BUSINESS LAW. Neurology Associates, LLP v. Elizabeth Blackwell, M.D.
Learning outcomes checklist:
If you master the material presented here you will be able to:
A. Explain the legal doctrines that govern the use of restrictive covenants.
B. Interpret and apply the rules set forth in the case law presented.
C. Articulate a cogent argument for each party/side in the dispute.
D. Negotiate a tenable solution as an alternative to a judicial forum.
The material in your text provides you with the legal doctrines and rules that govern contract law, an area of law immensely important to business. The purpose of this simulation is to give you an opportunity to apply the topics covered in your text pertaining to contract law and to connect that with the use of a simulated legal dispute. This will require you to apply legal doctrines and use analytical and critical thinking skills.
The simulation consists of three parts:
PART I: a hypothetical fact pattern that sets the stage of the legal dispute between the parties, in the imaginary state of Longville, U.S.A.
PART II: a set of two hypothetical cases from the Longville appellate courts that provide a brief set of fact, some legal points, and short excerpts from the decisions themselves. (The cases here, while only hypothetical, are in fact based on actual cases and represent the view of the majority of state courts in the U.S.).
PART III: your assignment, with instructions.
PART I: STIPULATED FACTS
1. In May 2005, Dr. Elizabeth Blackwell (“Blackwell”) had earned her Medical Doctor degree and completed all necessary requirements to receive a license to practice medicine in the State of Longville. She specialized in neurological medicine. Although she was offered professional opportunities in several large hospitals, she pursued an employment offer with Neurological Associates, LLC (“NA”). NA is a two-physician practice located in a small town in the southwestern area of the state of Longville and located 20 miles north of the City of Galway, the largest city in Longville. Although the pay was lower than the larger hospitals, Blackwell wanted to be close to her family and did not wish to engage in a practice that required the strenuous schedules associated with larger medical providers.
2. NA was managed by the two partners, Dr. Richard Cohn (“Cohn”) and Dr. Jean Valjean (“Valjean”). While negotiating Blackwell’s Employment Agreement, Cohn was the primary contact and the parties agreed to compensation terms, vacation, on-call duties(after hours), and a fringe benefit package. The agreement included an arbitration clause requiring that the parties agree to nonbinding arbitration in the event of a dispute arising from the Employment Agreement. The Employment Agreement also provided for Blackwell to have paid time off to study for and take the examinations required to become board certified in neurology. NA agreed to a $1,000 payment to be used for a course intended to help prepare candidates for the test. Blackwell began her employment with NA on June 1, 2005.
3. Immediately after hiring Blackwell, NA paid for Blackwell to accompany them to a medical conference at which they were scheduled to speak. At the conference, Cohn and Valjean introduced her to a number of physicians in hopes of building the referral base for the practice.
4. In July 2005, Cohn approached Blackwell and told her that he needed her to sign an additional document that was supposed to be part of her contract, but that Cohn had neglected to mention during negotiations. He explained that the document was standard procedure in medical practices and that he had been so busy during the negotiations period that he had forgotten to mention it to Blackwell. He went on to explain that Blackwell should sign the document by the end of the workday and that this would “make the lawyers happy.”
5. The document was titled ‘Addendum to Contract-Restrictive Covenant and Noncompete Clause” and read in pertinent part:
Section 1: The parties hereby agree, inconsideration of the exchange of good, valuable, and sufficient consideration, to be bound by the following provision:
For a period of three years after the date of her separation from NA, Blackwell
agrees that she will not contract with any provider of neurological services,
nor compete in anyway with NA, within a radius of 50 miles of NA’s practice
location. It is acknowledged that this restriction covers the entirety of the
Southwestern region of Longville.
6. Blackwell felt that she should have a lawyer review the document, but Cohn insisted the addendum was normal procedure and that she needed to sign it quickly to make things “legal.” He emphasized that he would have to
have the document by the end of the day or that, as it was a condition of her employment, Blackwell’s payroll check could not be processed until the document had been signed. Blackwell reluctantly signed the document
and submitted it to Cohn.
