Non-compete or binding out provisions in a Sale Agreement: what can a buyer reasonably expect?

The starting point for these clauses is that a restraint of trade clause which restricts free competition will usually be void as a matter of law unless the party requiring the clause can show:-

• The clause is designed to protect a legitimate business interest;
• The clause is no wider than reasonably necessary to protect that interest; and
• A wider public interest in not infringed.

When considering the first “legitimate business interest” it will come as no surprise to learn that the protection of Goodwill is such a legitimate interest which does not offend the public interest. Clearly no buyer would ever buy a dental practice if the seller walked away completely free to trade again whenever and howsoever they chose.
As such in dental sale agreements the focus will turn to consider whether or not the clause is no wider then reasonably necessary when considering the length of the restriction, the geographical radius of any restrictions and what activities are being restricted.

Case law makes it clear pretty quickly that each case turns on its own facts and what is upheld or not in one case cannot be used as a binding precedent in another. That said, it can, with some confidence, be said that indefinite restrictions are highly unlikely to be upheld. Also, a seller of a dental practice can be restricted for a longer period than one might see in an associate agreement (where a 12 month restriction period is commonly seen). Typically we tend to see 2 to 3 years in a non-dental corporate buyer sale as a standard period and such period, in our view, should be upheld. Dental corporate buyers tend to seek longer periods; sometimes up to 7 or 10 years. Where these match any kind of deferred payment or earn out period there would seem to be a legitimate interest in imposing them. If not, such periods may be struck down by the courts.

We sometimes see attempts to stop a seller setting up a Practice anywhere in England and Wales or applying for an NHS Contract anywhere. In our view these clauses are unlikely to be upheld.
Even where there is a defined non-compete territory, the surrounding geography can be important, with courts requiring smaller non-compete areas in an urban setting than in a less densely populated rural area. Also specialist practices where patients travel or are referred from further afield can expect larger areas being reasonably required. Typically we tend to see areas being requested from 2 to 5 miles in an urban setting with a non-corporate buyer purchase with the dental corporates again often requesting wider territories of between 10 to 20 miles.

The key activities we see restricted are:-

• Setting up a competing Practice
• Soliciting Practice Patients away to another practice
• Treating patients of the Practice (even if there has been no solicitation)
• Soliciting Practice staff to join another Practice

In the Facebook and Instagram age “solicitation” has to be defined carefully to allow a departing seller to maintain an online presence for other practices; provided such online advertising is not targeted within the restricted area.

The third of the above often causes some sellers an “issue”; the argument being that patients should be free to instruct a clinician of their choice. In our view (provided that the restriction period is otherwise reasonable) such clauses are capable of enforcement in a business sale agreement since proving “solicitation” is difficult; the seller has been paid for the Goodwill in each and every patient and provided that:

• the patients caught by this provision are limited to those who have received treatment at the Practice within a defined period of time (perhaps 18 to 24 months before Completion); and
• the length of the restriction is shorter than the solicitation restriction.

Finally, as a rule, the solicitation of staff restrictions tend to be in place for a shorter period of time than the other provisions – say for 12 to 18 months rather than two to three years; perhaps on the basis of showing a court that the clause is not unreasonably interfering in the labour market.
From the points above it can been seen that these clauses should be considered with care. If you are selling a practice and retaining any other practice interests, or the desire to practise elsewhere, please take advice concerning them before exchanging contracts.

Find out more about Buying a Dental Practice or Selling a Dental Practice