Sadler Clinic Association, P.A. v. Nora C. Hart, Tawfiq Gordy Alam, Sanjaykumar Patel, Temitope Soares and Benny Wang ( 2013 )


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  •                                       In The
    Court of Appeals
    Ninth District of Texas at Beaumont
    ____________________
    NO. 09-12-00086-CV
    ____________________
    SADLER CLINIC ASSOCIATION, P.A., Appellant
    V.
    NORA C. HART, TAWFIQ GORDY ALAM,
    SANJAYKUMAR PATEL, TEMITOPE SOARES AND BENNY WANG,
    Appellees
    _______________________________________________________           ______________
    On Appeal from the 9th District Court
    Montgomery County, Texas
    Trial Cause No. 12-02-01579-CV
    ________________________________________________________            _____________
    OPINION
    In a suit against Dr. Nora C. Hart, the Sadler Clinic Association, P.A. sought
    to enforce a noncompetition covenant in an employment contract. See Tex. Bus. &
    Com. Code Ann. §§ 15.50-.52 (West 2011). Drs. Tawfiq G. Alam, Sanjaykumar
    Patel, Temitope Soares, and Benny Wang intervened in the suit with a declaratory
    judgment action to have the noncompetition covenant declared unenforceable.
    Sadler and the physicians filed motions for summary judgment. The trial court
    1
    determined the contract does not include a reasonable buyout clause and is
    therefore unenforceable. The court also awarded the physicians attorney fees.
    Sadler Clinic appealed.
    We conclude the trial court erred in its construction of the contract and in the
    court’s application of the Covenants Not To Compete Act. The contract includes a
    buyout clause. If a party contends the buyout price is unreasonable, the party’s
    remedy is to have a reasonable price determined by binding arbitration. We also
    hold that in this proceeding the physicians’ entitlement to attorney fees is governed
    by the Covenants Not To Compete Act. Fees not recoverable under that Act in this
    proceeding are not recoverable under the Declaratory Judgments Act. The
    judgment of the trial court is reversed and the cause is remanded for further
    proceedings.
    SUMMARY JUDGMENT REVIEW
    In reviewing a summary judgment, a court determines whether the movant
    established that no genuine issue of material fact exists and that the movant was
    entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c); Mann Frankfort
    Stein & Lipp Advisors, Inc. v. Fielding, 
    289 S.W.3d 844
    , 848 (Tex. 2009). When
    the trial court grants one party’s motion and denies the opponent’s, the appellate
    court considers the summary judgment evidence and determines the questions
    2
    presented. Valence Operating Co. v. Dorsett, 
    164 S.W.3d 656
    , 661 (Tex. 2005);
    Jones v. Strauss, 
    745 S.W.2d 898
    , 900 (Tex. 1988).
    THE EMPLOYMENT CONTRACT
    The individual employment contracts are substantively identical. Each
    agreement contains a restrictive covenant prohibiting a departing physician from
    competing with Sadler Clinic for eighteen months within a twenty-two mile radius
    of the main Sadler facility.
    Texas law requires that a covenant not to compete be ancillary to an
    otherwise enforceable agreement. Tex. Bus. & Com. Code Ann. § 15.50(a); see
    Marsh USA Inc. v. Cook, 
    354 S.W.3d 764
    , 775 (Tex. 2011). The physicians argue
    the employment agreements are illusory and cannot support the enforcement of the
    noncompetition covenant, because the employment agreements bind physicians to
    certain obligations, but set forth no corresponding obligation for Sadler. Sadler
    asserts it was required to provide the physicians with confidential information:
    minutes from all board of directors’ meetings, including those involving strategic
    and operational information; income distributions for all Sadler physicians;
    contract information regarding drugs and supplies, including vendors and various
    cost-pricing methods; reimbursement rates and credentialing information with
    Sadler’s insurance carriers; medical coding and billing, and financial information;
    3
    and Sadler’s patient accounting systems. The contracts here include a provision
    that the physicians will not disclose confidential information the physicians are
    “placed in a position by Clinic to become acquainted with[.]” See Alex Sheshunoff
    Mgmt. Servs., L.P. v. Johnson, 
    209 S.W.3d 644
    , 651-56 (Tex. 2006) (covenant
    ancillary to agreement to preserve confidences). Sadler argues that at confidential
    meetings the physicians could attend, the Sadler board discussed the location and
    features of new facilities, the addition of new practice specialties, policies and
    procedures about quality care, financial data, and negotiated rates for insurance
    carriers. Dr. Robert Branstetter, chief executive officer of Sadler Clinic, stated by
    affidavit that the doctors received and had access to confidential information “from
    day one of their work at Sadler Clinic.” Branstetter expressed concern that “[t]he
    confidential information provided to the physicians . . . may be used to compete for
    patients in Sadler Clinic’s primary patient draw area, and to lure physicians away
    to compete with Sadler in that area.”
