Cedar Valley Medical Specialists, PC v. James Wright, M.D.

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).
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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
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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.
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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
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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
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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
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$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
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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.
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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
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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
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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
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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.
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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.
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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.