Court Opinion

ID: 2927371
Source: CourtListenerOpinion
Date Created: 2015-09-11 22:52:07.238845+00
Date Added: 2024-06-11T08:36:16.369170
License: Public Domain

NUMBER 13-08-00201-CV

                             COURT OF APPEALS

                  THIRTEENTH DISTRICT OF TEXAS

                     CORPUS CHRISTI - EDINBURG

VALLEY DIAGNOSTIC CLINIC, P.A.,                                             Appellant,

                                            v.

JOSEPH C. DOUGHERTY, M.D.,                                                   Appellee.

  On appeal from the 107th District Court of Cameron County, Texas.

                                   OPINION
             Before Justices Rodriguez, Garza, and Benavides
                         Opinion by Justice Garza
       In this case, we are asked whether a covenant not to compete incorporated into a

professional association’s bylaws is enforceable. Appellant, Valley Diagnostic Clinic, P.A.

(“VDC”), challenges the trial court’s judgment in favor of appellee, Joseph C. Dougherty,

M.D., contending by eleven issues that the trial court erred in determining that a deferred

compensation forfeiture clause contained in VDC’s bylaws is unenforceable as a unlawful

restraint of trade. We affirm.

                                     I. BACKGROUND

       VDC is a medical clinic established in April 1998 in Harlingen, Texas.          Dr.

Dougherty, a nephrologist, entered into a “Physician Employment Agreement” with VDC

on July 1, 1999, which provided in part that VDC would be entitled to receive all fees
generated by Dr. Dougherty for professional services. In exchange, Dr. Dougherty would

receive regular compensation from VDC in the amount of “47.5% of the net collected

receivables attributed solely to [Dr. Dougherty’s] professional fees,” with the exact

percentage subject to change annually by VDC’s board of directors.

       In July 2000, VDC adopted bylaws which included a deferred compensation

program for its shareholder physicians. Specifically, section 6.4 of the bylaws provided as

follows:

               6.4    Deferred Compensation. Subject to Section 6.4(c) below, upon
       the first day of the month following his separation from service, and on the
       first day of each of the ensuing forty-seven (47) months, each Member shall
       be entitled to receive a deferred compensation amount determined as
       follows:

                     (a)   Existing Members:        Those who are Members
             (shareholders) on November 30, 2001 (“Existing Members”) shall be
             entitled to receive a monthly deferred compensation amount
             equivalent to his/her share, proportionate to the number of Members
             (both Existing and New), of 1/48 of:

                           (1)    90% of the estimated collectible accounts
                    receivable of the Association, as determined by the
                    Association’s Executive Director, plus 100% of the
                    Association’s Cash,

                                  less

                          (2)    the amount of all Association Liabilities, including
                    Association’s indebtedness from all sources, accounts
                    payable, and accrued payroll and benefits.

       An Existing Member shall also be entitled to receive an additional deferred
       compensation amount equivalent to his/her share, proportionate to the
       number of Existing Members, of 1/48 of the fair market value of the
       Association’s Tangible Assets, as determined by a majority of the Members,
       or by a qualified medical practice appraiser, if agreement cannot be reached.

             ....

                    (c)     Restrictions Applicable to Existing Members and New
             Members: If a Member separates from service within four (4) years
             of becoming a Member, he/she shall be entitled to receive only a
             portion of the above-described deferred compensation payments, in
             accordance with the following schedule:

                                            2
                                 YEARS                     PERCENTAGE OF
                                 AS A                        DEFERRED
                                MEMBER                     COMPENSATION
                                                            ENTITLEMENT
                          less than 2 years                       0%
                       2 years but less than 3                   50%
                       3 years but less than 4                   75%
                           4 years or more                       100%

                In addition, if a Member with any degree of seniority separates from
                service and practices medicine during the next four (4) years, within
                a 50-mile radius of Harlingen, Texas, such former Member shall forfeit
                his/her entitlement to any remaining monthly deferred compensation
                payments from the Association. Such forfeiture shall constitute
                liquidated damages to reasonably compensate the Association for
                harm suffered by it due to such former Member’s competition.
                Although this does not represent an express covenant not to
                compete, the Association nevertheless shall comply with the
                provisions of § 15.50(b) of the TEXAS BUSINESS AND COMMERCE CODE;
                such provisions are hereby incorporated by reference into these
                Bylaws.