    The physicians maintain that Sadler did not own this information and that it
    instead belonged to Sadler’s management company. But, as Branstetter stated in a
    supplemental affidavit, “all management services provided by MCMC were under
    contract with and at the request of Sadler Clinic.” He stated that “Montgomery
    County Management Company must maintain the confidentiality of Sadler Clinic’s
    4
    documents and information” and that “[e]ach of the doctors in this lawsuit is a
    member of [MCMC], as well as a shareholder in Sadler Clinic.”
    The physicians argue that Sadler does not have a protectable interest in
    patient records because Sadler is required to provide departing physicians with a
    list of all patients seen within two years of the departure. See 22 Tex. Admin Code.
    § 165.5 (2011) (two years); see also Tex. Bus. & Com. Code Ann. §
    15.50(b)(1)(A) (one year). The contract provides that the restrictive covenant shall
    not be construed to deny the physicians the required patient information. But the
    contract also provides that such confidential information as “operation methods
    and information, accounting and financial information, marketing and pricing
    information and materials, [and] internal publications and memoranda” are
    protectable. The physicians agreed to protect the confidential information. The
    employment agreements contain promises that are not illusory, and the covenants
    not to compete are ancillary to an otherwise enforceable agreement. See Marsh
    USA Inc., 
    354 S.W.3d 764
    , 774-80; Mann 
    Frankfort, 289 S.W.3d at 849-52
    .
    THE BUYOUT PROVISION
    The employment agreements contain an “Option to Pay Liquidated
    Damages” provision that allows the physicians to buyout of the noncompetition
    covenant if they do not desire to be bound by it. The order granting the physicians’
    5
    motion for summary judgment states the ground on which the trial court granted
    summary judgment: “[P]aragraph 13 of Physician’s Employment Agreement fails
    to contain a reasonable buyout clause and is therefore unenforceable as a matter of
    law.”
    Sadler argues that the trial court is not authorized to second-guess what the
    parties have determined is a reasonable amount. Sadler also argues that the
    physicians did not show that the buyout amount was greater than necessary to
    protect the goodwill or other business interests of Sadler or, if the provision is for
    liquidated damages, that the provision amounts to an unenforceable penalty. 1
    Section 15.50 of the Business and Commerce Code provides that a covenant
    not to compete relating to the practice of medicine 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[.]”
    Tex. Bus. & Com. Code Ann. § 15.50(b)(2). The physicians argue the buyout
    clause is ambiguous and so “could not be enforced.” The “enforceability of a
    covenant not to compete is a question of law.” Mann 
    Frankfort, 289 S.W.3d at 848
    .
    1
    But see Tex. Bus. & Com. Code Ann. § 15.51(b).
