients to go around and far more valuable assets to be concerned about.
Information pertaining to litigation, legislation, and ethics will be reported under this section of the American Journal of Orthodontics and Dentofacial Orthopedics. Manuscripts for publication, readers’ comments, and reprint requests may be submitted to Laurance Jerrold, DDS, JD, 82 Laurel Dr, Massapequa Park, NY 11762.