Court Opinion

ID: 4445392
Source: CourtListenerOpinion
Date Created: 2019-10-09 16:04:26.748691+00
Date Added: 2024-06-11T08:48:05.664866
License: Public Domain

IN THE COURT OF APPEALS OF IOWA

                                    No. 18-1900
                               Filed October 9, 2019

CEDAR VALLEY MEDICAL SPECIALISTS, PC,
    Plaintiff-Appellee,

vs.

JAMES WRIGHT, M.D.,
     Defendant-Appellant.
________________________________________________________________

       Appeal from the Iowa District Court for Black Hawk County, George L.

Stigler, Judge.

       A surgeon appeals a district court order enforcing the liquidated damages

provision of a covenant not to compete in his employment contract with a former

employer. AFFIRMED.

       David J. Dutton and Laura L. Folkerts of Dutton, Braun, Staack & Hellman,

P.L.C., Waterloo, for appellant.

       Brandon M. Schwartz and Michael D. Schwartz of Schwartz Law Firm,

Oakdale, Minnesota, for appellee.

       Considered by Potterfield, P.J., Greer, J., and Scott, S.J.*

       *Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2019).
                                          2

GREER, Judge.

       The district court enforced a liquidated damages provision based on a

violation of a covenant not to compete in a cardiothoracic surgeon’s employment

contract. On appeal, the doctor argues that the covenant not to compete is

unenforceable and prejudicial to the public interest and, in any event, the liquidated

damages provision constitutes an unenforceable penalty. We affirm the district

court and remand for further proceedings.

       I. Background Facts and Proceedings.

       Dr. James Wright has been a board-certified cardiothoracic surgeon since

1982. Cardiothoracic surgeons perform surgical procedures on the organs in the

chest, including the heart and lungs.         These procedures include open-heart

surgeries, coronary artery bypasses, and valve replacements and repairs. Wright

worked as a cardiothoracic surgeon in Jacksonville, Florida, Texarkana and

Nacogdoches, Texas, and Mason City and Iowa City, Iowa, before being recruited

to the Black Hawk County, Iowa area.

       In May 2007, Cedar Valley Medical Specialists, P.C. (CVMS) and Allen

Memorial Hospital entered into a recruiting agreement with Wright. CVMS and

Allen Hospital have a mutual and long-standing interest of providing health care in

the Black Hawk County area. Under the terms of the agreement, Wright agreed

to work as a cardiothoracic surgeon for CVMS. Wright received a signing bonus,

moving expenses, and a guaranteed salary regardless of the revenue he brought

in or the expenses he incurred. He also did not have to agree to a covenant not

to compete or a liquidated damages provision. CVMS agreed to give Wright the

necessary resources and support to establish his practice and relationships in the
                                         3

Black Hawk County medical community, marketing, and other benefits of a group

practice.    Allen Hospital agreed to pay Wright’s signing bonus and moving

expenses and to ensure that Wright received his guaranteed income during the

two-year contract term.

       In February 2009, CVMS and Allen Hospital entered into an agreement

whereby CVMS agreed to provide a physician to serve as the medical director of

cardiovascular surgery at Allen Hospital, and in exchange Allen Hospital would pay

CVMS $10,000 per month beginning June 1. CVMS designated Wright as the

physician.

       In April, Wright’s initial two-year contract was coming to an end and he

submitted a written notice of intent to become a shareholder at CVMS as of the

first of June. At the time Wright transitioned to become a shareholder, he had a

deficit of $390,969.10 in expenses, which CVMS forgave.

       On May 8, CVMS entered into a written employment contract with Wright,

effective June 1, that contained various provisions, including noncompete

language. Paragraph 2C of the contract specifically provided:

               2C. LIQUIDATED DAMAGES FOR COMPETITION. For the
       two-year period commencing with the last day Professional is
       employed by Corporation and within 35 miles of Black Hawk County,
       Iowa, Professional agrees Professional will not practice medicine or
       engage in any business or practice related to medicine, nor will
       Professional own, manage, operate, control, be employed by,
       participate in, or in any fashion be connected with the ownership,
       management, operation, or control of any business or practice
       related to medicine, nor shall Professional on behalf of or in
       conjunction with any other person, persons, firm, partnership,
       agency, association, company, or corporation, call upon any patient,
       customer, or supplier of Corporation, for the purpose of or with the
       effect of soliciting or diverting or taking away from Corporation such
       patient, customer, or supplier.
                                          4

               In the event of a breach by Professional of the provisions of
       this Item 2C, Professional agrees to pay Corporation as liquidated
       damages the greater of:
               a.     $100,000.00, or
               b.     The compensation paid by Corporation to Professional
                      during the six months immediately preceding the
                      termination of Professional’s employment.
       In addition, in the event Corporation is required to enforce the terms
       of this Item and is successful in such enforcement, Professional
       agrees to be responsible for and pay any costs and expenses
       incurred by Corporation, including court costs and reasonable
       attorney’s fees.