    6
    If the written instrument can be given a definite legal meaning, it is not
    ambiguous. Coker v. Coker, 
    650 S.W.2d 391
    , 393 (Tex. 1983). A court attempts to
    give effect to the parties’ intent as expressed in the contract. Balandran v. Safeco
    Ins. Co. of Am., 
    972 S.W.2d 738
    , 741 (Tex. 1998). The entire contract is examined
    in an effort to harmonize and give effect to all the provisions so that none will be
    rendered meaningless. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am.,
    
    341 S.W.3d 323
    , 333 (Tex. 2011). An agreement subject to more than one
    reasonable interpretation is ambiguous. See Pilarcik v. Emmons, 
    966 S.W.2d 474
    ,
    478 (Tex. 1998). To determine whether an agreement is ambiguous, a court looks
    at the contract as a whole and considers the circumstances at the time of the
    agreement. See Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 
    940 S.W.2d 587
    , 589 (Tex. 1996). The parties’ offer of conflicting interpretations does
    not necessarily establish ambiguity. See Praeger v. Wilson, 
    721 S.W.2d 597
    , 600
    (Tex. App.—Fort Worth 1986, writ ref’d n.r.e.). And an agreement is not
    ambiguous simply because the contract must be read carefully to be properly
    understood. See Gomez v. Hartford Co. of the Midwest, 
    803 S.W.2d 438
    , 442 (Tex.
    App.—El Paso 1991, writ denied).
    The physicians assert that, using the language of the contract, there are
    multiple interpretations of how to calculate a buyout. One alleged ambiguity
    7
    relates to the meaning of the word “income” and the phrase “during the preceding
    12 months. . . .” Under the contract at issue, if the physician desires to practice
    medicine in violation of the covenant-not-to-compete provisions, the physician has
    the option of paying Sadler a certain percentage of the “[i]ncome paid by Clinic to
    Physician during the preceding 12 months as shown on the W-2 forms of Clinic[.]”
    The amount varies with the length of employment and with the status of the
    physician as a shareholder or employee. The contract explains the “damages are in
    partial restitution for the loss or damage which Clinic will suffer as a result of such
    breach and in partial recovery of its investment in the practice of Physician.”
    The physicians argue the phrase “preceding 12 months” could mean the 12
    months immediately prior to the end of the working relationship, which may be
    different from the 12 months reflected on the last year’s W-2 form. The contract
    provides that the physician must pay to clinic as liquidated damages an amount
    based on the length of employment. For those physicians who are clinic
    shareholders, each “condition” or section includes the phrase “the Income paid by
    Clinic to Physician during the preceding 12 months as shown on the W-2 forms of
    Clinic.” It is apparent that the preceding 12 months is a reference to the 12 months
    reflected on the last W-2 form of the Clinic.
    The physicians also argue the contract does not specify whether the income
    8
    is gross income or “reported W-2 wages.” The contract defines “income,”
    however, as “income for federal income tax purposes,” and the contract specifies
    the income paid by clinic to Physicians as shown on the W-2 forms of Clinic. It is
    apparent the contract refers to the gross pay reported on the W-2 form. “[F]or
    federal income tax purposes,” the amount of gross pay is the starting point. If the
    parties had intended to use a different number that allowed for a reduction for
    deductions, exclusions or taxes withheld, the parties would have included that
    calculation in the contract. We are not persuaded by the physicians’ argument that
    they “established that the Buyout Clause was ambiguous and could not be
    enforced.”
    A REASONABLE PRICE
    The statute requires that the covenant provide for a buyout by the physician
    at a reasonable price, and that is the issue addressed by the trial court. See Tex.
    Bus. & Com. Code Ann. § 15.50(b)(2). The physicians argue the buyout clause is
    unenforceable because it sets forth an arbitrary and unreasonable value that has no
    relationship to the damages Sadler would incur if a physician violated the
    noncompetition covenant.
    Reasonable price is not defined in the statute, but the ordinary meaning of
    price is not the same as that for damages. Price is the “amount of money or other
    9
    consideration asked for or given in exchange for something else; the cost at which
    something is bought or sold.” Black’s Law Dictionary 1308 (9th ed. 2009). The
    term damages refers to “[m]oney claimed by, or ordered to be paid to, a person as
    compensation for loss or injury[.]” Black’s Law Dictionary 445 (9th ed. 2009). The
    term liquidated damages generally refers to an acceptable measure of damages
    stipulated in advance in the event of a breach of contract. Flores v. Millennium
    Interests, Ltd., 
    185 S.W.3d 427
    , 431 (Tex. 2005); Valence Operating 
    Co., 164 S.W.3d at 664
    (“Liquidated damages clauses fix in advance the compensation to a
    party accruing from the failure to perform specified contractual obligations. . . .”).
