Several physicians employed by Court Street Family Practice, a division of the Sisters of Charity Health Systems Inc. (Health System) resigned to join a competing practice owned by a competing health system. The employment contracts included a “Limitation of Practice” clause which “forbade them from practicing medicine with Central Maine Health Care Corporation, its affiliates or its subsidiaries within a twenty-five mile radius” of the Health System’s office in Lewiston, Maine for a period of two years, but the contract provision also included a $100,000 liquidated damages clause.
The Health System filed suit, not seeking an injunction, but seeking liquidated damages. The court concluded that restrictive covenants were enforceable when designed to protect legitimate business interests, and ruled liquidated damaged clauses were enforceable if they met a two part test, i.e. (i) “it must be very difficult to estimate the damages caused by the breach accurately;” and (ii) “the amount fixed in the agreement must be a reasonable approximation of the loss caused by the breach.” This of course sounds like an oxymoron, requiring the damages must be very difficult to estimate but that the estimate be a reasonable approximation; perhaps this is a before and after test — the damages must be hard to estimate when the contract is signed, but turn out to be reasonable when the facts are examined afterwards.
I think the moral of this story is that liquidated damages clauses could be enforceable, but including them in the contract could actually be just a disguised purchase price so that hospitals and employers using the restrictive covenant should be prepared to essentially sell the practice if the physicians resign and pay the liquidated damages.