(Emphasis in original.)

        On or about August 26, 2004, VDC informed Dr. Dougherty that he had violated

certain provisions of his employment agreement.1                 VDC decided to terminate Dr.

Dougherty’s employment pursuant to a clause in his employment agreement providing that

he may be terminated without cause upon ninety days’ notice. VDC gave Dr. Dougherty

notice of his termination on September 7, 2004, and the termination took effect on

December 7, 2004. In December 2004, Dr. Dougherty set up a separate nephrology

practice in Harlingen.         Subsequently, VDC refused to make monthly deferred

compensation payments to Dr. Dougherty, contending that he forfeited his rights to receive

those payments under the final paragraph of section 6.4 of the bylaws (the “forfeiture

clause”).

        Dr. Dougherty sued VDC on April 19, 2005, alleging wrongful termination and

contending that VDC’s refusal to make deferred compensation payments to him amounted

       1
          Specifically, VDC alleged that Dr. Dougherty had inform ed another nephrologist, who was a
candidate for em ploym ent at VDC, that “VDC was not supportive of nephrology and would not support [the
candidate] if he accepted em ploym ent at VDC as a nephrologist.” Dr. Dougherty denies the allegation.
Because VDC was authorized under the em ploym ent agreem ent to term inate Dr. Dougherty without cause,
this background is im m aterial to our analysis.

                                                   3
to a breach of contract and breach of fiduciary duty.2 Dr. Dougherty later amended his

petition, seeking declaratory relief in the form of a judgment stating that the forfeiture

clause is an unenforceable covenant not to compete. See TEX . BUS. & COM . CODE ANN .

§§ 15.50-.52 (Vernon Supp. 2008) (setting forth criteria for the enforceability of covenants

not to compete). The amended petition requested judgment against VDC for failing to pay

Dr. Dougherty’s deferred compensation and for attempting to enforce the forfeiture clause,

as well as for attorney’s fees and interest.

        VDC moved for summary judgment, contending that the forfeiture clause is not a

covenant not to compete and is therefore not subject to the requirements of the business

and commerce code. Dr. Dougherty also moved for summary judgment, contending that

the forfeiture clause is a covenant not to compete and that it is unenforceable because it

does not comply with those requirements. The trial court declined to grant either motion

for summary judgment, but it did specifically find that the forfeiture clause constitutes a

covenant not to compete. The case proceeded to trial solely on the issue of whether the

covenant was enforceable.

        After a trial before the bench, the trial court ruled in favor of Dr. Dougherty on

January 31, 2008, finding the forfeiture clause to be unenforceable. The trial court also

awarded $179,870.46 to Dr. Dougherty, representing the withheld deferred compensation

payments and pre-judgment interest, as well as monthly payments of $4,560.06, $20,000

in trial attorney’s fees, $20,000 in additional attorney’s fees upon appeal to this Court,

$5,000 in additional attorney’s fees if a petition for review is filed with the Texas Supreme

Court, and $15,000 in additional attorney’s fees if that petition for review is granted.

        On January 31, 2008, VDC filed a “Motion for Reformation” with the trial court,

seeking to have the forfeiture clause reformed in accordance with section 15.51(c) of the

business and commerce code. See id. § 15.51(c). The motion was denied on February

        2
          Dr. Dougherty’s original petition also nam ed Candice Downing, D.O. and Luis Reynoso, M.D., VDC’s
president and m edical director at the tim e the petition was filed, as defendants. The trial court awarded
sum m ary judgm ent in favor of Drs. Downing and Reynoso on May 24, 2007, and neither party to this appeal
contests that judgm ent.

                                                    4
6, 2008. Subsequently, pursuant to VDC’s request, the trial court issued written findings

of fact and conclusions of law on February 13, 2008. Among the findings of fact were the

following:

              5.     The forfeiture provision specifically denied that the provision
                     was a covenant not to compete, but that if it should be so
                     found that it would abide by the provisions of Tex. Bus. &
                     Comm. Code §15.50(b).

