Hill Medical Corp. v. Wycoff
| Decision Date | 30 January 2001 |
| Docket Number | No. B134869.,B134869. |
| Court | California Court of Appeals Court of Appeals |
| Parties | HILL MEDICAL CORPORATION, Plaintiff and Appellant, v. Russell R. WYCOFF, Defendant and Appellant. |
Frank Albino, Gary Ganchrow, Los Angeles, and Parker, Milliken, Clark, O'Hara & Samuelian, for Plaintiff and Appellant.
Charles C. Ivie, Antoinette DeCamp, Los Angeles, and Gibson, Dunn & Crutcher, for Defendant and Appellant.
In this case we are called upon to determine if a covenant not to compete between Hill Medical Corporation (Hill Medical) and Dr. Russell R. Wycoff (Dr. Wycoff) is void pursuant to Business and Professions Code section 16600. Hill Medical has sought an injunction to enforce the covenant against Dr. Wycoff claiming it falls within the narrow exception set forth in Business and Professions Code section 16601.1
The trial court denied Hill Medical's request for an injunction concluding the covenant not to compete was unenforceable under section 16600 and did not fall within the exception of section 16601. We agree with the trial court. We conclude the noncompetition provision was void under section 16600 and did not comply with the requirements of section 16601. We affirm the judgment in favor of Dr. Wycoff. In light of this conclusion, we need not address other issues raised by the parties.2
Hill Medical is a professional California corporation of radiologists. It provides services in the field of radiology to hospitals, clinics, medical offices, and other health institutions and facilities. It employs licensed physicians in the field of radiology and associated medical-imaging disciplines.
Dr. Wycoff is a physician and surgeon specializing in the practice of radiology. He became a Hill Medical employee in 1976 and a shareholder in 1978. In 1978, Dr. Wycoff purchased 100 shares of Hill Medical stock in exchange for a $10,200 promissory note.
At all times relevant to this dispute, Hill Medical's common stock was owned by 14 radiologists, including Dr. Wycoff each of whom worked for Hill Medical under written employment agreements.
Throughout the years, Dr. Wycoff received distributions reflecting his share of the corporation's profits. From 1996 through 1999, Dr. Wycoff received a total of $98,349 in such payments. For the 1998 calendar year, Hill Medical's gross receipts were approximately $12.5 million.
In 1996, Dr. Wycoff entered into an "amended and restated employment agreement" and a "stock redemption agreement" with Hill Medical.3 According to the stock redemption agreement, in the event of a "buyout event," which was defined to include the end of Dr. Wycoff s employment, he was required to sell his stock back to the corporation and Hill Medical was required to repurchase the stock, at a price measured by net book value, i.e., assets minus liabilities. Hill Medical did not carry goodwill as an asset on its books.
The stock redemption agreement also contained a covenant not to compete. According to this noncompetition provision, upon a "buyout event," Dr. Wycoff would be barred from practicing radiology within a seven and one-half mile radius from any Hill Medical Facility for three years.4
On June 21, 1998, Dr. Wycoff tendered his resignation to the corporation's Board of Directors. The resignation was accepted.
On November 4, 1998, Dr. Wycoff gave a six-month notice of his intention to terminate his employment with Hill Medical.
Dr. Wycoff intended to practice radiology at 638 West Duarte Road in Arcadia, California (Duarte Facility). The Duarte Facility was located within seven-and-one-half miles of Huntington Memorial Hospital. Hill Medical practiced out of Huntington Memorial Hospital.
In 1999, the repurchase value of Dr. Wycoff's 100 shares under the book-value valuation in the stock redemption agreement was approximately $217,000. This figure did not include any component of goodwill.
On April 5, 1999, Hill Medical sued Dr. Wycoff seeking injunctive relief and enforcement of the covenant not to compete. The complaint also sought declaratory relief.
