Pharmacy Non-Competition and Non-Solicitation Agreements

By Colony RX

When a pharmacy is purchased, the buyer assumes all sorts of risks related to the business. One risk the buyer should not have to assume, however, is that the seller, or any key employee of the business, will seek to harm the business by competing against it.

Pharmacy Non-Competition and Non-Solicitation Agreements

There are several clauses in agreements that are used to protect the buyer. The use of such clauses is premised on the possibility that a seller of employee might begin working for a competitor or starting a business, and gain an unfair competitive advantage by exploiting confidential information about their former employer’s operations or trade secrets, or sensitive information such as customer/client lists, business practices, upcoming products, and marketing plans. To protect the money that the seller has spent on the business, three documents are used: a non-compete agreement, a non-solicit agreement and a confidentiality agreement. In the case of employees, this will be part of the employment agreement. In the case of the seller, this will be part of the asset purchase agreement.

A non-solicitation clause typically restricts or restrains the ability to contact present or past patients of the pharmacy. Often it will prohibit contacting these patients for the purpose of selling them a product or service, or seeking to entice them away from the pharmacy.

A non-competition or non-compete clause, on the other hand, is typically not limited to specific contacts, but rather restricts a person from engaging in activity that is competitive to the pharmacy. Frequently, non-competition clauses restrict competition for a specific activity; specific amount of time in a specific geographical area; however, in order to be enforceable, these restrictions must be reasonable. A reasonable clause balances the right of the seller/employee to earn a living and the right of the seller to protect their business.

A confidentiality clause, prevents a seller or employee from disclosing secrets of the business or using them in any way for the benefit of anyone other than the pharmacy. A “secret” is generally defined as something not generally known to the public.

If a seller is going to work for the business after the sale, they will sign two versions of these clauses, one in their capacity as seller and one in their capacity as employee. Each will have a different expiry date, and the longer of the two will survive.

Enforceability

These clauses have to be fair to be enforceable. If the restrictions are found to be overly-broad, the agreements will allow a judge to amend them. For example, a non-competition agreement preventing a seller from being a pharmacist for 25 years anywhere in the United States is too broad. It goes beyond protecting the business. A judge may reduce this to 5 years within a 30-minute drive of where the pharmacy is located.

What is reasonable depends on the area and circumstances. A 5-mile radius in Manhattan covers millions of people. A 5-mile radius in rural Ohio may cover a population of ten people. Likewise, state law varies from state-to-state on non-competition agreements.

At Colony RX, we understand that employees can be afraid of these clauses. They fear that a new owner will come into the business, fire them, and then they will not be able to find a job. In reality, the reverse is true. The buyer of the pharmacy needs a team to take care of the patients, and arbitrarily firing employees would erode the team morale and unity that gives the business value that they are paying for. The buyer has no interest or desire in restricting the ability of the employee or seller to find other work – their sole interest is protecting their business they just bought.

At Colony RX, we have never terminated an employee when we bought a business. This policy is a central element of our business model. In fact, when we are evaluating a pharmacy to buy, if the finances of a pharmacy cannot support continued employment of everyone, we will pass on the opportunity and not buy the business.

 

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