Michael Salewski, D.v.m., App. v. Pilchuck Veterinary Hospital, Inc., P.s., Res. , 189 Wash. App. 898 ( 2015 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION ONE
MICHAEL SALEWSKI, D.V.M., No. 72314-6-1
en
an individual,
C.C
Appellant,
v.
PILCHUCK VETERINARY HOSPITAL, PUBLISHED OPINION
INC., P.S., a Washington corporation,
FILED: August 31, 2015
Respondent.
Verellen, A.C.J. — The mutual promises of shareholders are adequate
consideration for a noncompete agreement among the shareholders, even if the
noncompete takes the form of promises in the shareholders' individual employment
agreements. And a liquidated damages clause is enforceable if it reasonably forecasts
the unascertainable financial harm that would result from a violation of the noncompete
agreement.
Michael Salewski, DVM, does not establish any error on the face of the
arbitrator's award that relied upon the mutual promises of the shareholders of Pilchuck
Veterinary Hospital, Inc. as the consideration supporting the noncompete agreements
signed by each of the shareholders. Neither is there an error on the face of the award
in concluding that the $300,000 liquidated damages clause was a reasonable forecast
of damages. We affirm.
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FACTS
On December 17, 1992, Pilchuck hired Salewski as an associate veterinarian.
That same day, Salewski signed an employment agreement and an agreement not to
compete. Sometime between 1998 and 2000, he became a shareholder in the
professional services corporation and signed a new confidentiality and noncompete
agreement. Subsequently, every time a new shareholder was brought in, a whole new
set of documents, including agreements not to compete, were prepared and signed by
all the shareholders. Consequently, Salewski signed a total of four noncompete
agreements as a shareholder.
The terms of the noncompete agreements changed slightly over time. The
agreement at issue here, signed by Salewski and the eight other shareholders on
January 1, 2007, stated:
3. Agreement Not To Compete. Employee shall not practice
veterinary medicine within 50 miles of the corporate offices of Principal
during the Non-compete Period [of thirty-six (36) months following
Employee's termination of employment with Principal]. Regardless of
geographical location, Employee shall not render services to any Pre
existing Client who was a client at any time within the 24 months
preceding termination of employment during the Non-compete Period.
Each of the parties has reviewed the terms of the Agreement and
acknowledges that the terms hereof are necessary for the protection of the
Principal and the clients of Pilchuck Veterinary Hospital. The parties
further acknowledge that the non-compete provisions contained herein do
not create an undue hardship for either Employee or for Principal and are
reasonable under the circumstances.
4. Remedies in an Event of Breach. Employee hereby recognizes
that irreparable damage will result to Principal and to the business of
Principal in the event of breach by Employee by any of the covenants set
forth in this agreement. In the event of breach of any of the covenants
and assurances contained in this Agreement, Principal shall be entitled to
enjoin and restrain Employee from any continued violation of this
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agreement. This equitable remedy shall be in addition to (and not
supercede) any action for damages Principal may have for breach of any
part of this Agreement.
4.1 Additionally, Employee agrees to pay liquidated
damages in the amount of Three Hundred Thousand Dollars ($300,000)
for any violation of the covenant not to compete.[1]
This 2007 agreement reflected the same terms as the two noncompete agreements he
signed in 2002 and 2005, except that the liquidated damages amount increased from
$200,000 in the 2005 agreement to $300,000 in the 2007 agreement.
In 2008, Salewski indicated that he wanted to leave the ownership group. As a
result, he and the remaining eight shareholders executed a stock redemption
agreement effective December 31, 2008. The agreement provided that "a list or
summary of any and all other agreements remaining in effect between Buyer and Seller
from and after the date of mutual execution hereof is attached as Exhibit D hereto."2
Exhibit D listed the noncompete agreement dated January 1, 2007.