7. In August 2009, Blackwell began to have conflicts with Cohn and, to a lesser extent, Valjean. While Cohn and Valjean took frequent vacations during the summer, Blackwell was left to staff the practice alone. She felt overwhelmed and
met with Cohn to discuss a more equitable work schedule. Cohn refused any negotiation explaining that Blackwell was hired as a “workhorse” and that her salary was fair given the size of the practice and market. Cohn urged Blackwell to continue her hard work and not to complain about her work schedule. Eventually, explained Cohn, Blackwell would become a partner in the
practice and would enjoy the fruits of her labor.
8. In September 2009, Blackwell continued to
handle a very heavy caseload seeing almost twice as many patients as Cohn or Valjean. In response to Blackwell’s plea for additional staff, NA hired a new physician to help manage the caseload. Although Blackwell was initially relieved, the situation at work continued to deteriorate. The workload was such that Cohn kept denying Blackwell’s request for time off to prepare for the upcoming board
certification exam, advising her to put if off until the caseload lightened up a bit.
9. Blackwell began to receive phone calls from recruiters trying to lure her away from the practice to work at a new neurology clinic in Galway Hospital (located in the City of Galway). The recruiters offered a significant
amount of money because there was a substantial shortage of neurologists in the southwest region of Longville. However, Blackwell never pursued these opportunities because she believed the restrictive covenant prevented her
from working in Galway.
10. In January 2010, Blackwell was granted her paid leave to prepare for her board certification and she took the exam in February 2010. However, after she returned to the practice, she began to feel even more isolated from the
11. On March 1, 2010, Blackwell, fed up with NA, announced that she was giving NA 60-days notice that she was leaving the practice to join Galway Hospital in the City of Galway and that her resignation was effective on May 1, 2010. She anticipated starting at Galway on June 1, 2010. Galway was forming a new neurology practice group and they had offered to employ Blackwell as one of the
founding physicians in the group.
12. Cohn immediately sent Blackwell a letter informing her that he accepted her resignation, but that she had responsibilities under her contract that prevented her from accepting a new position with a competitor.
PART 2: STATE OF LONGVILLE CASE LAW: Wellspan Hospital and Medical Group v. Phillip Bayliss, M.D., Supreme Court of the State of Longville (2005)
· This is the leading case on restrictive covents/noncompete agreements in the context of medical practices in the state of Longville. It has not been modified or reversed since it was decided.
· Wellspan is a not-for-profit health care system located in Columbus County in the southeastern portion of the state of Longville. Bayliss is a physician specializing in OB/GYN services.
· Wellspan hired Bayliss as its medical director in 2000 at which time Bayliss signed an employment agreement that included a restrictive covenant under which Bayliss agreed not to engage in medical practice in Columbus County and five other contiguous counties (this covered the entire southeastern region of Longville) for a period of two years after the separation of employment between Wellspan and Bayliss.
· Wellspan invested over $1 million in equipping Bayliss’s practice, hiring additional physicians, and promotional strategies intended on marketing the practice and increasing the number of referrals.
· Relations between Wellspan and Bayliss deteriorated when they disagreed over Wellspan’s expansion strategy. In February 2004, Bayliss resigned his position at Wellspan and established his OB/GYN practice only 5 miles from the Wellspan practice. This was within the area covered under the restrictive covenant.
· The state’s highest court considered the enforceability of Wellspan’s restrictive covenant against Bayliss.
POINTS OF LAW AND OPINION EXCERPTS
The state of Longville courts will enforce a restrictive covenant only if it is reasonably necessary to protect the legitimate interests of the employer and courts may either strike down a covenant altogether or may reform (known as blue-lining) a covenant if it is overbroad in some way.
“Courts in the State of Longville have historically been reluctant to enforce contracts that place restraints on trade or on the ability of an individual to earn a living; however, postemployment noncompetition covenants are not per se unreasonable or unenforceable.”
