Anniston Urologic Associates v. Kline
Anniston Urologic Associates v. Kline
Opinion
The defendant, Anniston Urologic Associates, P.C. ("Anniston Urologic"), appeals from a partial summary judgment for the plaintiff, Dr. Michael B. Kline. Dr. Kline had sought a judgment declaring that parts of an employment contract and a stock redemption agreement were unenforceable as covenants not to compete, relying on Ala. Code 1975, §
Anniston Urologic, a professional corporation organized under the Revised Alabama Professional Corporation Act, Ala. Code 1975, §
*Page 56"(d) It is expressly acknowledged that in the event of the voluntary termination of this EMPLOYMENT AGREEMENT by the Employee so that the terms of Paragraph 2 of the said STOCK REDEMPTION AGREEMENT become applicable, the 'total purchase price' properly payable to a 'departing shareholder' under the terms of the STOCK REDEMPTION AGREEMENT under the provisions thereof shall be reduced as follows in the event of the occurrence of either of the below described contingencies:
"(i) if a Shareholder/Employee of the Corporation voluntarily terminates his employment relationship with the Corporation at a time when said Shareholder/Employee is not 'disabled' as that term is therein described, without giving the Corporation nine (9) calendar months advance written notice of his intention to so voluntarily terminate, then in such event the 'total purchase price' otherwise payable thereunder by the Corporation to said departing shareholder shall be reduced by the sum of Twenty thousand and No/100 ($20,000.00) Dollars; or
"(ii) if a Shareholder/Employee of the Corporation voluntarily terminates his employment relationship with the Corporation and during the one (1) year period commencing on the date of said termination, engages in the practice of medicine at a location within a twenty-five (25) mile radius of the Corporation's offices at 411 East 9th Avenue, Anniston, Alabama, then in such event the 'total purchase price' otherwise payable thereunder by the Corporation to said departing Shareholder shall be reduced by the sum of Seventy-Five thousand and No/100 ($75,000.00) Dollars."
The stock redemption agreement contained similar language. On its face, each agreement contained a covenant purporting to impose a $20,000 penalty on Dr. Kline (by devaluing his stock) if he terminated his employment without giving nine months' advance written notice of his intention to terminate. (For the sake of clarity, this covenant will at times be referred to in this opinion as the "first covenant.") In addition, both agreements contained a covenant purporting to impose an additional $75,000 penalty on Dr. Kline (again, by devaluing his stock) if he practiced medicine in competition with Anniston Urologic within one year after the termination of his employment and within 25 miles of his former office. (This covenant will at times be referred to in this opinion as the "second covenant.") Dr. Kline terminated his employment without giving nine months' written notice, and he began within a year to practice medicine within 25 miles of Anniston Urologic. This litigation ensued. The trial court entered a partial summary judgment for Dr. Kline, declaring that both of the covenants illegally restricted or interfered with his ability to practice medicine.2 The trial court also ruled in Dr. Kline's favor on Anniston Urologic's counterclaim.
Because each of the covenants at issue has its own particular field of operation, we will discuss each covenant separately, beginning with the second covenant, as quoted above from paragraph (d)(ii) of the employment contract. As previously noted, the second covenant provided:
"[I]f a Shareholder/Employee of the Corporation voluntarily terminates his employment relationship with the Corporation and during the one (1) year period commencing on the date of said termination, engages in the practice of medicine at a location within a twenty-five (25) mile radius of the Corporation's offices at 411 East 9th Avenue, Anniston, Alabama, then in such event the 'total purchase price' otherwise payable thereunder by the Corporation to said departing Shareholder shall be reduced by the sum of Seventy-Five thousand and No/100 ($75,000.00) Dollars."
It is well settled in Alabama that to the extent a contract restrains the practice of a lawful profession, it is void, under §
"The contract provides:
" '7. TERMINATION
" '. . . .