Salewski continued to work for Pilchuck as a nonshareholder employee until
December 2010, when he announced that he was moving to start a new practice in
Oregon. Prior to terminating employment, Salewski met with Pilchuck's chief financial
officer and chief executive officer to discuss the provisions of his noncompete
agreement. Shortly after, Pilchuck discovered, and Salewski admitted, that he was
providing veterinary services within 50 miles of Pilchuck, as well as services for former
Pilchuck clients outside the 50-mile radius.
1 Clerk's Papers (CP) at 110.
2 CP at 323.
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The parties agreed to arbitrate the enforceability and application of the
noncompete agreement and its corresponding liquidated damages provision. The
arbitrator issued an award in favor of Pilchuck, concluding that "[t]he covenant not to
compete in question is a valid and binding contract, and [Pilchuck] is entitled to
judgment or credit in the amount of the liquidated damages of $300,000."3
Pilchuck filed a motion in Snohomish County Superior Court to confirm the
arbitration award, including attorney fees and costs, and prejudgment interest. Salewski
responded with a motion to vacate the arbitration award. After hearing oral argument,
the superior court granted Pilchuck's motion to confirm the award and denied Salewski's
motion to vacate, entering a judgment in favor of Pilchuck in the amount of
$125,855.66,4 prejudgment interest in the amount of $30,229.20, and statutory costs
and attorney fees in the amount of $39,929.91.
Salewski appeals.
ANALYSIS
Salewski contends that the superior court erred in denying his motion to vacate
the arbitration award. He argues the award is erroneous on its face because the
noncompete agreement lacked valid consideration and because the liquidated damages
provision was an unenforceable penalty. Neither argument is persuasive.
Appellate review of an arbitrator's award is limited to the same standard
applicable in the court which confirmed, vacated, modified or corrected that award.5
3 CP at 150.
4 This amount reflects the liquidated damages amount, $300,000, less the
amount of the principal owed under the stock redemption agreement note, $174,144.40.
5 Pegasus Constr. Corp. v. Turner Constr. Co.. 84 Wash. App. 744, 747, 929 P.2d
1200 (1997) (quoting Barnett v. Hicks, 119Wn.2d 151, 157, 829 P.2d 1087(1992));
No. 72012-1-1/5
Judicial review "is confined to the question of whether any of the statutory grounds for
vacation exist."6 The party seeking to vacate the award bears the burden of showing
that such grounds exist.7 "One of the statutory grounds for vacating an award exists
when the arbitrator has 'exceeded the arbitrator's powers.'"8 To vacate an award on
this ground, the error must appear "on the face of the award."9
The "facial legal error standard is a very narrow ground for vacating an arbitral
award."10 It does not extend to a potential legal error that depends upon the
consideration of the specific evidence offered or to an indirect sufficiency of the
evidence challenge.11 Courts are not permitted to conduct a trial de novo when
reviewing the award, "do not look to the merits of the case, and they do not reexamine
evidence."12 "The error should be recognizable from the language of the award, as, for
instance, where the arbitrator identifies a portion of the award as punitive damages in a
jurisdiction that does not allow punitive damages.'"13 "Where a final award sets forth the
Cummings v. Budget Tank Removal & EnvtI. Servs., LLC, 163 Wash. App. 379, 388, 260
P.3d 220 (2011).
6 Cummings, 163 Wash. App. at 388.
7ld\
8 Jd, (quoting RCW 7.04A.230(d)).
9 Federated Servs. Ins. Co. v. Pers. Representative of Estate of Norberg, 101
Wash. App. 119, 123, 4 P.3d 844 (2000).
10 Broom v. Morgan Stanley DW, Inc.. 169 Wash. 2d 231, 239, 236 P.3d 182(2010).
11 See Cummings, 163 Wash. App. at 389-90.
12 Broom, 169 Wash. 2d at 239.
13 Cummings, 163 Wash. App. at 389 (quoting Estate of Norberg. 101 Wash. App. at
123-24).