              6.     Plaintiff [Dr. Dougherty] did not sign the [Bylaws] or Section 6.4
                     of the [Bylaws].

              7.     There was no consideration for the execution of the covenant
                     not to compete.

       The trial court’s conclusions of law concisely restated the declarations made in the

final judgment and additionally stated that “[r]eformation is not applicable to the covenant

not to compete.” VDC filed its notice of appeal on April 18, 2008, and this appeal followed.

                                       II. DISCUSSION

       On appeal, VDC raises eleven issues, each challenging the trial court’s central

conclusion that the forfeiture clause contained in VDC’s bylaws was unenforceable as a

covenant not to compete.

1.     Standard of Review

       Findings of fact in a case tried to the court have the same force and dignity as a

jury’s verdict upon questions. Anderson v. City of Seven Points, 806 S.W.2d 791, 794

(Tex. 1991). When reviewing facts,

       . . . the final test for legal sufficiency must always be whether the evidence
       at trial would enable reasonable and fair-minded people to reach the verdict
       under review. Whether a reviewing court begins by considering all the
       evidence or only the evidence supporting the verdict, legal-sufficiency review
       in the proper light must credit favorable evidence if reasonable jurors could,
       and disregard contrary evidence unless reasonable jurors could not.

Villagomez v. Rockwood Specialties, Inc., 210 S.W.3d 720, 728 (Tex. App.–Corpus Christi

2006, pet. denied) (quoting City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005)).

When conducting a factual sufficiency review of findings of fact, we may not merely

substitute our opinion for that of the trial court; rather, we must “consider and weigh all of

the evidence and will set aside the verdict only if it is so against the great weight and

                                              5
preponderance of the evidence that it is clearly wrong and unjust.” City of Keller, 168
S.W.3d at 826.

       A trial court’s conclusions of law may not be reviewed for factual sufficiency and

may be reversed only if they are erroneous as a matter of law. Villagomez, 210 S.W.3d

at 728 (citing Stable Energy, L.P. v. Newberry, 999 S.W.2d 538, 547 (Tex. App.–Austin

1999, pet. denied); Hofland v. Fireman’s Fund Ins. Co., 907 S.W.2d 597, 599 (Tex.

App.–Corpus Christi 1995, no writ)). We review such conclusions de novo. Id. at 727.

Incorrect conclusions of law do not require reversal, provided that the controlling findings

of fact support a correct legal theory. Id. at 728 (citing Stable Energy, 999 S.W.2d at 547).

       The enforceability of a covenant not to compete is a question of law for the court.

Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 644 (Tex. 1994); Powerhouse Prods.

v. Scott, 260 S.W.3d 693, 696 (Tex. App.–Dallas 2008, no pet.). The trial court stated in

its conclusions of law that the forfeiture clause constitutes an unenforceable covenant not

to compete, but it did not explain why it is unenforceable. Accordingly, we will uphold the

trial court’s conclusion upon any legal theory supported by the evidence. BMV Software

Belg., N.V. v. Marchand, 83 S.W.3d 789, 794 (Tex. 2002); Waggoner v. Morrow, 932
S.W.2d 627, 631 (Tex. App.–Houston [1st Dist.] 1996, no writ).

2.     Applicable Law

       Although the provision at issue here is a forfeiture clause and expressly states that

it is not a covenant not to compete, the Texas Supreme Court has analyzed such clauses

in the same manner as covenants not to compete because they share the same

objective—to restrain a former employee from competing against the employer. See Peat

Marwick Main & Co. v. Hass, 818 S.W.2d 381, 383 (Tex. 1991).

       Covenants not to compete are generally considered restraints of trade and are

disfavored in law. See TEX . BUS. & COM . CODE ANN . § 15.05(a) (Vernon Supp. 2008)

(“Every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.”);

see also Travel Masters, Inc. v. Star Tours, Inc., 827 S.W.2d 830, 832 (Tex. 1991).

However, the Covenants Not to Compete Act (the “CNCA”) sets forth certain circumstances

                                              6
under which such covenants are enforceable. See TEX . BUS. & COM . CODE ANN . §§

15.50-.52. The CNCA provides in relevant part that:

               Notwithstanding Section 15.05 of this code, and subject to any
       applicable provision of Subsection (b), a covenant not to compete is
       enforceable if it is ancillary to or part of an otherwise enforceable agreement
       at the time the agreement is made to the extent that it contains limitations as
       to time, geographical area, and scope of activity to be restrained that are
       reasonable and do not impose a greater restraint than is necessary to protect
       the goodwill or other business interest of the promisee.