       In 2013, CVMS and Allen Hospital entered into a Cardiovascular Surgery

Call Coverage and Medical Director Services Agreement specifically geared

toward providing “cardiovascular surgery services to the community.”            Again,

Wright was the designated physician and CVMS received $301,125 annually for

the call coverage and $2,000 monthly for the services of the Medical Director.

       Also in 2013, Wright voiced his concerns to CVMS about the number of

days and hours he was required to be on call. To address his concerns, later that

same year, CVMS merged its Department of Cardiovascular/Thoracic Surgery and

Department of Cardiology, appointed another physician to serve as the merged

department director, and entered into an agreement with the Gunderson Clinic in

La Crosse, Wisconsin, to provide backup coverage for Wright. Effective November

1, Wright would receive a guaranteed $400,000 salary and forty-two vacation days

annually until July 1, 2016. Wright agreed that Schedule A of the May 8, 2009

employment contract, including the liquidated damages provision, “remain[ed] in

full force and effect.”

       These changes did not alleviate Wright’s concerns, and in July 2016, Wright

told his department director that he intended to retire at the end of the year. Wright
                                        5

offered to serve in an auxiliary role if his help was “desired.” In the summer of

2016, Allen Hospital learned about Wright’s impending retirement. On September

30, Allen Hospital gave CVMS notice that it was terminating the Medical Director

Surgical Services Agreement effective December 31. On November 1, Wright

gave CVMS’s human resources director written notice that he would retire from

CVMS effective December 31.

      CVMS and Allen Hospital began attempting to recruit a physician to fill

Wright’s position at CVMS. Wright helped with these recruitment efforts. CVMS

and Allen Hospital discussed attempting to convince Wright to stay until they were

able to recruit his replacement. However, because the Allen Hospital contract with

CVMS was being terminated, CVMS informed Wright that there would not be any

money to keep him on past December 31. Wright also indicated that he would not

be willing to continue working for CVMS but that he would be willing to contract

with Allen Hospital until they found a replacement. In a November 2 email, a

representative from Allen Hospital discussed the possible imposition of liquidated

damages if it was to enter into such an arrangement with Wright and inquired

whether CVMS would be willing to waive that provision. Nevertheless, CVMS

never agreed to waive the liquidated damages.

      On November 16, Wright and Allen Hospital entered into an employment

agreement whereby Wright agreed to provide full-time cardiothoracic surgery

services for Allen Hospital’s clients beginning January 1, 2017, the day after his

retirement from CVMS, until the hospital was able to hire a new full-time surgeon.

During the negotiations for this contract, Allen Hospital and Wright discussed the

liquidated damages provision in his CVMS employment contract. Allen Hospital
                                         6

offered a plan to help with this payment, but in the end, the hospital set Wright’s

compensation at $727,119—over $327,000 more than he earned at CVMS—plus

six weeks of vacation. Wright told Allen Hospital he would pay the liquidated

damages on his own. In a paragraph titled “Other Obligations,” Wright agreed

that the employment agreement with Allen Hospital would not violate any existing

contract between him and any third party. Wright also agreed to a two-year, thirty-

five-mile restrictive covenant.

       Wright worked full time for Allen Hospital from January 1, 2017, until

February 28, 2018. All the revenues that CVMS had received from Allen Hospital

for call coverage and cardiothoracic surgery were now being paid to Allen Hospital.

CVMS’s annual revenue for Wright’s cardiothoracic surgery services in 2014,

2015, and 2016 was $596,295.23, $518,500.01, and $400,010.10, respectively.

       In February 2017, CVMS sued Wright alleging he breached his employment

contract by practicing medicine within thirty-five miles of Black Hawk County within

two years of his last day of work for CVMS. CMVS sought enforcement of the

liquidated damages provision in the contract. Wright denied breaching the contract

because the liquidated damages provision was invalid, and requested a

declaratory ruling that the district court adjudicate the liquidated damages clause

to be unenforceable.