" 'C. Watwood may terminate this Agreement at any time upon (30) days written notice to the Association and the Association shall be obligated in that event to pay to Watwood his compensation up to the date of termination only. In the event Watwood shall terminate this Agreement and enter into the practice of medicine and surgery within Tallapoosa County within twelve (12) months following such termination of employment with the Association, he shall pay to the Association, as liquidated damages, Twenty Thousand and No/100 ($20,000) Dollars. It is agreed by the parties that Watwood is receiving direct benefit and goodwill from the reputation and goodwill previously developed by the Association and its other physicians and surgeon and that such termination and entry into practice in Tallapoosa County subsequent to the practice of medicine with the Association would cause irreparable damage to the Association.'
"The plaintiff concedes that contracts restraining the practice of a profession are *Page 57 void under Title 9, § 22, [Ala. Code of 1940,] supra. However, it argues that cases so holding, Gant v. Warr,
286 Ala. 387 ,240 So.2d 353 (1970), and Odess v. Taylor,282 Ala. 389 ,211 So.2d 805 (1968), are distinguishable from this case. It says, in brief:" '. . . this contract provision is not a restraint of the exercise of the medical profession but it is simply a means of compensation for the benefit received by the Defendant by his having been associated with the Plaintiff in the practice of medicine. . . .'
"There is universal agreement that the law looks with disfavor upon contracts which restrain employment. Hill v. Rice,
259 Ala. 587 ,593 ,67 So.2d 789 (1953)."We are convinced that a contract which requires the payment of damages in the event one of the contracting parties competes with the other is a contract 'by which . . . one is restrained from exercising a lawful profession . . .' within the meaning of § 22, supra. Professor Williston finds that '. . . Any bargain or contract which purports to limit in any way the right of either party to work or to do business . . . may be called a bargain or contract in restraint of trade.' 14 Williston on Contracts, § 1633 (3d ed. 1972).
"The fact that the contract provision is couched in terms of liquidated damages rather than in negative form is not significant. '. . . This is clearly a restraint of a substantial character and the form in which it is cast does not make it less a restraint. . . .' Chamberlain v. Augustine,
172 Cal. 285 ,288 ,156 P. 479 ,480 (1916)."In Chamberlain v. Augustine, supra, the contract provided for the payment of $5,000 as liquidated damages in the event the contracting party went into the same business as the other party to the agreement. In construing its statute on restraint of a trade or profession, which incidentally is identical to our own, the California Court said:
" 'It will be observed that defendant Augustine's covenant with respect to liquidated damages is not expressly cast in negative form, and because of this it is insisted by appellant that it is not a contract restraining Augustine from exercising a lawful business, but is merely an agreement that if he did engage in such business he would pay the sum of $5,000 [five thousand dollars] as liquidated damages, and that the contract does not, therefore, violate the Code provision. In form, the agreement is as appellant claims. But none the less it is a contract which operates to restrain Augustine from carrying on the business mentioned. It imposes upon him a liability in the sum of $5,000 [five thousand dollars] if he does engage in such business. If the contract is valid, he is not as free to do so as he would have been if he were not bound by it. To the extent that the necessity of paying $5,000 [five thousand dollars] deters him from engaging therein, he would be restrained. This is clearly a restraint of a substantial character and the form in which it is cast does not make it less a restraint. . . . The covenant in question clearly operates to restrain the defendant from "exercising a lawful profession, trade, or business" [the language of the California and Alabama statutes] and as it does not fall within the exceptions given in section 1673, it is, therefore, void.' (
172 Cal. at 288 ,156 P. at 480 )"We find the reasoning of the California Court compelling. In the instant case, too, the language of the contract has been framed in positive rather than negative terms. However this appears to us to be a matter of form rather than substance; the purpose of the provision is to penalize the defendant if he terminates his employment with the plaintiff and engages in the practice of medicine in Tallapoosa County within twelve months thereafter. In effect, it requires him to forfeit $20,000 in order to pursue the practice of medicine in that county within that period of time. It is a restraint on the exercise of a lawful profession in violation of Title 9, § 22, supra, and is therefore void."
