Question: I am selling my practice and plan to become employed by the buyer for a year following the closing. I expect that I will have to agree to a covenant not to compete.
We recently got the deal documents to review and there is a covenant not to compete in both the purchase agreement and the employment agreement. The one in the purchase agreement has a larger restricted area and longer restricted period than the one in the employment agreement. Why is this? Can they both be enforceable?
Answer: The reason for the two different covenants not to compete is that there are different standards of enforceability that apply to them. Your buyer and future employer are taking advantage of this, maximizing the amount of time and the size of the geographic area in which you can be prohibited from competing.
A covenant not to compete in an employment agreement is enforceable if it is “reasonable.” This standard comes from MCL 445.774a, the section of Michigan’s Antitrust Reform Act applicable to employment agreements. A covenant not to compete in an employment agreement will generally be held to be reasonable if the duration of the restriction, the geographic area restricted, and the scope of the activities restricted are limited to that which is necessary to protect the employer’s legitimate competitive interest.
For dental practices, this usually means that the employer should determine the geographic area its patients come from and limit the restricted area accordingly. It will be difficult for the employer to justify a geographic restriction that extends into areas from which a practice currently does not draw patients. Generally, Michigan courts have enforced covenant not to competes in employment agreements with a term of two to three years. Employers seeking enforceability of a covenant not to compete for a longer term must prove why restricting the dentist from practice for two to three years is not sufficient to protect the employer’s interest in preserving relationships with existing patients.
Michigan’s Supreme Court has made clear that the enforceability of a covenant not to compete in a purchase agreement is not subject to the same reasonable standard as those in employment agreements. Instead, the court has held that when the covenant not to compete is part of a commercial contract (e.g., a purchase agreement, independent contractor agreement, distributorship agreement, franchise agreement, etc.) it will be judged under MCL 445.772, the general contract provision of Michigan’s Antitrust Reform Act. Under this provision, a covenant not to compete will be enforceable if it satisfies the federal antitrust law’s “rule of reason” standard. This standard is much easier to satisfy than the reasonableness standard used to judge a covenant not to compete in an employment agreement. Under the rule of reason standard, a covenant not to compete will be enforceable so long as it does not cause an adverse impact in the relevant market. Frankly, it is hard to imagine how restricting a single dentist from practicing in a particular area would cause such an adverse impact on competition, provided it is not a remote area with no other or very few dentists.
It has become routine in practice acquisitions involving the employment of the seller following the closing that purchasers of dental practices (and other business) will insist on differing covenants not to compete in the employment agreement and the purchase agreement, with the harsher terms included in those placed in the purchase agreement.
This article originally appeared in the August 2025 edition of the Journal of the Michigan Dental Association.
