To: Senior Attorney

From: Law Clerk

Re: Carol Hathaway / The Caring Chiropractic Group Agreement / Client File #1234

Date: March 15, 1996

Question Presented

Is a non-compete covenant in an employment agreement of a chiropractor reasonable such that it will be enforced when, for a period of two years, it precludes the employee from soliciting any patient of the employer and from working in the same or related field within fifty miles of the former employer?

Short Answer

Yes. It is likely that courts in the state of Washington will find such a clause to be enforceable. By looking at the necessity to the employer, the imposition on the employee and the injury to the public of a non-compete covenant that, for a period of two years, precludes the employee from soliciting any patient of the employer and from working in the same or related field within fifty miles of the former employer a court would likely find it enforceable.

Statement of Facts

Dr. Carol Hathaway, a chiropractor, recently received a demand letter from her former employer. The demand letter informed her that she will be sued for violating the non-compete covenant in her employment agreement with her former employer if she does not close her solo practice within thirty days. After graduating from Mudd Chiropractic School, Dr. Hathaway began a practice in Taylor, Washington with several of her classmates that focused on high quality, low cost chiropractic care. At the time they opened the Caring Chiropractic Group, P.C. the doctors signed employment agreements. The agreements, in part, restricted, for a period of two years after leaving the group, any of the doctors from soliciting any patient of the group and from working in the same or related field within fifty miles of the group.

After several years of successful practice with the group, Dr. Hathaway decided to leave the group. In addition to the fact that she was expecting twins, she left because she felt dismayed with the group's departure from a quality and low-cost focus. She left the group on September 1, 1994, gave birth to her twins on September 15, 1994 and began a part-time solo practice in her basement on January 15, 1995. When she left she took only the files of her patients. She later sent announcements about her new practice to these patients. Until she received the demand letter, Dr. Hathaway felt that she left on good terms with the other members of the group. Her new practice, approximately thirty-five miles from the group's offices, has been extremely successful thus far. Approximately 25% of her business ($12,090 of $52,400) during the first three quarters has come from former clients she saw during her time at the group. After her departure, several other important events have occurred in the Taylor area. A new line has opened at the local Ford assembly plant, which provides a large number of the group's patients. A new low-cost medical group has opened, which includes several chiropractors. Finally, during this time the Caring Chiropractic Group's business has declined approximately 20%.

Discussion

To hold the non-compete covenant included in Dr. Hathaway's employment agreement enforceable the court must find the agreement to be a valid contract and find the non-compete covenant reasonable. As per your October 23, 1995 memorandum this memorandum will not discuss whether the agreement is a valid contract. It is important to note that non-compete covenants are considered a restraint of trade by Washington courts, Perry v. Moran, 748 P.2d 224, 232 (Wash. 1987), modified on other grounds, 766 P.2d 1096 (Wash. 1989), cert. denied, 492 U.S. 911 (1989), and therefore are generally prohibited under Washington's Unfair Business Practices Act, RCWA 19.86.030. As a result, courts only enforce the covenants "to the limited extent that they constitute partial restraints and meet the test of reasonableness." Perry, 748 P.2d at 232. Therefore, this memorandum focuses on the reasonableness of the non-compete covenant in Dr. Hathaway's employment agreement. Washington courts have stated that the determination of the reasonableness of a non-compete covenant involves the consideration of three factors: (1) whether the restraint is necessary for the protection of the business or good will of the employer, (2) whether it imposes upon the employee any greater restraint that ins necessary to secure the employer's business or goodwill, and (3) whether the degree of the injury to the public is such a loss of the service and skill of the employee to warrant non-enforcement of the covenant. Knight, Vale and Gregory v. McDaniel, 680 P.2d 448, 452 (Wash. Ct. App. 1984) (restating in clearer terminology the rule established in Racine v. Bender, 252 P. 115, 116-17 (Wash. 1927)). See also Alexander & Alexander, Inc. v. Wohlman, 578 P.2d 530, 539-40 (Wash. Ct. App. 1978). Further, the courts, in considering the restraint on the employee, look to the duration and area of the restraint included in the covenant. Wood v. May, 438 P.2d 587, 590.