    A valid liquidated damages amount may represent a reasonable buyout price
    in a particular case, but though the concepts may be closely related in this context,
    they are not necessarily identical. And though it is not clear how a physician’s
    annual gross income would relate directly to Sadler’s lost profits, the Legislature’s
    choice of words -- “price,” rather than “damages” or “lost profits” -- may make a
    difference in determining a reasonable buyout amount under the circumstances.
    As originally introduced, the legislative bill provided that a reasonable price
    was to be “determined by a mutually agreed upon arbitrator.” House Comm. on
    Pub. Health, Bill Analysis, Tex. H.B. 3285, 76th Leg. R.S. (1999). The final
    version of the bill removed the requirement of arbitration if the parties agreed on a
    10
    reasonable price, and added the provision that if the parties could not agree on the
    arbitrator, the court would appoint one. 2
    Parties agree to an amount or formula at the time they sign the contract.
    Although intervening circumstances may make the amount seem unreasonable at
    the time the buyout provision is sought to be implemented, the statute does not
    give the trial court authority to reform the price. See Tex. Bus. & Com. Code Ann.
    §§ 15.50, 15.51. The statute does give the trial court the authority to “reform the
    covenant to the extent necessary to cause the limitations contained in the covenant
    as to time, geographical area, and scope of activity to be restrained to be
    reasonable and to impose a restraint that is not greater than necessary to protect the
    goodwill or other business interest of the promisee . . . .” Tex. Bus. & Com. Code
    Ann. § 15.51(c). The relief that may be granted to the employer after reformation is
    limited to injunctive relief. 
    Id. But the
    absence of damages as a remedy for the
    employer after reformation does not mean a physician is precluded from exercising
    a valid buyout option to avoid entry of an injunction prohibiting competition. See
    
    id. §§ 15.50(b)(2),
    15.51(c). Section 15.50(b)(2) provides arbitration as relief from
    an unreasonable stipulated price. The Legislature anticipated that the price may be
    in dispute, for whatever reason, at the time of the buyout, whether the limitations
    2
    See Act of May 26, 1999, 76th Leg. R.S., ch. 1574, § 1, 1999 Tex. Gen.
    Laws 5408, 5409.
    11
    are reformed or not, and in that event provided for binding arbitration to determine
    the price to be paid.
    The agreement here includes a buyout provision. The covenant does not
    include an express reference to the arbitration option, but that is not fatal to the
    agreement and does not preclude arbitration of the issue of reasonable price. See
    Tex. Bus. & Com. Code Ann. § 15.50(b)(2). We presume that the parties
    contracted with knowledge of the statute’s arbitration provision concerning the
    price, and that the parties intended the statute’s application in determining a
    reasonable price. See generally Danciger Oil & Ref. Co. of Tex. v. Powell, 
    154 S.W.2d 632
    , 635 (Tex. 1941) (An implied covenant “must arise from the presumed
    intention of the parties as gathered from the instrument as a whole.”).3
    Under the statute, if the physician elects to compete despite signing a valid
    noncompetition covenant with a buyout provision, the physician must pay the
    agreed amount or elect to have a reasonable price determined by an arbitrator. See
    Tex. Bus. & Com. Code Ann. § 15.50(b)(2). The statute does not give the trial
    3
    The physicians cite an unpublished opinion by this Court where we
    concluded that section 15.50(b)(2) did not “interject” an agreement to arbitrate. See
    Gulf Coast Cardiology Group, P.A. v. Samman, No. 09-02-009CV, 
    2002 WL 1877175
    , at *1 (Tex. App.—Beaumont Aug. 15, 2002, pet. denied) (not designated
    for publication). The employment agreement in that case had no buyout provision,
    however. See also Tex. R. App. P. 47.7(b) (Unpublished opinion prior to January
    1, 2003, has “no precedential value[.]”).
    12
    court the role of determining a reasonable price. See 
    id. § 15.51(c).
    An arbitrator is
    given that role. See 
    id. § 15.50(b)(2).
    We hold the trial court erred in declaring the
    entire covenant not to compete unenforceable because the court believed the
    stipulated buyout price was unreasonable. The proper remedy was binding
    arbitration to determine a reasonable price. 4 Issue one is sustained.