       The case proceeded to a bench trial on June 12, 2018. The district court

determined that the 2009 employment contract was enforceable against Wright

such that his full-time work for Allen Hospital was a “direct violation” of that

agreement. Accordingly, the court determined the liquidated damages provision

applied. The court entered judgment for damages against Wright in the amount of
                                           7

$215,631.68, plus interest from June 12, 2018. On October 31, 2018, Wright

timely filed notice of appeal. After Wright filed his notice of appeal, CVMS filed

affidavits of attorney fees and costs. For that reason, the district court has not

ordered payment of any attorney fees or costs.

       II. Standard of Review.

       We review equity cases de novo. Iowa R. App. P. 6.907. Whether a

liquidated damages provision is an unenforceable penalty is a question of law, and

we will review the district court’s ruling on this issue for correction of errors at law.

City of Davenport v. Shewry Corp., 674 N.W.2d 79, 82 (Iowa 2004); Rohlin Constr.

Co. v. City of Hinton, 476 N.W.2d 78, 79 (Iowa 1991).

       III. Analysis.

       Restrictive covenants involving physicians have been upheld as valid and

enforceable in Iowa. Cogley Clinic v. Martini, 112 N.W.2d 678, 681 (Iowa 1962).

Because restrictive covenants involve the partial restraint of trade, we construe

them against the party seeking enforcement and approve them with some

reluctance.     Id.   We apply a three-pronged test to determine whether an

employment contract with a restrictive covenant is enforceable: “(1) Is the

restriction reasonably necessary for the protection of the employer’s business;

(2) is it unreasonably restrictive of the employee’s rights; and (3) is it prejudicial to

the public interest?” Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751,

761 (Iowa 1999) (quoting Lamp v. Am. Prosthetics, Inc., 379 N.W.2d 909, 910

(Iowa 1986)).

       “Essentially, these rules require us to apply a reasonableness standard in

maintaining a proper balance between the interests of the employer and the
                                        8

employee.” Iowa Glass Depot, Inc. v. Jindrich, 338 N.W.2d 376, 381 (Iowa 1983).

Reasonableness of a particular restrictive covenant depends on the facts and

circumstances of each individual case. Id. “Factors we consider in determining

the enforceability of a noncompete agreement include the employee’s close

proximity to customers, the nature of the business, accessibility to information

peculiar to the employer’s business, and the nature of the occupation which is

restrained.” Revere Transducers, Inc., 595 N.W.2d at 761. For that reason, any

other CVMS noncompete covenants with other medical personnel referenced in

this case are not factored into our analysis of the Wright contract. Ehlers v. Iowa

Warehouse Co., 188 N.W.2d 368, 370 (Iowa), reh’g denied and opinion modified,

190 N.W.2d 413 (Iowa 1971).

      A.   Is the Restriction Necessary for Protection of the Employer’s

Business? “The employer has the initial burden to show that enforcement of the

covenant is reasonably necessary to protect its business.” Dental East, P.C. v.

Westercamp, 423 N.W.2d 553, 555 (Iowa Ct. App. 1988); see also Ma & Pa, Inc.

v. Kelly, 342 N.W.2d 500, 502 (Iowa 1984) (“The burden of proving

reasonableness is upon the employer who seeks to enforce such a covenant.”

(quoting Iowa Glass Depot, 338 N.W.2d at 381)). “[T]he restriction must be no

greater than necessary to protect the interests of the employer.” Mutual Loan Co.

v. Pierce, 65 N.W.2d 405, 407 (Iowa 1954). We are more likely to uphold a

restrictive covenant “when the employee is placed in a position of close customer

relationship and has an opportunity to pirate customers from the employer at the

termination of his employment.” Iowa Glass Depot, 338 N.W.2d at 382.
                                         9

       The record in this case demonstrates that the Black Hawk County area

could only support one cardiothoracic surgeon, with some vacation coverage. That

provider over the past nine years of employment with CVMS was Wright. During

that time, CVMS promoted, supported, and recommended Wright in the Black

Hawk County area. There was investment in the doctor for their mutual good.

CVMS waived the $390,969.10 deficit that Wright accrued after his initial two years

of practice with the clinic when he became a shareholder. By virtue of his position

with CVMS as director and shareholder, Wright also has confidential knowledge

about the clinic and its operations. Likewise, during the time that Wright worked

for Allen Hospital, CVMS lost the benefit of revenue from his surgeries as well as

the payments Allen Hospital made to support Wright. Other than the payments

referenced above, specific financial losses related to competition were not

detailed, but as the Cogley Clinic court noted, “There are too many intangibles and

variable contingencies in a situation such as we have here to have the case

decided on whether there has been a gain or loss of income in the first six months

of the contract violation.” 112 N.W.2d at 682.

