The last thing you’re probably thinking about when you’re about to sign an employment agreement is how your relationship with your employer might end. Yet these days most employment agreements address not only the terms of employment (salary, duties, benefits), but also the reasons an employer might terminate you and what your obligations are after termination. The clause most heavily negotiated in most employment agreements is the covenant not to compete. However, there are two other clauses that often accompany covenants not to compete to which you should also pay attention: the non-solicitation clause and the non-disparagement clause.
What is a non-solicitation clause? A non-solicitation clause typically restricts you from “soliciting” either your employer’s patients or your employer’s employees. These provisions are a means by which an employer protects its legitimate business interests, the logic being that you were only introduced to these patients or employees by virtue of your employment.
A typical non-solicitation clause might read:
(i) During Employee’s employment hereunder and for a period of two (2) years after his employment hereunder, Employee shall not, directly or indirectly, by himself or on behalf of any other person, partnership, corporation or other business entity, solicit any patient of Employer.. For purposes of this Agreement, the term “patient” shall mean any patient of Employer at the time this Agreement is executed and all patients who become such during the term of this Agreement.
(ii) During Employee’s employment hereunder and for a period of two (2) years after his employment hereunder, Employee shall not, directly or indirectly, by himself or on behalf of any other person, partnership, corporation or other business entity, solicit any then-existing employee of Employer for the purpose of soliciting or recruiting such employee to leave or abandon the employ of Employer for any reason whatsoever.
The question is: what is meant by the term “solicit”? The dictionary defines the word as “to seek by entreaty, earnest or respectful request, formal application…” Would it be considered “solicitation” if you respond to a patient’s inquiry about your plans, rather than initiating contact with the patient? Would it be considered “solicitation” if, once you establish a new office, you advertise your new practice in a local newspaper or on the internet? Similarly, would it be considered “solicitation” if you hire an employee of your former employer if the employee approached you for a job, rather than vice versa?
Since “solicitation” is an ambiguous term, it would serve you well to define it in your employment agreement. One way to define it is to state what it doesn’t mean, e.g., “Employee will not be considered to have solicited a patient or employee of Employer if: (1) the patient or the employee initiates the contact with Employee; 2) the patient or employee was known to the Employee prior to his employment by Employer; or (3) the patient or employee responds to a notice that the Employee publishes in a medium that is available to the general public, e.g., newspaper, internet, etc.”
In order to be enforceable in Pennsylvania, non-solicitation clauses must have been signed near the time you signed your employment agreement or when you received some sort of improvement in the terms or conditions of your work. This is because your employer must give you something valuable in return for your agreement in order for the contract to be considered legally valid.
Although it is clear under Pennsylvania law that covenants not to compete must be “reasonable” in order to be enforceable (that is, the geographic, time and scope of practice restrictions cannot be overly broad or lengthy), it is less clear that covenants against the solicitation of patients or employees must be “reasonable.” However, a federal court in New York, applying Pennsylvania law, recently concluded that Pennsylvania law requires that non-solicitation clauses must be reasonable. In Fenner Precision, Inc. v. Mearthane Products Corp. 2013 WL 441090 (W.D.N.Y.), the federal court observed that to determine what is “reasonable”, a court must weigh the business interests of the employer against the interests of the employee in being able to continue his livelihood, considering such relevant facts and circumstances as the “reasons that the employee’s employment ended, the employee’s personal circumstances, the number of times the employee had previously agreed to [similar restrictions], the potential harm to the employer and the size of the potential pool of customers and the business climate.”
In Fenner, the court refused to uphold a non-solicitation clause in a former Fenner employee’s employment agreement even though the former Fenner employee, as a new employee of Mearthane, contacted customers of Fenner to try to sell them Mearthane products that competed with those of Fenner. Although the court considered Fenner’s customer base to be the type of customer “goodwill” that is a legitimate and protected business interest, the court based its conclusion on the facts that the employee had made many of the contacts with Fenner’s customers prior to his employment with Fenner so that the customer “goodwill” shouldn’t have been attributed to Fenner. The court also considered that Fenner terminated the employee due to the employee’s alleged incompetence and therefore shouldn’t be able to claim that he had the business acumen to steal Fenner’s customers. Moreover, the court concluded that the employee took no confidential Fenner information with him when he left. Finally, the court noted that the employee would suffer harm if the restriction were enforced because of the small number of potential buyers in the relevant market and the fact that the employee had shown how difficult it would be for him to find employment in another aspect of the industry.
Thus, your employer would not likely be successful in enforcing a non-solicitation clause against you if you were able to show that, although you did initiate contact with the employer’s patients and/or employees, in fact, you had had relationships with your employer’s patients and/or employees prior to your employment with your employer, thus undermining your employer’s claim that your “solicitation” of these individuals would harm the customer “goodwill” which the employer had developed through the investment of its time and resources. Moreover, if you could show that you were terminated from employment for alleged unsatisfactory performance, it would be difficult for the employer to argue that you would be successful in “stealing” its patients or employees.
