Restrictive covenants are often the most complicated clauses in a physician employment contract. Medical practices and their lawyers are constantly striving to make these non-competition agreements more protective, more comprehensive and more enforceable. Sometimes this "more is better" approach backfires!
A good example of this problem is the liquidated damages provision. Frequently you will see, buried in the bowels of a restrictive covenant, a liquidated damages clause stating somewhat as follows:
"In the event that (doctor) violates the provisions of the restrictive covenant above, the actual damages sustained by practice are uncertain, impossible to ascertain and irreparable. Therefore, it is hereby agreed that the amount of One Hundred Thousand Dollars (or some other large number) shall be established as liquidated damages for any breach or violation hereof".
If restrictive covenant provisions probably also contain language prohibiting competition within a defined geographic area, which might very well entitle you to an injunction prohibiting such competition. However, injunctions are usually obtainable in Pennsylvania only when monetary damages cannot be determined. This article suggests you reconsider the idea of including this provision. Instead of protecting you, it might just be nothing more than an agreement of sale for the portion of your practice that follows the breaching new physician out your door.
In a recent Bulletin article entitled "Whose Patients Are They Anyway", I wrote that the general rule in Pennsylvania is restrictive covenants are enforceable. This rule was recently reaffirmed in the case of Wellspan Health, York Hospital and Wellspan Medical Group vs. Phillip Bailus, M.D., wherein the Court stated:
"Pennsylvania Courts have historically been reluctant to enforce contracts that place restraints on trade or on the ability of an individual to earn a living; however, post employment non-competition covenants are not per se unreasonable or unenforceable….At a minimum, for a non-competition or restrictive covenant to be enforceable, it must be reasonably related to the protection of a legitimate business interest….The type of interest that has been recognized in the context of the non-competition covenant include trade secrets or confidential information, unique or extraordinary skills, customer good will, and investments in an employee specialized training program….An issue that has not yet been explicitly addressed by a Pennsylvania appellate court is whether a patient referral base and the investments needed to generate that base constitutes a protected interest…"
The Wellspan court analyzed a number of cases dealing with protectable interests, particularly the New Jersey case of Community Hospital Group vs. More. The Wellspan Court decided:
"We find much merit in the holding and arguments from the More court regarding the wisdom of recognizing a patient referral base as a protected interest and of protecting the interest required to develop such a base. Furthermore, in the context of a non-competition covenant, we find that the referral basis of the specialized medical care institution are analogous to a physician’s patient relationships or an employer’s customer relationships. Viewed in such light, the recognition of a patient referral basis as a protected interest fits squarely within Pennsylvania case law".
A crucial part of enforcing a restrictive covenant, after determining that a legitimate protectable business interest is at stake, is the "balancing test". Courts must balance the employer’s protectable business interests against the employee’s interest in earning a living and the public’s interest in sufficient access to quality medical care.
Knowing that a Pennsylvania court may enforce a reasonable restrictive covenant, you must decide whether you wish to prohibit competition by means of an injunction, i.e., a court order specifically prohibiting competition within a certain geographic area for a certain time, or whether you wish to seek damages for breach of the contract. The essential element for obtaining an injunction is the inability to measure economic damages; permanent injunctions are awarded only to prevent a legal wrong for which there is no adequate remedy through monetary damages. If a Court believes that it can determine monetary damages, then typically an injunction will not be issued and the case will be held over for trial on the liability and damages issues. Injunctions are sought and obtained only when it is too difficult to measure economic damages and the only remedy is the prohibition of the prohibited conduct.
If you include a liquidated damages clause in the restrictive covenant, i.e., a clause that states that the damages will be a specific amount, what happens to the argument for the injunction? To date, there had been little in the way of specific guidance on this issue. However, in the case of Lehigh Valley Bone, Muscle and Joint Group, LLC vs. Puccio, the Common Pleas Court of Lehigh County, Pennsylvania addressed this specific issue. The Court held that Steven Puccio, D.O., had expressly violated the restrictive covenant contained in his employment contract with the plaintiff orthopedic practice, and the employment contract contained a liquidated damages provision very similar to that quoted at the beginning of this article. The practice sought both the injunction and the liquidated damages. Dr. Puccio argued that, even though he had violated the contract and the parties had specifically agreed that One Hundred Thousand Dollars ($100,000.00) would be the liquidated damages, the liquidated damages provisions should not be enforced because it was a penalty and in violation of public policy.
The Court decided that the agreement was enforceable as written, stating:
"Here, the agreement itself states that the actual damages would be difficult to ascertain, but that the sum of $100,000.00 would be a reasonable estimate of damages in the event the agreement is violated… The Defendant is in violation of the employment agreement and pursuant to said agreement, Plaintiff is entitled to recover damages in the amount of $100,000.00 as set forth in the employment agreement…Plaintiff also seeks a permanent injunction to enjoin Defendant from working at St. Luke’s Hospital. To prevail on a claim for permanent injunction, the Plaintiff must prove a clear way to relief and the injury claim must be one that can not be compensated by an award of damages….A permanent injunction is appropriately awarded to prevent a legal wrong for which there is no adequate redress at law….In the present case, the parties have agreed that $100,000.00 is a reasonable compensation for damages caused by a violation of the restrictive covenant and we have agreed that this clause is enforceable. In light of this, injunctive relief is not required. Therefore, Plaintiff’s motion for a permanent injunction is denied."
In light of this case, should your restrictive covenant include a liquidated damages provision? Yes is a correct answer only if you believe that the amount specified as liquidated damages would also be fair compensation for the sale of the portion of the practice you might lose by forfeiting the injunction. Otherwise, you might simply be establishing a bargain purchase price. And don’t presume that your problem will be solved if you simply include some astronomical figure that would be satisfactory but has no relationship to your actual damages, such as a value that far exceeds the gross revenue of the practice, because a Court could find the liquidated damages unenforceable as a penalty.
In summary, you should treat the liquidated damages as a purchase price. If you would not sell that potion of your practice for that amount, then don’t risk using it as a liquidated damages provision.
As published in the Allegheny County Medical Society Bulletin, October 2006.