       Factors showing that the noncompete covenant was not necessary to

protect CVMS’s business are that Wright, as the sole cardiothoracic surgeon in

Black Hawk County, was not competing against any other local medical provider

at the time he left CVMS. See generally Ehlers, 188 N.W.2d at 371 (questioning

Cogley Clinic for leading to results of “questionable equity”). Additionally, he was

helping with the recruitment efforts to obtain a new surgeon to replace him at

CVMS. There is no evidence that Wright solicited work or approached any former
                                         10

patients. In fact, almost all patients he saw at Allen Hospital were referred to him

by CVMS cardiologists. Arguably, these efforts helped enhance CVMS’s business.

       However, what Wright overlooks is that while there may not be a competing

doctor at CVMS at the time of his work for Allen Hospital, had Wright stayed on

and not violated the employment contract terms, his surgeries likely would have

generated income for CVMS. Additionally, had CVMS recruited a surgeon, there

are no guarantees that Wright would have stepped down at Allen Hospital and not

been in direct competition. There are economic losses to a clinic if a medical

provider can transition without penalty across the street to practice.

       Wright also testified that he was willing to pay the liquidated damages when

his period of remaining in practice in Black Hawk County was to be short term, but

when it became a large penalty he thought it was unfair since he was doing

“someone a favor.” These are the “intangibles” that impact supporting the use of

noncompete covenants between physicians and their employers. Thus, we find

that CVMS has met its burden to show the necessity of the restriction in Wright’s

employment contract.

       B.   Is the Covenant Unreasonably Restrictive?            As to the second

consideration, no one argued at trial that the thirty-five mile radius and a two-year

time frame from last day of employment were too restrictive. Here, on its face, the

terms of the covenant not to compete between CVMS and Wright are reasonable

under Iowa law and not unduly restrictive as to time or area. See Pro Edge, L.P.

v. Gue, 374 F. Supp. 2d 711, 740–41 (N.D. Iowa 2005) (enforcing noncompete

agreement with restrictions of 250 miles for one year); Farm Bureau Serv. Co. v.

Kohls, 203 N.W.2d 209, 212 (Iowa 1972) (enforcing agreement prohibiting
                                         11

competition in six townships for two years); Ehlers, 188 N.W.2d at 374 (enforcing

modified agreement prohibiting former employee from soliciting business from

individuals the employee contacted while working for employer for a period of one

year); Orkin Exterminating Co. v. Burnett, 146 N.W.2d 320, 327 (Iowa 1966)

(enforcing agreement prohibiting competition within ten miles for three years);

Cogley Clinic, 112 N.W.2d at 681–83 (enforcing agreement prohibiting competition

within twenty-five miles for a period of three years); Phone Connection, Inc. v.

Harbst, 494 N.W.2d 445, 450 (Iowa Ct. App. 1992) (enforcing a modified

agreement prohibiting solicitation of business in certain counties in Iowa and

Minnesota for two years); Dental East, P.C., 423 N.W.2d at 555 (enforcing

agreement prohibiting competition within twenty miles for two years); but see

Rasmussen Heating & Cooling, Inc. v. Idso, 463 N.W.2d 703, 705 (Iowa Ct. App.

1990) (refusing to enforce a ten-year noncompete agreement).

       C. Is the Restriction Contrary to Public Policy? The third prong of the

test relating to public hardship is a close call. The burden of proof that a contract

is contrary to public policy is upon the person asserting such position. Cogley

Clinic,112 N.W.2d at 682.

       Wright asserts that he was the only cardiothoracic surgeon in Black Hawk

County and the next closest surgeon was fifty miles away. Restricting the only

surgeon in a fifty-mile radius from performing life-saving surgeries could be

deemed prejudicial to the public interest. Wright compares the facts of his case to

those in Board of Regents v. Warren, No. 08–0017, 2008 WL 5003750 (Iowa Ct.

App. Nov. 26, 2008).      In Warren, a panel of this court held in part that a

noncompete agreement between an oncologist and the University of Iowa
                                            12

Hospitals and Clinics was unenforceable because imposing an injunction on the

oncologist would be prejudicial to the public interest as there was a shortage of

oncologists in the Cedar Rapids area and restricting the oncologist’s ability to

practice in Linn County would negatively impact the Cedar Rapids community.