The threshold requirement* for enforceability of a covenant is that the employer must be protecting a legitimate business interest. The primary legitimate business interests that Longville courts have held to be protectible in a covenant are (1) trade secrets or confidential business information, (2) customer goodwill, and (3) investments in the employee.
Excerpt (b l)
“A trade secret is legitimate business interest because it may include a compilation of information which is used in one’s business that gives one an opportunity to obtain an advantage over competitors. A trade secret does not include an employee’s aptitude, skill, dexterity, manual and mental ability, or other subjective knowledge. In addition, if a competitor could obtain the information by legitimate means, it will not be given protection as a trade secret.”
“The interest protected under the umbrella of goodwill is a business’s positive reputation. Goodwill represents a preexisting relationship arising from a continuous course of business which is expected to continue indefinitely. A business’s goodwill is considered a protectable interest even when the goodwill has been acquired through the efforts of an employee. The concept of customer goodwill as a protectable interest has been applied to patient relationships when the noncompetition covenant at issue involves a health care professional. This court has cited the erosion of the ex-employer’s patient relationships as one factor in the decision to enforce a restrictive covenant.
*Definition: Threshold Requirement: A requirement that must be met by the plaintiff prior to the court engaging in further legal analysis to determine the rights of the parties.
Except (b 3)
“A third protectible interest recognized by Longville courts is the efforts and financial resources invested by an employer to provide to its employees specialized training in the methods of the employer’s business. In a past case, the defendant was a salesman of securities who had received extensive and continuous training from his employer, particularly with respect to methods and problems in the sale of mutual fund shares. He then voluntarily left his position with his employer and started his own business selling mutual fund shares. The court enforced the noncompetition covenant at issue, enjoining the defendant from engaging in the business of selling mutual fund shares in Pennsylvania. The court found merit in the argument that it would be inequitable for the defendant to start a new business in direct competition with his ex-employer after having received extensive, specialized training in the methods and problems of the business directly from his ex-employer.”
A medical practice’s patient referral base is a legitimate protectible business interest when a medical practice can demonstrate that they have invested in the production and generation of such a base.
“Recognizing a patient referral base as a protect interest and of protecting the investments required to develop such a base is consistent with our holding in other employer-employee situation outside the health care field. In the context of a noncompetition covenant, we think that the referral bases of a specialized medical care institution are analogous to a physician’s patient relationships or an employer’s customer relationships. Viewed in such a light, recognition of a patient referral base as a protected interest fits squarely within Longville case law.”
If the threshold requirement of protectible interest is met, the next step in the analysis is to apply two balancing tests: (1) the employer’s protectible interest balanced against the employee’s interest in earning a living, and (2) the employee and employer interest with the interests of the public.
Except (d 1)
“In weighing the competing interests of employer and employee, the court must engage in an analysis of reasonableness. First, the covenant must be reasonably necessary for the protection of the employer. In addition, the temporal and geographical restrictions imposed on the ex-employee must be reasonably limited.”
Except (d 2)
“Regarding the second balancing test, in the context of noncompete agreement among physicians, the interests of the public are defined as a function of the availability of appropriate medical services to the community. Since there is no evidence of a lack of availability of OB/GYN physicians within the restricted area, the interests of the public are served and, thus, enforcement of the covenant against Bayliss does not result in public harm.”
HELD: Because Wellspan has shown that they have a legitimate business interest in protecting their patient referral base, and that the court has determined that the restriction is tailored to those interests, and that no public harm will be suffered by enforcement of the restriction, the court finds in favor of Wellspan.
Regional General Hospital v. Anesthesiology Associates, Inc.,
Appellate Court of the State of Longville (2007)
· Anesthesiology Associates Inc. (“AAI”) is a medical practice that employs physicians
and certified registered nurse anesthetists (“Employee”). In January 2002, AAI entered
into a contract with Regional General Hospital (“Regional”) to provide mutually agreed upon services to Regional’s patients.
