IS THE GOODWILL OF YOUR PRACTICE AT RISK?: PREVENTING FORMER EMPLOYEES/ASSOCIATES FROM POACHING YOUR BUSINESS EVEN WITHOUT WRITTEN CONTRACTS
We often warn clients who employ employees or associates without employee or associate agreements that the lack of a written agreement can result in significant risk to them, especially in the case of dental or other healthcare professions where the value of your business is tied directly to the Goodwill of the practice. A written and signed associate or employment agreement will often set out each parties’ responsibilities and expectations of the relationship, including wages, schedule, termination, and will contain promises or covenants between the parties that are worded to prevent former employees or associates from soliciting or attracting patients or customers away from their past employer, effectively leeching away the value of the Goodwill built by the business. Written termination provisions can prove especially useful when seeking to end a long-term employee relationship—the absence of a written agreement may lead to unwanted litigation over wrongful dismissal or a lack of appropriate notice of termination.
Contracts for associates and employees will sometimes contain a non-competition covenant, where the associate or employee covenants and agrees to refrain from competing with the former employer in a certain geographical area for a specified period of time. These non-compete clauses are often difficult to enforce at court, as Judges are reluctant to support a restraint of trade unless under exceptional circumstances. More often, we advise that employers include a very robust and well-drafted non-solicitation covenant in their agreements to prevent the former employee/associate from contacting and recruiting all the patients or clients of the business once they have been terminated.
In cases where there is no employment/associate agreement, or if the agreement does not contain a non-competition or non-solicitation clause, employers are often left wondering how they should go about protecting the Goodwill of their business following termination of the employee or associate.
A recent Ontario court decision (Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2018 ONSC 5206 (CanLII)) directly addressed this issue: a former employee of the plaintiff, who had worked there for 23 years with no employee agreement or contract, was terminated by the company and began to solicit customers and clients of the former employer to her new company following her termination. The employee had been privy to a number of trade-secrets of the company and had gotten to know many of the clientele of the business during her 23 years of employment, making it a simple matter for her to recruit them to her new business, i.e. to damage her former employer’s goodwill.
Despite the lack of a written agreement or non-solicitation clause, the court decided that the terminated employee had breached her duty not to use the confidential information of her former employer’s customers to solicit them. Although the employee did not take or share any written or recorded client records from her previous employment, the Court found that the employee had relied on her knowledge of the customers from 23 years of working with them, which was tantamount to taking a customer list with her when she left. The employee was found to have breached her duty of confidence and good faith to her former employer for the improper purpose of soliciting their customers and misappropriation of trade secrets, and the employee’s new employer was found liable for damages and over $390,000.00 in legal costs.
As you can see from the case above, employers still may have some recourse where the value of their Goodwill is at risk due to the lack of a non-solicitation covenant between employer and employee. Even absent a contract with a non-solicitation clause, the court has determined that the misappropriation of confidential information belonging to a former employer is an act of impropriety, which can cause both the former employee and their new employer to be found liable for the misuse of such information. In particular, Dentists and Hygienists have a professional obligation not to solicit the patients of another healthcare practitioner, regardless of whether or not a contract exists. However, employers who choose to forgo written agreements with employees, associates or hygienists may potentially face prolonged litigation that could continue for months (or possibly, years) without resolution, during which time the value of their practice’s Goodwill could continue to plummet. Notwithstanding the case, no purchaser of a dental practice will be willing to bring legal action and go after former employees or associates in court – this is very expensive and could have been prevented had a written contract been signed.
For the protection of your Goodwill, we strongly recommend that you enter into strong, enforceable agreements with your employees, hygienists, and independent contractors/associates. If you have any questions about employee or associate agreements and how to implement them in your practice, please feel free to contact our team at Kutner Law LLP. This blog post is for informational purposes only and should not be construed as legal advice.