In Dr. Hathaway's situation it is rather unlikely that a court would be willing to find the non-compete covenant unenforceable. From review of the previous decisions, it appears likely that the court would find the covenant was necessary to the employer and that the restraint on Dr. Hathaway was not more than was necessary. Though previous decisions have focused on the injury to the public imposed by the covenant only in a cursory manner, this appears to be a strong factor in favor of Dr. Hathaway due to her position as a chiropractor. Finally, precedent in Washington clearly indicates that a court may modify the agreement such that it would conform to the court’s view of reasonable. Overall, a review of precedent cases in Washington leads to the conclusion that the non-compete covenant included in Dr. Hathaway's employment agreement would be enforceable.

I. Necessity to Employer

The non-compete covenant must be necessary to protect the business and goodwill of the employer to be enforceable. The court in Knight, Vale and Gregory v. McDaniel, found the covenant was necessary to protect the business interests of the former employer. 680 P.2d at 448, 452 (Wash. Ct. App. 1984). The employees were accountants who left the employer's firm and formed a new partnership. The new partnership began providing services to three former clients of the employer, who the filed suit to enforce the covenant. Here, the court found enforcement was necessary to protect the employer's business interest and to "maintain the large and profitable clientele acquired over the years." Knight, 680 P.2d at 452. It reasoned that the nature of the accounting profession would allow former employees to be "exceptionally competitive." Knight, 680 P.2d at 452. This unique accountant-client relationship would appear to induce a loyalty on the part of the client to the individual accountant rather that the accountant's firm. This led the court to hold that the business interests of the employer needed the protection of the covenant. In contrast, in Wood v. May, the dissent argued that "there is no showing of irreparable harm to the [employer] if the contract is not enforced." 438 P.2d 587, 595 (Wash. 1968). The employer, a master horseshoer, taught the employee, an apprentice horseshoer, the trade of horseshoing. At the time of employment both parties signed an agreement which prevented the employer from practicing horseshoing within 100 miles for two years after leaving the employer. After leaving, the apprentice set up a horseshoing business five miles from the former employer's establishment. While he majority found the covenant to be enforceable with some modification of the duration and area, the dissent argued that the covenant was unenforceable. The record showed that the former employer had only 130 customers in a county of 3000 horses. The dissent reasoned that 3000 horses allowed ample room for expansion of both party's businesses and that the employer did not demonstrate necessity sufficient to have the covenant enforced. Wood, 438 P.2d at 588-92. In Dr. Hathaway's situation it appears that there is not an abundance of clients, as in Wood, and that there is a unique chiropractor-patient relationship similar to the accountant-client relationship in Knight. These observations do not help Dr. Hathaway's position, but there are some important differences which help to distinguish Dr. Hathaway's situation. While the Caring Chiropractic Group's business is down 20%, there are indications that the chiropractic business as a whole is not declining but rather is increasing in Taylor. First, a new line opened at the nearby Ford Motor Company auto manufacturing plant. A large portion of existing chiropractic business comes from Ford employees and this new line should increase the chiropractic business. Second, during Dr. Hathaway's first three quarters as a solo practitioner only about 25% of her business came from previous clients while the other 75% came from new clients. Finally, a large new clinic, including several chiropractors, has opened up nearby. Investments of this sort are not generally made where there is not demand. These three observations indicate that generally the chiropractic business in Taylor is growing. It appears there may be another reason for the loss of business at the Caring Chiropractic Group. The abundance of chiropractic patients brings Dr. Hathaway's situation into the realm of Wood, where an abundance of horseshoing customers allowed the dissent to argue the covenant was unenforceable. 438 P.2d at 592-96. The chiropractor-patient relationship is significantly different from that of an accountant-client relationship as discussed in Knight. 680 P.2d at 452. While in both instances a close relationship develops between the two parties, the subject matter of the relationship differs significantly. Though individual's regard both their health and their finances as very important, ultimately one's health would seem to hold higher importance. One may argue that the patient's interest in their health outweighs an employer's business interests. This argument, which has no precedent in Washington, ultimately goes to the public injury factor and as a result, will be discussed in greater detail below. Ultimately, though these distinctions are significant, it appears the Caring Chiropractic Group can establish that the necessity of protecting their business interests requires enforcement of the covenant.