· The employment agreements that AAI has with its Employees contained a postemployment rrestrictive covenant wherein Employees agreed to the following restrictions: (1)that for a period of two years from,”separation from AAI, ex-Employees would not contract with or compete against AAI at any facility where AAI was currently the provider of anesthesiology services, and (2) that for a period of one year from separation, ex-Employees agreed not to contract or compete against AAI at any facility where AAI has provided services for the last 12 months ending on the period of the Employee’s departure date. Because AAI provided services to more than 35 hospitals in five different state, the geographic restrictions effectively covered a five-state region.
· Regional let the agreement with AAI expire and offered direct employment to several
AAI Employees. Fearing that Employees of AAI would not accept these employment
offers for fear of a lawsuit by AAI based on breach of the restrictive covenant, Regional
filed suit against AAI, seeking a declaratory judgment* that the Covenant was unenforce-
able because it was overly broad in scope and duration and unduly restricted the AAI
Employees from accepting employment with Regional.
*Definition: Declaratory Judgment : A remedy used to determine the rights of the parties in a set of circumstances (such
as the enforceability of a contract) and is binding on the litigants even though no damages were awarded.
POINTS OF LAW AND OPINION EXCERPTS
In accordance with the Supreme Court of Longville’s decision in Wellspan v. Bayliss, this court will enforce a restrictive covenant only if it is reasonably necessary to protect the legitimate interests of the employer.
In addition to the legitimate business interest, the restriction must be narrowly enough tailored so that it is reasonably necessary to protect the interest of the employer. If an employer does not compete in a particular geographic area, enforcement of a covenant in that area is not reasonably necessary for the employer’s protection. Any restriction that is overly broad in geographic scope and durationrenders it unenforceable, and courts have the authority to either pare back the restriction or to set it aside entirely.
Excerpt (b 1)
“In determining reasonableness of scope and duration, we must balance the interest the employer seeks to protect against the important interest of the employee in being able to earn a living in her chosen profession. The court finds that neither the time limitations, nor the territorial scope of the agreement are overly broad or unreasonable. Furthermore, although the noncompete clause coveres five states in scope, such restriction is reasonable given the regional nature of their current hospital clientele. In this case, the restrictions are narrowly tailored to be limited only to certain providers within that region.”
HELD: In favor of AAI. AAI’s restrictive covenants in its employment agreements were reasonably related to AAI’s business interests and were not overly broad.
Instructions: Answers to the following questions regarding the case of Neurological Associates, LLC v. Blackwell. Be sure to read this over carefully.
In your answers, make sure you include the legal reasoning needed to show your understanding and mastery of contract law. Make sure to answer the entire question.
1. Identify the formation elements in the first contract signed by the parties.
2. Identify the formation elements in the non-compete agreement, signed later.
3. Could Blackwell reasonably claim that she was under duress when signing the restrictive covenant? What factors would suggest that she could/couldn’t. Is the fact that she subjectively feared for her job relevant? Why?
4. What is the primary factor in deciding whether a party may avoid a contract based on a claim of undue influence? Could it apply to the Blackwell case?
5. Apply the good faith standard that underlies all contract law in terms of how the parties acted in this case. Could either party have breached the covenant of good faith? What actions specifically support your conclusion?
6. Did any of the parties’ actions on either side amount to a breach of contract? Does the doctrine of anticipatory repudiation apply? Why? When, if ever, did one party anticipatorily repudiate the Employment Agreement?
7. Assuming Blackwell prevails (wins), what remedies are available to her? Assuming NA prevails, what remedies are available to it?
8. Can NA legitimately protect their interests in their patient base and referral base in the entire 50-mile radius? Couldn’t Blackwell simply locate her practice outside the restricted area? What arguments could either party make to justify/deny the effectiveness of such a restriction?
9. The case law does not give an exact number of years, but there are no cases that provide for a 3-year covenant such as the one Blackwell signed. Is 3 years necessary to protect NA’s interest? What argument would you make in support of NA’s claim that such an extended time period is required?
10. Given the objectives of each party (e.g. NA’s desire to protect their legitimate business interest; Blackwell’s desire to practice medicine in southwestern Longville), could the parties agree to a tenable, non-judicial solution that is mutually beneficial? What terms would you propose?