Two months later, a two-day court trial occurred. The trial court denied the request for a permanent injunction. The trial court held that
In so ruling, the trial court found the following. The "Employment Contract and the Share Repurchase Agreement are a package deal and not two separate agreements." The noncompetition covenant was invalid under section 16600 and it did not fall into the exception provided under section 16601. As in Bosley Medical Group v. Abramson (1984) 161 Cal. App.3d 284, 207 Cal.Rptr. 477, the clause was devised to accomplish what the law prohibits. The repurchase price was
The trial court further found that Hill Medical had not established the reasonableness of the noncompetition provision, in geographical scope.
Judgment was entered estopping Dr. Wycoff from denying the covenant not to compete and denying Hill Medical's request for an injunction. Hill Medical appealed from that portion of the judgment that denied the injunction. Dr. Wycoff cross-appealed from that part of the judgment estopping him from denying the applicability of the 1996 covenant not to compete.
Hill Medical contends the judgment must be reversed because it was entitled to an injunction. Hill Medical bases this contention on the argument that the trial court erred in concluding that the covenant not to compete was unenforceable. This contention is unpersuasive.
At common law, and in many states, restraints on the practice of a profession, trade, or business were valid, if reasonable. (Bosley Medical Group v. Abramson, supra, 161 Cal.App.3d at p. 288, 207 Cal.Rptr. 477.) In contrast, however, California has settled public policy in favor of open competition. (Howard v. Babcock (1993) 6 Cal.4th 409, 416, 25 Cal. Rptr.2d 80, 863 P.2d 150; Pacific Wharf etc. Co. v. Dredging Co. (1920) 184 Cal. 21, 24-25, 192 P. 847 [ ]; Golden State Linen Service, Inc. v. Vidalin (1977) 69 Cal.App.3d 1, 12-13, 137 Cal.Rptr. 807.) California codified its public policy and rejected the common law "rule of reasonableness" in 1872, upon the enactment of the Civil Code. (Former Civ.Code, § 1673, repealed and enacted as Bus. & Prof.Code, § 16600, Stats.1941, ch. 526, § 1, p. 1834; Bosley Medical Group v. Abramson, supra, 161 Cal.App.3d at p. 288, 207 Cal.Rptr. 477.)
Section 16600 presently sets out the general rule in California—covenants not to compete are void. (South Bay Radiology Medical Associates v. Asher (1990) 220 Cal.App.3d 1074, 1080, 269 Cal.Rptr. 15.) "[T]his provision [is] an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice." (Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal. App.4th 853, 859, 27 Cal.Rptr.2d 573.) Section 16600 reads: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."
The noncompetition provisions of the 1996 stock redemption agreement fall squarely within the proscription of Section 16600. The agreement provides that upon the occurrence of a "buyout event," Dr. Wycoff is prohibited from engaging "in the practice of the specialty of radiology or any associated medical imaging discipline in any way, directly or indirectly ... within a seven and one-half (7 1/2) mile radius of any hospital, clinic, office, institution or other facility maintained, serviced or operated by ... [Hill Medical]," for a period of three years. (See fn. no. 4.) As Dr. Wycoff s professional practice consists solely of providing radiology and associated medical imaging services, the provision effectively excludes him from the practice of his profession and is thus void. (§ 16600.)
Section 16601 provides one of the narrow exceptions to section 16600. (Kolani v. Gluska (1998) 64 Cal.App.4th 402, 407, 75 Cal.Rptr.2d 257.)5 Pursuant to section 16601, in certain defined circumstances, persons who sell the goodwill of a business may agree to refrain from carrying on a similar business. Section 16601 reflects that when the goodwill of a business is sold, it would be "`unfair' for the seller to engage in competition which diminishes the value of the asset he [or she] sold." (Monogram Industries, Inc. v. Sar Industries, Inc. (1976) 64 Cal.App.3d 692, 698, 134 Cal.Rptr. 714; accord, Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34, 48, 6 Cal.Rptr.2d 602.)6
In limited circumstances, section 16601 permits purchasers of a business to protect themselves through a covenant not to compete. (Hilb, Rogal & Hamilton Ins. Services v. Robb (1995) 33 Cal.App.4th 1812, 1824, 39 Cal.Rptr.2d 887; accord, Vacco Industries, Inc. v. Van Den Berg, supra, 5 Cal.App.4th at p. 48, 6 Cal.Rptr.2d 602.)
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