No. 72012-1-1/6
arbitrator's reasoning along with the actual dollar amounts awarded, any issue of law
evident in the reasoning may also be considered as part of the face of the award."14
Noncompete Agreement
Salewski argues that there is an error on the face of the award because "[t]here
is no authority in Washington to support the arbitrator's conclusion that a promise by
another shareholder... is sufficient consideration for a noncompetition agreement
entered into by a different individual after the start of his or her initial employment."15
We disagree.
Generally, owners of a business entity can agree to reasonable limits on their
ability to compete with each other without regard to the terms of their employment. This
concept is recognized in Restatement (Second) of Contracts: "Promises imposing
restraints that are ancillary to a valid transaction or relationship include ... a promise by
a partner not to compete with the partnership."16 This principle expressly applies both to
partnerships and joint ventures,17 and particularly to professional partners.18
14 Jd
15 Appellant's Br. at 19.
16 Restatement (Second) of Contracts § 188 (1981).
17 Restatement! 188 cmt. h; 6 Samuel Williston & Richard A. Lord, A
Treatise on the Law of Contracts § 13:18 (4th ed. 2009).
18 2 Louis Altman & Malla Pollack, Callmann on Unfair Competition,
Trademarks and Monopolies § 16:27, at 16-112 to -113 (4th ed. 2009) ("When a
covenant not to compete is signed by a true partner in a professional partnership, some
courts have recognized that this presents a situation which is entitled to a level of
scrutiny intermediate between that which is applicable to an employment and that which
is applicable to a sale of a business interest.").
No. 72012-1-1/7
Such noncompete agreements are not uncommon, especially in small business
entities where the owners are professionals who are also employees.19 For purposes of
restraints on competition, we see no distinction between the shareholders of Pilchuck
and partners or joint venturers who have agreed to restrict their competition with the
partnership or joint venture. Most importantly here, the adequacy of consideration
should be viewed in the context of the agreement among owners and not merely as an
employee/employer relationship.20 The mutual promises of all the owners of a business
are adequate consideration for a noncompete agreement among all the owners.21
19 See Emerick v. Cardiac Study Ctr., Inc.. 170 Wash. App. 248, 255, 286 P.3d 689
(2012) (explaining that restrictive covenants are common among professionals because
they allow a new professional to step into an already established practice while
protecting the employer from future competition); see also Columbia Physical Therapy.
Inc. v. Benton Franklin Orthopedic Assocs.. 168 Wash. 2d 421, 430, 228 P.3d 1260(2010)
(concluding that the professional services for which a professional service corporation is
incorporated and in which it may therefore engage are those for which the shareholders
are licensed); RCW 18.100.010 (the shareholders in a professional services
corporation, such as Pilchuck, are all required by statute to be licensed professionals
rather than mere passive investors).
20 See Ashley v. Lance. 75 Wash. 2d 471, 475, 451 P.2d 916 (1969) ("In interpreting
the partnership agreement, including the restrictive covenant, the agreement must be
read as a whole. It must also be construed in the light of the history of the partnership
and its purpose.").
21 See generally id. (holding that in a five-man medical partnership, where a new
partnership agreement was signed each time a new partner was added, the plaintiff
doctor could invoke the partnership agreement despite being the only remaining partner
after four partners left in concert to start a competitive practice); Alexander & Alexander,
Inc. v. Wohlman, 19 Wash. App. 670, 682-84, 578 P.2d 530 (1978) (holding that there was
adequate consideration to support noncompete agreements made by shareholders as
part of the sale of an insurance business); Paula Berg, Judicial Enforcement of
Covenants Not to Compete Between Physicians: Protecting Doctors' Interests at
Patients' Expense, 45 Rutgers L. Rev. 1, 4 n.14 (1992) ("The requirement of
consideration is not particularly problematic in the context of noncompetition clauses
ancillary to partnership agreements, because all partners are equally benefitted and
burdened by the provision and the parties' bargaining power is presumed to be equal.").