II. Imposition on the Employer

A non-compete covenant must not impose on the employee a restraint, in terms of duration and area, that is greater than necessary to protect the business and goodwill of the employer. An alternative view of this factor is expressed by the dissent in Wood when it states that the restriction must not "deny [the employee] the opportunity to earn a livelihood." 438 P.2d at 592-93. While evaluating this factor on a case by case basis courts have generally held a duration in excess of five years, Perry, 748 P.2d at 230-31 (dictum here suggests a duration beyond five years unenforceable), and most area restrictions, Frederick D. Huebner & Yana D. Koubourlis, Trade Secrets and Noncompetition Agreements: A Washington Law Primer, Washington State Bar News, June 1995 at 33, 39, unreasonable. But, when covenants are found unreasonable in duration or area, the courts will modify the covenant so it is reasonable. Alexander, 578 P.2d at 539.

A. Duration of the Covenant

Where an employer restricts a former employee through a non-compete covenant to not performing accounting work for employer's clients for a period of three years after leaving the employer the restriction is found reasonable and therefore enforceable. Racine, 252, P. at 115-18. In Racine, the employee signed weekly reports which contained, just above the employee's signature, language restricting the employee from performing accounting services for employer's clients for three years after leaving the employer. After the employee was terminated, he set up accounting offices and began performing services for many of the employer's clients. The court ultimately held the three year restriction not unreasonable and upheld the non-compete covenant. It reasoned enforcement would not harm the employee's ability to earn a livelihood because of the large pool of potential clients. Racine, 252 P. at 115-18. The covenant in Racine corresponds to Dr. Hathaway's covenant in terms of duration. Dr. Hathaway's covenant restricts her from soliciting clients of the Caring Chiropractic Group for a period of two years after leaving. In Racine, the restriction was for three years and in Dr. Hathaway's situation the restriction is less, two years. Racine, 252 P. at 115. Similarly, both the covenant in Racine and Dr. Hathaway's covenant contain restrictions against soliciting clients or patients of the former employer. Thus, it appears likely that Dr. Hathaway's covenant would be found to be enforceable as to duration.

B. Area of the Covenant

Where a former employee is restricted from engaging in the insurance business within 100 miles for two years after leaving, the court found the area restriction unreasonable. Alexander & Alexander, Inc. v. Wohlman, 578 P.2d 530, 533-39 (Wash. Ct. App. 1978). In Alexander, the employee was required to sign a non-compete covenant requiring him not to work in the insurance business within 100 miles of the employer for two years after leaving the company. Following the employee leaving and setting up his own insurance business the employer filed suit to enforce the covenant. In considering the reasonableness of the covenant in this case, the court held the 100 mile restriction unreasonable. It further held that a restriction of the greater metropolitan area (Seattle in this case) would be reasonable, but only when applicable to solicitation of former clients of the employer. See also Wood, 438 P.2d at 590 (where the court found an area restriction of 100 miles unreasonable). In apparent contrast, a recent Washington Supreme Court opinion indicates in dictum that limiting the restriction to the geographical area served by the former employer would place too large a burden on the employee and therefore would be held unreasonable. Perry v. Moran, 748 P.2d 224, 229-30 (Wash. 1987), modified on other grounds, 766 P.2d 1096 (Wash. 1989), cert. denied, 492 U.S. 911 (1989). Dr. Hathaway's covenant, which restricts her from engaging in the practice of chiropractic medicine for two years within fifty miles of the Caring Chiropractic Group, appears to fall in the middle of the apparent contradiction of precedent regarding reasonableness of area restrictions. Like the holding of Alexander, Dr. Hathaway's restriction of fifty miles appears to reasonably approximate the greater metropolitan area of Taylor. But, unlike the holding of Alexander, Dr. Hathaway's restriction is complete rather than just to solicitation of clients of the former employer. Alexander, 578 P.2d at 533-39. It may appear, thus far, that a court would modify Dr. Hathaway's agreement to only apply to solicitation of former clients of the Caring Chiropractic Group. This conclusion is called into question by dictum discussed above in Perry which suggests that any geographic restriction, even if just to the area served by the former employer, is unenforceable. Perry, 748 P.2d at 229-30. If this dictum were followed by a court in Dr. Hathaway's case it would definitely be to her favor. It seems somewhat hopeful, in light of the complete picture surrounding Dr. Hathaway's covenant and the dictum of Perry, that a court may find Dr. Hathaway’s covenant unenforceable in terms of area.