2008 WL 5003750, at *5-6.

       In response to Wright’s assertion that he was the sole cardiothoracic

surgeon in Black Hawk County and that the public would be harmed, CVMS

detailed that (1) the surgeries Wright performed were scheduled by patients, (2)

only three to four emergent cases occurred annually, (3) there are cardiologists in

Waterloo and other cardiac surgeons near Black Hawk County, (4) typically a

locums tenens physician could cover the surgeries if Wright was unavailable,1 and

(5) other hospitals, such as Mayo Clinic, were available to Black Hawk County

residents.

       In communities across Iowa, and as we noted in the Warren case, the

shortage of physicians can impact the public welfare of the community.                   Id.

However, based on the facts of this case including the limited number of emergent

surgeries Wright performed and the admitted need for only one cardiothoracic

surgeon in Black Hawk County, the record supports that the community needs are

being accommodated by the hospitals in the general area of Black Hawk County.

Further, unlike the hospital in Warren, CVMS is not seeking an injunction to prevent

Wright from practicing in the area. Instead CVMS is seeking enforcement of the

1
  A “locum tenens” is a licensed physician who will travel to and work on a short-term basis
for hospitals that need temporary coverage for a physician during his or her vacations and
holidays.
                                         13

liquidated damages provision to make up for the losses it incurred when Wright left

to go work for another hospital in the area. As opposed to a complete prohibition

to practice, this contract clause is more like a “buy back into the market” option.

Intermountain Eye & Laser Ctrs., P.L.L.C. v. Miller, 127 P.3d 121, 127 (Idaho 2005)

(referencing impact of noncompete clause allowing payment to compete). We

conclude Wright has not met his burden of showing the lack of appropriate and

sufficient health care coverage        to render the noncompete agreement

unenforceable on public policy grounds.

      D. Is the Liquidated Damages Clause Enforceable? Finally, Wright

argues that the liquidated damages payment of $215,631.68 is a penalty and

cannot be enforced. Wright has the burden of proof on this issue. Carroll v. Reo,

L.L.C., No. 15–0487, 2016 WL 4051565, at *3 (Iowa Ct. App. July 27, 2016). Iowa

law allows contractually prescribed liquidated damages so long as those damages

do not constitute a penalty. Aurora Bus. Park Assocs., L.P. v. Michael Albert, Inc.,

548 N.W.2d 153, 155 (Iowa 1996).

      The Iowa Supreme Court adopted the following two-factor test to determine

if liquidated damages are a penalty:

      The first factor is the anticipated or actual loss caused by the breach.
      The amount fixed is reasonable to the extent that it approximates the
      actual loss that has resulted from the particular breach, even though
      it may not approximate the loss that might have been anticipated
      under other possible breaches. Furthermore, the amount fixed is
      reasonable to the extent that it approximates the loss anticipated at
      the time of the making of the contract, even though it may not
      approximate the actual loss. The second factor is the difficulty of
      proof of loss. The greater the difficulty either of proving that loss has
      occurred or of establishing its amount with the requisite certainty, the
      easier it is to show that the amount fixed is reasonable.
                                        14

Rohlin Constr. Co., 476 N.W.2d at 80 (quoting Restatement (Second) of Contracts

§ 356(1) cmt. b (Am. Law Inst. 1981)). The liquidated damages clause should

compensate for the loss as opposed to punishing for the breach. Id. at 81.

      The terms for the liquidated damages claim were set forth in Wright’s

employment contract. Wright is an intelligent and sophisticated surgeon who had

a previous contract with CVMS that did not contain a noncompete or liquidated

damages provision. Additionally, after Wright left CVMS, he negotiated a salary of

$727,000, which was $327,000 more than what he made in previous years at

CVMS. The record confirms that negotiations occurred with the payment of the

liquidated damages in mind. Additionally, CVMS argues that they lost recruitment

and support capital, the two-year deficit of $390,969.10 that Wright was not

required to repay, and several thousand dollars of lost revenue over the time

Wright worked at Allen Hospital. Given the expenses of initial recruitment and

promotion, the deficit forgiven, the loss of payments for call coverage, surgeries,

and medical director services, the liquidated damages provision is reasonable as

it does not exceed CVMS’s anticipated losses as a result of Wright’s breach of the

noncompete agreement.

      IV. Disposition.

      For the foregoing reasons, we affirm the district court judgment and remand

the case for additional proceedings related to attorney fees and costs.

      AFFIRMED.