Id. § 15.50(a).

       Section 15.50(b) of the CNCA provides additional requirements for a covenant not

to compete to be enforceable against a physician licensed by the Texas State Board of

Medical Examiners. Specifically, the statute provides that:

       (1) the covenant must:

              (A)    not deny the physician access to a list of his patients whom he
                     had seen or treated within one year of termination of the
                     contract or employment;

              (B)    provide access to medical records of the physician’s patients
                     upon authorization of the patient and any copies of medical
                     records for a reasonable fee as established by the Texas State
                     Board of Medical Examiners under Section 159.008,
                     Occupations Code; and

              (C)    provide that any access to a list of patients or to patients’
                     medical records after termination of the contract or
                     employment shall not require such list or records to be
                     provided in a format different than that by which such records
                     are maintained except by mutual consent of the parties to the
                     contract;

       (2)    the covenant must provide for a buy out of the covenant by the
              physician at a reasonable price or, at the option of either party, as
              determined by a mutually agreed upon arbitrator or, in the case of an
              inability to agree, an arbitrator of the court whose decision shall be
              binding on the parties; and

       (3)    the covenant must provide that the physician will not be prohibited
              from providing continuing care and treatment to a specific patient or
              patients during the course of an acute illness even after the contract
              or employment has been terminated.

Id. § 15.50(b). Accordingly, to determine whether there is an enforceable covenant not to

compete in the instant case, we must first examine whether the parties entered into an

                                             7
“otherwise enforceable agreement” and then decide whether the covenant was “ancillary

to or part of” that agreement at the time the agreement was made. See id. § 15.50(a); see

also Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006)

(holding that a covenant not to compete is not unenforceable under the CNCA solely

because the employer’s promise is executory when made). Additionally, because Dr.

Dougherty is a board-licensed physician, the covenant must meet the requirements of

section 15.50(b) if it is to be enforceable. See TEX . BUS. & COM . CODE ANN . § 15.50(b).

Even if the covenant meets all of these requirements, it will be enforceable only to the

extent that it is reasonably restricted as to time, geographical area, and scope of activity.

See id. § 15.50(a).

3.      Analysis

        By its third issue, VDC contends that the forfeiture clause was enforceable because

it was ancillary to or part of an otherwise enforceable agreement at the time the agreement

was made. See id.3 Specifically, VDC argues that the deferred compensation provision

was supported by sufficient consideration and served as the “otherwise enforceable

agreement” to which the forfeiture clause is ancillary.

        For a covenant to be “ancillary to or part of” an otherwise enforceable agreement,

it must satisfy a two-prong test: “(1) the consideration given by the employer in the

otherwise enforceable agreement must give rise to the employer’s interest in restraining

the employee from competing; and (2) the covenant must be designed to enforce the

employee’s consideration or return promise in the otherwise enforceable agreement.”

        3
           W e note that Dr. Dougherty perceives there to be a significant am biguity within the forfeiture clause
at issue. See Frost Nat’l Bank v. L & F Distribs., Ltd., 165 S.W .3d 310, 312 (Tex. 2005) (per curiam ) (“[A]
contract is am biguous if it is susceptible to m ore than one reasonable interpretation.”). The clause states that
it applies to “a Mem ber with any degree of seniority separat[ing] from service and practic[ing] m edicine during
the next four (4) years . . .” (em phasis added). By a cross-point, Dr. Dougherty asserts that period of tim e
referred to by “the next four (4) years” com m enced with the beginning of his em ploym ent at VDC. According
to Dr. Dougherty, because he departed the practice m ore than four years after he com m enced his
em ploym ent there, the forfeiture clause is not applicable to him . On the other hand, VDC appears to assert
that the four-year period referred to in the clause com m enced instead with Dr. Dougherty’s term ination of
em ploym ent from VDC; thus, the forfeiture clause would have been effective as to Dr. Dougherty until
Decem ber 4, 2008, four years after he departed VDC. Because, as detailed herein, we find that the trial court
did not err in concluding that the forfeiture clause is unenforceable, we need not address this perceived
am biguity.