No. 72012-1-1/8
Here, the face of the award reveals the determination by the arbitrator that the
shareholders all agreed to and signed new noncompete agreements each time a new
shareholder joined the practice.22 On the face of the award, the arbitrator relied upon
the mutual promises of the shareholders as consideration for the noncompete
agreements.23 The agreements here took the form of ancillary promises contained in
the individual "employment agreements" between each shareholder and the
professional services corporation. But the arbitrator expressly found that new
agreements were signed by all of the shareholders each time a new shareholder joined.
Accordingly, the mutual agreement of all the Pilchuck shareholders not to compete with
the professional service corporation provided adequate consideration for the 2007
noncompete agreement.24
Salewski relies upon employment law decisions recognizing that where a
noncompete agreement is entered into or modified after employment, mere continued
employment does not provide adequate consideration to enforce the agreement
because independent consideration is required.25 But he provides no authority that
such limitations apply to the modification of a noncompete agreement mutually entered
22 CP at 147 ("Every time a new owner was brought in as a shareholder of
[Pilchuck], a whole new set of documents, including agreements] to not compete, were
prepared and signed by all.").
23 CP at 148 ("The promises of the other shareholders were consideration for
[Salewski]'s promise. Thus there was a bargained for exchange of promises.").
24 Here, Salewski was not an employee who acquired a negligible or revocable
ownership interest in order to qualify as a partial "owner" of the business for the purpose
of enforcing the covenant not to compete. See 2 Altman & Pollack, supra.
25 Labriolav. Pollard Grp.. Inc., 152 Wash. 2d 828, 100 P.3d 791 (2004).
8
No. 72012-1-1/9
into by all shareholders of a corporation.26 Thus, there is no legal error revealed on the
face of the award. To the extent Salewski suggests that we should somehow evaluate
the strength of the evidence that the shareholders mutually agreed and mutually
executed identical new "employment agreements" each time a new shareholder joined,
that approach would far exceed our narrow review.
The impact of the stock redemption agreement by which Salewski became a
former shareholder and employee does not alter our analysis. The redemption
agreement expressly provides that the 2007 noncompete agreement continues in effect.
The redemption agreement is entirely consistent with the arbitrator's determination that
the 2007 agreement continued to apply after the stock redemption.27
There is no error on the face of the award. The 2007 noncompete agreement is
supported by adequate consideration and applies to Salewski's post-2010 conduct.
26 Consistent with the arbitrator's observations, some courts and commentators
recognize that the reason for greater scrutiny in an employee/employer noncompete
agreement is the leverage held by the employer in that relationship. See 2 Altman &
Pollack, supra, at 16-113 ("In one such case[,] the court said that a professional
partner is like an employee, but does not suffer from the same inequality of bargaining
power and impairment of his ability to find subsequent employment."); 10A William
Meade Fletcher & Carol A. Jones, Fletcher Cyclopedia of the Law of
Corporations § 4979, at 52-53 (perm, ed., rev. vol. 2011) ("The rationale behind the
distinction in analyzing covenants not to compete is that a contract of employment
inherently involves parties of unequal bargaining power to the extent that the result is
often a contract of adhesion, while a contract for the sale of a business interest is far
more likely to be one entered into by parties on equal footing."); see also Restatement
§ 188 cmt. g ("Post-employment restraints are scrutinized with particular care because
they are often the product of unequal bargaining power and because the employee is
likely to give scant attention to the hardship he may later suffer through loss of his
livelihood.").
27 Salewski did not become a mere employee; he was a former
shareholder/employee who was owed more than $200,000 under the redemption
agreement.
No. 72012-1-1/10
Liquidated Damages
Salewski argues that the liquidated damages provision "is not based on any
formula and bears no reasonable relation to any actual damage that might befall
Pilchuck ifa veterinarian were to leave the practice and compete."28 We disagree.