Of course, if you were to take patient lists with you or if your former employer were able to show that you used promotional materials originally developed by the employer in marketing your practice after your departure, a court might be weigh the employer’s interests more favorably in the balancing test between your interests and the employer’s since proprietary materials are usually considered legitimate protected employer interests. Also, most employment agreements also contain provisions that obligate you to maintain the confidentiality of proprietary business information of your employer. Patient lists, prices charged for services, and salaries of employees would all be considered proprietary information or “trade secrets”. If you used such information in the process of soliciting patients or recruiting employees, you might be found to have violated the confidentiality clause. You then might be both subject to an injunction prohibiting you from using the information in the future and a damage award equal to any related profits you received from your use.
Many employers want to control the end of their relationship with an employee not only by specifying the bases upon which the employer may terminate employment, but by regulating the employee’s behavior after termination. (It’s surprising how many physician employment agreements I see in which the employer fails to mention the bases upon which the employee may terminate the agreement!) Employers are often concerned about what the employee will say about the employer once he departs from the practice—hence the inclusion of non-disparagement clauses in a physician’s employment agreement. Non-disparagement clauses can range from a simple statement like “The employee will not disparage or comment negatively about the Practice either during his employment or thereafter” to more detailed clauses, e.g.:
So long as Employee is employed by Employer, and following the termination of such employment, for any reason, whether voluntary or involuntary, neither party shall disparage the other or its products or services or its employees, officers, shareholders, agents, or partners, or interfere with the other’s relations with any patient, client, account, referral source, employee, supplier or competitor or induce or attempt to induce any patient, client, account, employee, supplier or competitor to refrain from dealing with the other or reduce the amount or type of business it does with the other.
Like the term “solicitation”, the term “disparagement” is subject to many interpretations. The dictionary defines the term “disparage” as “to depreciate or belittle”. Of course one man’s “belittlement” is another’s constructive criticism. I usually try to replace the word “disparage” with the word “defame” since defamation has a legal definition which includes the determination that a statement is not true. Thus, if you criticize your practice but you can show that the criticism was accurate, you will not be considered to have defamed the practice.
Some believe that non-disparagement clauses infringe on their First Amendment rights to speak freely. However, an employee may bargain away his constitutional rights in most cases. The exceptions to this rule are situations in which the restraint on the employee’s speech may harm the public interest. For example, an employer cannot prevent you (either during or after your employment) from reporting an occupational safety hazard to the Occupational Safety and Health Administration or from reporting Medicare fraud to the Center for Medicaid and Medicare Services.
But you should not bargain away your rights to make public comments about your employer without getting something in return. Thus, if your employer wants to obligate you not to disparage your employer, you should ask for the clause to be made mutual, that is, your employer should not be able to disparage you. This may be problematic for some employers since they may be reluctant to agree not to say anything “disparaging” about you to future employers: they may argue that if they are prevented from being “honest” in their employment references, they may be accused of negligent misrepresentation. Again, if the word “disparage” is changed to “defame” and neither party is permitted to defame the other, this argument is undermined since the agreement would only prevent the employer from making untrue negative comments about you.
Another reason employers may balk at making this provision mutual is that, if the employer has many employees, it may believe that it would be impossible to police the statements of all of its employees. One solution is for the employee to limit the employer’s non-disparagement obligation only to the employees that provide references on behalf of the employee. Another possibility is to insert a provision that obligates the employer, upon the employee’s departure to negotiate a mutually acceptable reference letter to be provided to the employee’s potential subsequent employers.
The problem with non-disparagement clauses in general is in their enforcement. Litigation generally means making the disparaging statements public which is unlikely to help the reputation of the party suing for breach of the provision. Also, while litigation (or even a “cease and desist” letter from an attorney) may prevent future disparaging remarks, it doesn’t compensate the plaintiff for the reputational damage caused by the original statements. Also, obtaining witnesses to testify in such a trial might be difficult, as would calculating the economic damage caused. Moreover, the cost of litigating such a breach could be prohibitive. Thus, non-disparagement provisions are worthwhile more for their psychological impact than for their enforcement potential.
In times past, non-solicitation and non-disparagement clauses were more likely to appear in severance agreements than in employment agreements. However, they, along with covenants not to compete, are now a routine part of physician employment agreements. Since your prospective employer is thinking of the end of your relationship at the beginning of your relationship, it makes sense for you to do the same and to negotiate these provisions in your favor.
The Law Office of Martha Swartz concentrates on the regulatory and business aspects on health care.