                                                        8
Sheshunoff, 209 S.W.3d at 648-49 (citing Light, 883 S.W.2d at 647).

       Assuming, without deciding, that the deferred compensation clause was in fact an

“otherwise enforceable agreement,” we conclude that the forfeiture clause failed to satisfy

the second prong of this test and was therefore not “ancillary to or part of” the deferred

compensation provision. See id. In order to satisfy the second prong, the forfeiture clause

must have been “designed to enforce” Dr. Dougherty’s “consideration or return promise”

made in the deferred compensation provision. See id. Here, the only “consideration or

return promise[s]” that Dr. Dougherty could be said to have provided under the deferred

compensation provision were: (1) that he not compete with VDC after departing the

practice, as detailed in the forfeiture provision; or (2) that he continue to practice with VDC.

       To the extent VDC claims that the consideration for its deferred compensation

promise was a reciprocal promise by Dr. Dougherty not to compete, the forfeiture clause

fails because there would be no otherwise enforceable agreement—that is, there would

be no agreement that is enforceable wholly separate from the covenant not to compete.

See id. A separate, ancillary agreement that is enforceable in and of itself must be present

in order for a non-compete covenant to be enforceable. See TEX . BUS. & COM . CODE ANN .

§ 15.50(a). A compensation provision made only in exchange for a non-compete promise

is precisely the sort of restraint of trade that Texas law prohibits. Cf. Sheshunoff, 209
S.W.3d at 647, 651 (finding an “otherwise enforceable agreement” where employer

promised to disclose confidential information and to provide specialized training under

employment agreement, and employee promised not to disclose employer’s confidential

information); Light, 883 S.W.2d at 646 (finding an “otherwise enforceable agreement”

where employer promised to provide training to employee and employee promised to (1)

give 14 days notice before terminating her employment and (2) provide an inventory upon

termination).

       On the other hand, to the extent that VDC claims that the consideration provided by

Dr. Dougherty was his promise to continue practicing with VDC, the forfeiture clause could

                                               9
not have been designed to enforce that promise. That is because, by its own terms, the

clause was to take effect only after Dr. Dougherty had already departed from the

association. There was no consideration provided by Dr. Dougherty in exchange for the

deferred compensation agreement which we can say the forfeiture clause was designed

to enforce. See Sheshunoff, 209 S.W.3d at 648-49 (citing Light, 883 S.W.2d at 647).

         Because the clause fails the second prong of the test elucidated in Sheshunoff and

Light, it was not “ancillary to or part of” any otherwise enforceable agreement. See TEX .

BUS. & COM . CODE ANN . § 15.05(a); Sheshunoff, 209 S.W.3d at 648-49 (citing Light, 883
S.W.2d at 647). Accordingly, the trial court did not err in concluding as a matter of law that

the clause was unenforceable as an unlawful restraint of trade. See TEX . BUS. & COM .

CODE ANN . §§ 15.05(a), 15.50(a); BMV Software Belg., N.V., 83 S.W.3d at 794. VDC’s

third issue is overruled.4

                                                III. CONCLUSION

         We affirm the judgment of the trial court.

                                                               DORI CONTRERAS GARZA,
                                                               Justice

Opinion delivered and filed this
the 12th day of February, 2009.

         4
            Having concluded that the trial court did not err in ruling that the forfeiture clause is unenforceable
as a m atter of law, we need not address VDC’s first or second issues contending that: (1) the trial court erred
in finding that no consideration was given by VDC in exchange for the forfeiture clause; and (2) the trial court’s
finding that Dr. Dougherty did not sign the bylaws is irrelevant to the enforceability of the forfeiture clause.
T EX . R. A PP . P. 47.1.

         Further, we need not address VDC’s final eight issues arguing that Dr. Dougherty failed to present
legally or factually sufficient evidence that (1) the forfeiture clause was unreasonably broad in tim e, distance,
and scope, or (2) that the clause did not com ply with the requirem ents of section 15.50(b), such as the
inclusion of a reasonable buy-out provision. Id.; see T EX . B U S . & C O M . C OD E A N N . § 15.50(b) (Vernon Supp.
2008).

                                                         10