When working with your attorney on drafting non-compete agreements for your employees, there are many aspects you should consider. These aspects may be related to the specific language used in the agreement or actions you should take when you believe there is a breach.
In a recent Arizona Court of Appeals case, Tortolita Veterinary Services, V. Rodden, the court found that, while the agreement itself was enforceable, the Plaintiff failed to adhere to some core non-compete principles.
Facts
Tortolita operates a veterinary practice in Tucson, Arizona.
Dr. Martin was a veterinarian employed by Tortolita, who later resigned. During her employment, Dr. Martin signed a 1-year non-compete agreement.
More than a month before Dr. Martin resigned, she informed Tortolita of her intent to resign and open a small animal mobile veterinary practice, Desert Paws. Tortolita did not object. In fact, Tortolita sent an announcement to all of its clients informing them of Dr. Martin’s departure and agreed to provide clients with the contact information for Desert Paws upon request.
After her mobile practice was up and running for a few months, Dr. Martin added surgeries to her list of offered services, which she performed at another local animal hospital, located in the restricted radius denoted in the non-compete.
Tortolita learned that surgeries were being performed in December 2017 but did nothing to investigate. They then learned in March 2018 that the surgeries were being performed at the local animal hospital but never demanded the cessation of the surgeries. Later, however, they demanded to be paid $120,000 in liquidated damages.
What Should Tortolita Have Done?
This case presents some key takeaways for enforcing your non-compete:
1. Be Specific With Your Contract Language: The court noted that, while enforceable, the language in the non-compete agreement did not prohibit Dr. Martin from operating a mobile clinic within the area where competition was otherwise restricted or from providing services to former Tortolita clients.
Furthermore, the agreement did not specifically delineate any prohibited services like surgeries, nor did it state that utilizing space at the local animal hospital constituted a breach. The only thing Desert Paws could not do was provide services at its brick and mortar location within the restricted area during the applicable restricted period.
When working with your attorney on drafting your agreement working with specificity is tantamount. Consider these checklist items:
– Location: If your business is located in an area with a high saturation of competition, it may be a good idea to denote a radius, city, or another geographic measure to ensure that former employees do not operate in direct or close proximity to your business.
– Business Type: In the above case, the agreement prohibited local brick and mortar competition, but it did not prohibit mobile services. If your business can be performed in multiple types of locations, you may want to discuss the business structure that proses the biggest risk to your business with your lawyers.
For example, if you operate a doctor’s office you may want to include physical location, mobile location, and telehealth conditions in your agreement.
– Services: For businesses that perform various services, like a lawyer’s office, delineating the specific services that compete with your business is encouraged. For example, if you are a tax attorney, you may want to prohibit former employees from opening another tax law office in your area, but not a family law office.
Keep in mind, though, with a business-like law, one office or attorney can practice many areas, so you may have a hard time tracking the specific services the competing law office offers.
– Partnerships: Tortolita’s agreement did not prohibit Dr. Martin from working in partnership with another brick and mortar clinic not owned by Desert Paws. While it is common for a non-compete to contemplate a former employee accepting a position at a competing company, a lot of agreement do not consider an independent contractor relationship with a competing company.
If this is something that is likely to affect your business, you may want to add a detailed provision.
2) Properly Estimate Your Damages: At trial, Tortolita could not present a calculation of damages based on the surgeries performed by the Dr. Martin at the local clinic. Nevertheless, Tortolita claimed that profits attributed to Dr. Martin’s competition dropped approximately $200,000. However, the evidence presented did not support a claim that this drop was due to the departure of Dr. Martin.
Instead, the court found that the losses were mostly attributed to another Tortolita physician who had gone on maternity leave during the same time period. Additionally, the replacement veterinarian hired to replace Dr. Martin did not perform surgeries, which accounted for additional lost revenue.
Here, Tortolita mistakenly calculated losses based on all of the lost profits from the time Dr. Martin left. Clearly, many other factors played into the decline in clientele. When seeking to calculate your damages you should consider the actual amount attributable to the breach.
3) Mitigate Your Damages: Tortolita did nothing to mitigate the claimed damages. When Desert Paws requested records from Tortolita for current Tortolita clients, Tortolita did nothing to contact the clients and ask them to remain with them. Additionally, they did not send out emails to clients or mail fliers to aimed at client retention.
Lastly, the court concluded that, in order to protect itself from lost profits, Tortolita could have and should have sent a cease and desist letter followed by a request for a preliminary injunction as soon as reasonably possible after finding out about the suspected breach.
Tortolita chose not to invoke this remedy, even though it “… is commonly done when an employer believes a former employee has violated a non-compete agreement.” If you are aware of an ongoing breach, it is imperative that you try as soon as possible to protect your business from correlated losses.
4) Be Realistic About Your Position: Dr. Martin had offered Tortolita $60,000 to settle the case early on, and, since the Court ultimately awarded damages to Tortolita in the amount of $29,788.90 (less than the previous settlement offer), the Court considered Dr. Martin to be the prevailing party/entitled to reimbursement and, thus, awarded Dr. Martin attorney’s fees in the amount of $40,445.
When evaluating your loss, be realistic. Your attorney should do a thorough assessment of the value of your case and reasonable efforts to reach a settlement or amicable solution should be wholly considered.
In the above case, the Court held that Dr. Matin’s non-compete was enforceable, and Tortolita was, in fact, awarded an amount in damages. However, due to unclear agreement terms, miscalculation of losses, and failure to mitigate, Tortolita was not able to recover much of a judgment.
In fact, they ended up owning money. So, when drafting your non-compete, consider all aspects of your business and the best way to protect it from undue competition. Furthermore, make sure you take appropriate steps as soon as you believe a breach has occurred. Working with an attorney experienced in non-compete drafting and defense is highly recommended.
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