Washington courts "are loathf ] to interfere with the rights of parties to contract as
they please between themselves."29
It is not the role of the court to enforce contracts so as to produce the most
equitable result. The parties themselves know best what motivations and
considerations influenced their bargaining, and, while "[t]he bargain may
be an unfortunate one for the delinquent party, ... it is not the duty of
courts of common law to relieve parties from the consequences of their
own improvidence . . . ."[30]
Liquidated damage clauses "are favored and are enforceable ifthey do not
constitute a penalty or are otherwise unlawful."31 The arbitrator correctly stated the test
for the enforceability of such clauses, that "(1) the amount fixed must be a reasonable
forecast of just compensation for the harm that is caused by the breach, and (2) the
harm must be such that it is incapable or very difficult of ascertainment."32
28 Appellant's Reply Br. at 7.
29 Mqmt.. Inc. v. Schassberger, 39 Wash. 2d 321, 326, 235 P.2d 293 (1951).
30 Watson v. Ingram, 124 Wash. 2d 845, 852, 881 P.2d 247 (1994) (alterations in
original) (quoting Reichenbach v. Sage, 13 Wash. 364, 368, 43 P. 354 (1896)).
31 Knight, Vale & Gregory v. McDaniel, 37 Wash. App. 366, 371, 680 P.2d 448
(1984).
32 Id.
10
No. 72012-1-1/11
"Harm resulting to one business from the competition of another business is
difficult to estimate accurately."33 The main inquiry is "whether the specified liquidated
damages were reasonable at the time of contract formation."34
The reasonableness of liquidated damages is not determined retroactively
by their correspondence with actual damages, but by reference to the
prospective difficulty of estimating the possible damages that would flow
from a breach. . . . The greater the prospective difficulty of estimating
possible damages, the greater the range of reasonableness used in
assessing a liquidated damages provision.[35]
Here, the arbitrator determined that the 2007 agreement to pay $300,000 for
violation of the noncompete agreement was a reasonable forecast of damages. This
agreement was negotiated and signed by all of the shareholders. As the arbitrator
observed, it "was not something rammed down the throat of an employee" by someone
with unequal bargaining power.36 We do not go beyond the face of the award to
evaluate the evidence that was before the arbitrator. The face of the award reveals no
legal error. To the extent Salewski's arguments imply that there could not have been
adequate evidence to support the arbitrator's determination that $300,000 was a
reasonable forecast of damages, such an inquiry would require us to go behind the face
of the award to consider evidence not before us.37
Accordingly, there is no error on the face of the arbitration award.
33 Id; Walter Implement, Inc. v. Focht, 107 Wash. 2d 553, 559, 730 P.2d 1340
(1987).
34 Watson, 124 Wash. 2d at 853.
35 ]d
36 CP at 150.
37 We note that the amount that would likely be owing to a redeemed shareholder
could be considerable, more than $200,000 in this case. Such a factor might be a valid
consideration in forecasting the harm if a redeemed shareholder chooses to breach the
noncompete agreement.
11
No. 72012-1-1/12
Attorney Fees
Lastly, Pilchuck contends it is entitled to attorney fees and costs as provided in
the noncompete agreement. In Washington, reasonable attorney fees may be awarded
when authorized by a contract.38 "A contract which provides for attorney fees to enforce
a provision of the contract necessarily provides for attorney's fees on appeal."39 Here,
the noncompete agreement provides that "[s]hould the Principal be the prevailing party
in any action to enforce this Agreement (Contract) the Principal shall be entitled to all
attorneys' fees and costs incurred enforcing its right under this Agreement."40 Pilchuck
remains the prevailing party and thus, is entitled to an award of reasonable attorney
fees and costs on appeal upon compliance with RAP 18.1.
We affirm.
WE CONCUR:
|o<^kcy
38 Marine Enters, Inc. v. Sec. Pac. Trading Corp., 50 Wash. App. 768, 771, 750
P.2d 1290(1988).
39 ]d at 774.
40 CP at 111.
12