    THE LIMITATIONS IN THE COVENANT
    Sadler asks that this Court render judgment enforcing the covenant not to
    compete. Sadler argues that the covenants “as a matter of law contain reasonable
    limitations.” The summary judgment record includes some evidence, however, that
    a geographic limitation of ten miles or possibly less may adequately protect Sadler.
    The covenant provides a twenty-two mile geographic limitation. The trial court
    originally denied Sadler’s request for a temporary injunction because “the
    geographical area of the noncompete provision is not reasonable as to Dr. Hart, a
    family practice doctor.” The trial court did not reform the contract, although the
    statute requires reformation “to the extent necessary” to cause the limitations “to
    be reasonable[.]” 
    Id. § 15.51(c).
    Any reformation occurs before the issue of
    reasonable price is determined. The cause must be remanded for the trial court’s
    4
    The statute provides that either party may choose arbitration to determine a
    reasonable price. See Tex. Bus. & Com. Code Ann. § 15.50(b)(2).
    13
    initial determination of the reasonableness of the limitations, and for reformation if
    necessary. See Tex. Bus. & Com. Code Ann. § 15.51(c).
    But apparently the restricted period -- during which the physicians were
    precluded from competing -- may have expired during the litigation. The contract
    contains a tolling provision during a breach, but under the contract the tolling
    period is “not to exceed” an additional eighteen months. The tolling period may
    have expired as to some, if not all, of the physicians. Sadler asks that we equitably
    toll the time period further, and presents two reasons.
    First, Sadler argues that at least one physician has “practiced without
    interruption in violation of the noncompete[,]” and that the time period of a
    covenant not to compete can be equitably extended if the violations were
    “continuous and persistent.” Compare Farmer v. Holley, 
    237 S.W.3d 758
    , 761
    (Tex. App.—Waco 2007, pet. denied) (Record did not support assertion that
    violations were continuous and persistent.). But in this case the contract contains
    its own tolling provision extending the restricted period during a breach. We
    decline to grant an equitable extension because of a breach when the parties
    expressly agreed in the contract as to the time of tolling during a breach.
    Second, Sadler argues we should rule that the time period of the
    noncompetition covenant has been equitably tolled during the pendency of the
    14
    litigation. Compare RenewData Corp. v. Strickler, No. 03-05-00273-CV, 
    2006 WL 504998
    , at *5, (Tex. App.—Austin Mar. 3, 2006, no pet.) (mem. op.) (Delays in
    the enforcement were not simply “inherent to litigation[.]”). While this reason
    relates to a breach, it focuses more directly on court inaction over which a party
    has no control. Following federal court precedent, an appellate court could leave
    initial consideration of the applicability of this reason for an equitable extension to
    the trial court on remand. See Guy Carpenter & Co. v. Provenzale, 
    334 F.3d 459
    ,
    464 (5th Cir. 2003) (power of federal district court “under Texas law” to craft
    injunction in light of court’s delay in deciding motion to reconsider). The Texas
    Supreme Court has indicated that the issue of reformation becomes moot after the
    term of the noncompetition covenant has expired. See Weatherford Oil Tool Co. v.
    Campbell, 
    340 S.W.2d 950
    , 952 (Tex. 1960). One court has concluded that
    Weatherford means that a Texas “court will not extend the period provided in a
    restrictive covenant contained in an employment contract.” Rimes v. Club Corp. of
    Am., 
    542 S.W.2d 909
    , 912 (Tex. Civ. App.—Dallas 1976, writ ref’d n.r.e.). While
    we do not believe Weatherford addressed the reason articulated by the federal
    court in Provenzale, we nevertheless decline to grant an equitable extension under
    the circumstances here. The parties to this contract apparently anticipated delay
    due to litigation resulting from a possible breach, and provided for a maximum
    15
    tolling period in the contract.
    If the trial court reforms the limitations, however, damages are not available.
    See Tex. Bus. & Com. Code Ann. § 15.51(c). Injunctive relief would remain
    available, assuming the restricted period for the specific physician has not expired.
