Employment Contract Clauses: Are There Long-Term Implications?

Can employers legally prevent employees from working at competing pharmacies?

Have you or a friend from pharmacy school encountered this situation? You are changing pharmacy positions and have been asked to sign a “non-compete” agreement by the new employer. Or a provision by the same name is encountered when negotiating the sale of a pharmacy. Such agreements may impose limits on your options or alternatives and can appropriately be viewed as “tying your hands.” These provisions may purport to be in effect for a number of years and cover a substantial geographic area. But are they legally enforceable?

Basic Contractual Principles

A basic principle of the law of contracts in the United States is that the contracting parties are free to negotiate to reach agreement, subject to relatively few restrictions. Sometimes this agreement is characterized by lawyers as having a “meeting of the minds.” Relatively uninhibited freedom to contract is one of the major characteristics of our free market economy. However, sometimes these opportunities to negotiate may result in agreements that are inconsistent with the operation of a free and unfettered economy. For example, an agreement may result in a contract that is anti-competitive and restrains trade, or one that unduly interferes with one’s ability to earn a living.

Non-competition clauses, known colloquially as “non-competes,” are a great example of this potential tension between the freedom to contract and the potential for restraining trade. Courts have upheld such provisions in contracts as acceptable and not unduly restraining trade if they are limited with regard to duration, geographic coverage, and scope. Duration refers to how long the agreement runs or remains in effect. Geographic coverage means the territory that is the subject of the non-competition agreement, for example, not in “the county where I have been practicing for quite a number of years.” Scope relates to the proscribed or prohibited activities, that is, what activities are the parties agreeing that one of them will refrain from engaging in under this non-compete? For a pharmacist, this presumably would apply to “engaging in the practice of pharmacy.”

Non-Competes in Employment Situations

In recent years, use of non-compete provisions has increasingly been extended into professional practice employment situations. This occurs when the employer seeks to insert into the employment contract a provision that limits the ability of the new employee to work for a competitor should the decision be made to move to a new practice setting. The view of the employer is that such limits are necessary because either the employee has created a “following” among patients at the employer’s pharmacy, a group of patients who might trail the departing pharmacist to the new practice site, or because the employer has entrusted to the employee some inside knowledge of business practices and decisions that would be best if not shared with local competitors. Again, if the employee pharmacist agrees to such a provision in an employment contract this likely will be enforceable if the restrictions are reasonable with regard to duration, geography, and scope.

Non-Competes in the Sale of a Pharmacy

Non-competition clauses have a long tradition of being used when selling a practice or business that has been an ongoing concern for quite some time. When a pharmacy owner sells his pharmacy, a part of what he is selling (and being paid for) is the “goodwill” of the business, or the professional or service reputation that draws patients there and the habits they have that may continue to bring them there. Without a non-compete clause, the owner would be free to go across the street, let’s say, and immediately open a competing pharmacy. Former patients may follow him there, and the owner would therefore be taking back the goodwill that he just sold. Thus, the buyer of the pharmacy is protecting his or her investment and expenditure by inserting such a provision in the sales agreement covering the pharmacy.

Restrictive covenants parallel to what we have discussed here are also quite common in real estate transactions. The seller may seek an agreement from the buyer that certain things will not be done, for example, no sales of alcohol on this former church property or no detached storage sheds may be erected in our housing development. These provisions are generally upheld if challenged in court. They may also be encountered in a landlord-tenant leasing relationship where, say, a party is putting a pharmacy in a shopping center and asks the landlord to agree that no other pharmacy operations will be accepted in the commercial center.

Non-Disclosure and Non-Solicitation Agreements

A related contractual provision or agreement is known as a “non-disclosure agreement.” Increasingly, a non-competition provision in an agreement is combined with a non-disclosure agreement, covering professional or business practices the former employer shared with the employee but does not want disclosed to others. A further twist can appear as a “non-solicitation” agreement. This latter one would prohibit the former employee from soliciting the business of patients or clients he or she dealt with in the former practice setting.

Issues with Using “Customer Lists”

An additional way one could possibly compete after leaving a former position is to take along “customer lists.” The idea here is that once the new business affiliation is established an individual communication would be sent to patients with whom the pharmacist dealt with at his or her prior position, inviting the patient to follow the professional to his or her new practice home.

Note that this is quite different from placing an advertisement in the newspaper to announce the new business affiliation and inviting former patients to come to the new practice site. The difference is in the broadcast nature of this invitation as contrasted with the individually customized communication using a purloined customer list.

Enforcement of Agreements

How are such agreements enforced? While the typical remedy for breach of a provision in a contract is monetary damages, these non-compete and related agreements may be the subject of an equitable, rather than a legal, proceeding by the party feeling injured. The non-breaching party may attempt to secure an injunction, that is, a court judgment ordering the breaching party to stop doing so and comply with the terms of the agreement. An additional equitable remedy that may be available to the employer is the equitable remedy of specific performance. This means that the court will order the party breaching the terms of the contract to bring his or her behavior into conformity with the wording of the agreement.

The ability to challenge a non-compete provision in an employment contract can be greatly impeded if one signs a contract bearing wording such as this in the agreement: “____agrees that this covenant is reasonable with respect to its duration, geographical area, and scope.” Signing an agreement bearing that language could greatly impede the ability to later challenge the non-compete in court.

The decisions of courts in this area of the law, when the tribunals are presented with disputes about such agreements, tend to be extremely fact specific to that controversy, making generalization in this area of the law a bit challenging. Nonetheless, pharmacists should be attentive to specific provisions in employment contracts that could adversely affect future activities should one decide to move on to a new position.

Dr. Fink is professor of pharmacy law and policy and Kentucky Pharmacists Association Endowed Professor of Leadership at the University of Kentucky College of Pharmacy, Lexington.