Based on the cases cited above, we conclude that the second covenant, purporting *Page 58
to restrain Dr. Kline from practicing medicine within one year of the termination of his employment with Anniston Urologic and within 25 miles of his former office, was made unenforceable by §
In so holding, we note that Anniston Urologic's reliance onMann v. Cherry, Bekaert Holland,
In Pierce, supra, this Court considered whether the trial court had erred in holding that an attorney was equitably estopped from asserting his claim to deferred compensation under his former firm's partnership agreement, which conditioned the payment of the deferred compensation on the attorney's not practicing in competition with his former firm. The attorney had left his former firm and was practicing in competition with it. We stated that "[t]he party asserting the doctrine of equitable estoppel may not predicate his claims on his own dereliction of duty or wrongful conduct." 678 So.2d at 768. After concluding that senior attorneys in the firm had drafted the noncompetition covenant into the partnership agreement, we held that the firm's participation in the drafting of that covenant precluded its assertion of the doctrine of equitable estoppel. The record in the present case indicates that the other stockholder/physicians in Anniston Urologic directly participated in the drafting of the second covenant; therefore, under the holding in Pierce, Anniston Urologic cannot rely on the doctrine of equitable estoppel to defeat Dr. Kline's claim to the full value of his stock. Although the evidence, viewed in the light most favorable to Anniston Urologic, indicates that Dr. Kline also directly participated in the negotiation of the second covenant and that he understood it and wanted it, Anniston Urologic did not raise the doctrine of in pari delicto as an affirmative defense before the entry of the judgment. See Pierce, supra, at 769.
We also note, but are not persuaded by, Anniston Urologic's contention that Ala. Code 1975, §
"Any provision regarding purchase, redemption or transfer of shares of a domestic professional corporation contained in the articles of incorporation, bylaws or any *Page 59 private agreement shall be specifically enforceable in the courts of Alabama."
There is nothing in the Act, or in the comments to the Professional Corporation Supplement to the Model Business Corporation Act (drafted by the Committee on Corporate Law of the American Bar Association), which served as a guide for the drafting of the Act, that would suggest a specific intent on the Legislature's part to repeal §
"[I]f a Shareholder/Employee of the Corporation voluntarily terminates his employment relationship with the Corporation at a time when said Shareholder/Employee is not 'disabled' as that term is therein described, without giving the Corporation nine (9) calendar months advance written notice of his intention to so voluntarily terminate, then in such event the 'total purchase price' otherwise payable thereunder by the Corporation to said departing shareholder shall be reduced by the sum of Twenty thousand and No/100 ($20,000.00) Dollars."
On its face, this covenant merely required Dr. Kline to give Anniston Urologic nine *Page 60
months' written notice of his intention to terminate his employment. The record reflects that this requirement was intended by the contracting parties to afford Anniston Urologic sufficient time in which to hire another physician and to otherwise provide for a smooth transition from one physician to another or, in the event nine months' notice was not given, to compensate the corporation for any economic hardship caused by the failure to give such notice. This covenant did not restrain Dr. Kline from practicing medicine for any period of time or restrain him from practicing medicine within a specified geographical area. Restrictions such as those contained in the second covenant tend to deny the public in the affected area access to a trained professional, see Odess v. Taylor,
For the foregoing reasons, the judgment is affirmed, insofar as the second covenant is concerned; however, insofar as the first covenant is concerned, the judgment is reversed. The case is remanded for further proceedings consistent with this opinion.
AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.
HOOPER, C.J., and MADDOX, KENNEDY, COOK, and SEE, JJ., concur.
Reference
- Full Case Name
- Anniston Urologic Associates, P.C. v. Michael B. Kline.
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- Published