    See 
    id. But if
    a limitation must be reformed, yet injunctive relief is not available
    because of the expiration of the time provided in the covenant, reformation may be
    a futile exercise. See John R. Ray & Sons, Inc. v. Stroman, 
    923 S.W.2d 80
    , 85
    (Tex. App.—Houston [14th Dist.] 1996, writ denied) (Expiration of covenant so
    “any reformation of that provision by the trial court would have been an exercise in
    futility.”). However, if on remand the limitations are determined to be reasonable
    for a specific physician and need not be reformed, and the physician nevertheless
    has chosen to compete in violation of a valid noncompetition covenant, the
    physician must pay a reasonable buyout price to be determined by an arbitrator,
    assuming the parties do not agree the stipulated buyout price is reasonable. If an
    injunction is still available to enforce a reformed agreement as to a particular
    physician, the issue of a reasonable buyout price would then also be arbitrable on
    remand.
    Issue two is therefore sustained in part and overruled in part. The cause will
    be remanded to the trial court for the determination of the matters set out in our
    16
    discussion of issue two. However, to the extent Sadler asks this Court to grant an
    extension and to also enforce the covenant before the trial court considers the
    reasonableness of the limitations, issue two is overruled.
    ATTORNEY FEES
    In issue three, Sadler argues that the physicians did not establish their
    entitlement to attorney fees under section 15.51 of the Act. Sadler argues the
    Covenants Not To Compete Act preempts recovery of attorney fees under the
    Declaratory Judgments Act. The physicians in a footnote in their brief state they
    “did not pursue an award of attorneys’ fees under the provision in Section 15.51 of
    the Covenants Not to Compete Act.” Instead, the physicians argue they are entitled
    to recover attorney fees under the Declaratory Judgments Act. 5 See Tex. Civ. Prac.
    & Rem. Code Ann. § 37.009 (West 2008).
    The procedures and remedies in an action to enforce a covenant not to
    compete provided by section 15.51 “are exclusive and preempt” proceedings and
    remedies “under common law or otherwise.” Tex. Bus. & Com. Code Ann. §
    15.52; see Perez v. Tex. Disposal Sys., Inc., 
    103 S.W.3d 591
    , 592-94 (Tex. App.—
    5
    In issue four, Sadler argues that if fees are recoverable under the
    Declaratory Judgments Act, the physicians were required to segregate “recoverable
    fees from the nonrecoverable fees.” See Tony Gullo Motors I, L.P. v. Chapa, 
    212 S.W.3d 299
    , 313-14 (Tex. 2006). We do not reach issue four because of our
    resolution of issue three.
    17
    San Antonio 2003, pet. denied) (attorney fee provision exclusive). In its suit
    against Hart, Sadler sought to enforce the covenant. The physicians intervened in
    that suit with a declaratory judgment action. Sadler sought to enforce the covenant,
    and the physicians sought to avoid the covenant through their motion for summary
    judgment. The terms of the Covenants Not To Compete Act govern the dispute
    over the enforcement of the covenant. The physicians did not pursue an award of
    attorney fees under section 15.51 in their motion for summary judgment, and do
    not argue that there is no genuine issue of material fact concerning liability for
    attorney fees under section 15.51(c). In this proceeding, the exclusivity and
    preemption provision of the Covenants Not To Compete Act precludes an award of
    attorney fees under the Declaratory Judgments Act. See Tex. Bus. & Com. Code
    Ann. § 15.52; see also generally MBM Fin. Corp. v. Woodlands Operating Co.,
    L.P., 
    292 S.W.3d 660
    , 669 (Tex. 2009) (“[T]he rule is that a party cannot use the
    [Declaratory Judgments] Act as a vehicle to obtain otherwise impermissible
    attorney’s fees.”). Issue three is therefore sustained. We reverse the trial court’s
    judgment, and remand the cause for further proceedings consistent with this
    opinion.
    18
    REVERSED AND REMANDED.
    ________________________________
    DAVID GAULTNEY
    Justice
    Submitted on January 10, 2013
    Opinion Delivered June 13, 2013
    Before McKeithen, C.J., Gaultney and Horton, JJ.
    19