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

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
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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
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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
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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.
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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[.]”).
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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).
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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
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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
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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.
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REVERSED AND REMANDED.
________________________________
DAVID GAULTNEY
Justice
Submitted on January 10, 2013
Opinion Delivered June 13, 2013
Before McKeithen, C.J., Gaultney and Horton, JJ.
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