III. Degree of Injury to the Public

Where a court deems there is sufficient injury to the public from restricting the employee from performing services it may find a non-compete covenant unenforceable despite necessity to the employer and lack of imposition on the employee. Racine, 252 P. at 117. Washington courts, though, do not seem to be in agreement about what constitutes sufficiency of degree of injury to the public. For example, in Racine, where services of an accountant are at issue, the court readily admits there are clients that desire the services of the former employee because of the relationship of trust that develops between an accountant and client over time but holds the covenant unenforceable. The court reasons that the clients "do not desire [the employee's] services because he is the only person who has the ability to perform them, but because they know him well, and he knows all about their business." Racine, 252 P. at 117. See also Knight, 680 P.2d at 452 (here the court reasons the public is not injured sufficiently to warrant non-enforcement unless they would be deprived of competent accounting services). In contrast, in Alexander, where services of an insurance broker are at issue, the court finds that "the public should be entitled to select whatever insurance broker they desire. " Alexander, 578 P.2d at 540. This observation led the court in Alexander to modify the covenant such that it only limits the employee from soliciting former clients of the employee. Alexander, 578 P.2d. at 540. This leaves open the possibility that clients can follow the employee of their own volition without solicitation. Dr. Hathaway's situation seems to compare in significant ways to both Racine and Alexander. Surely, as in Alexander, a chiropractor's patient should have the ability to select whatever chiropractor they desire. Alexander, 578 P.2d at 540. But, as in Racine, there are other chiropractors who would adequately be able to assist the patients. Racine, 252 P. at 117. It seems that this inconsistency in Washington courts can be decided to Dr. Hathaway's favor by arguing that the chiropractor-patient relationship is even more significant than that between an insurance broker or accountant and clients. The significance of this relationship does not lie with the right of the patient to choose but rather with the right of the patient to adequate care. It could be argued that another chiropractor would not be able, though just as skilled, to adequately render care to the patient because of the lack of knowledge developed over time. Granted, this same argument could be made in relation to an insurance broker, Alexander, 578 P.2d at 540, or an accountant, Racine, 252 P. at 117. But, an injury resulting from a mistake endangers one's health rather than one's finances. This argument does not have any precedent in Washington. The closest a Washington court comes is in dictum included in Racine where the court discounts this argument as applied to a physician's or dentist's assistant by stating that the "law presumes that the service can well be performed by some one else." Racine, 252 P. at 117. Courts that have ruled on this argument appear to be divided but at least one, a New York Appellate court in Owe v. Reynolds, 75 A.D.2d 967 (N.Y. App. Div. 1980), has found this to be an attractive argument. Michael G. Getty, Note, Enforceability of Noncompetition Covenants in Physician Employment Contracts: Confusion in the Courts, 7 J. Legal Med. 235, 250-53 n.2 (1986). This argument, that the unique chiropractor-patient relationship demands the non-enforcement of Dr. Hathaway's covenant, appears to be a significant factor which should be raised in Dr. Hathaway's situation.

Conclusion

Arguments in favor of not enforcing Dr. Hathaway's non-compete covenant can be made in regard to the necessity to the employer, the imposition to the employee and the injury to the public. Despite these arguments, it appears that the precedent cases in the state of Washington would lead a court to decide against Dr. Hathaway and enforce the covenant in favor of the Caring Chiropractic Group.