Calhoun v. Wha Medical Clinic, Pllc
| Decision Date | 01 August 2006 |
| Docket Number | No. COA05-1345.,COA05-1345. |
| Citation | 632 S.E.2d 563 |
| Court | North Carolina Court of Appeals |
| Parties | Linda P. CALHOUN, M.D.; Mark T. Murphy, M.D.; Hemantkumar Patel, M.D.; Praful N. Patel, M.D.; and J. Robinson Harper, Jr., M.D., Plaintiffs, v. WHA MEDICAL CLINIC, PLLC, Defendant. |
Ward and Smith, P.A., by Jenna Fruechtenicht Butler and John M. Martin, Wilmington, for plaintiffs-appellants.
Nelson, Mullins, Riley, & Scarborough, L.L.P., by Noah H. Huffstetler, III, Raleigh, and Catharine W. Cummer, and Murchison, Taylor, & Gibson, P.L.L.C., by Michael Murchison and Andrew K. McKay, Wilmington, for defendant-appellee.
Linda P. Calhoun, M.D., Mark T. Murphy, M.D., Hemantkumar Patel, M.D., Praful N. Patel, M.D., and J. Robinson Harper, Jr., M.D., collectively ("plaintiffs"), appeal from a declaratory judgment of the trial court, determining a covenant not to compete and a liquidated damages provision were enforceable in an employment agreement between plaintiffs and WHA Medical Clinic, PLLC ("WHA"). We affirm in part and remand in part.
The trial court made, inter alia, the following findings of fact:
1. [WHA] is a multi-specialty medical group of approximately 60 physicians who provide both primary and specialty care in southeastern North Carolina.
2. [Plaintiffs] are physicians licensed to practice medicine by the State of North Carolina and are board-certified in cardiology.
3. WHA was formed in 1996 as the successor to Wilmington Health Associates, P.A. ("Wilmington Health"). Prior to 1996, many of the physicians who work for WHA were owners or employees of Wilmington Health.
4. Harper joined Wilmington Health as an employee physician in July 1990 and became a shareholder in August 1993. Calhoun joined Wilmington Health in January 1992 and became a shareholder in January 1994. P. Patel joined Wilmington Health in December 1994 and became a member of WHA in December 1996. Harper, Calhoun, and P. Patel shall be collectively referred to as "Member Plaintiffs."
5. At the time the Member Plaintiffs joined Wilmington Health, their employment agreements included restrictive covenants with liquidated damages provisions that enabled the employee-physician to stay and compete through payment of a fixed sum designed to compensate Wilmington Health for its investment in the physician and the expenses associated with the physician's departure. When Harper and P. Patel originally joined Wilmington Health prior to 1996, they signed such covenants without objection.
6. The benefits of joining an established practice such as Wilmington Health included a guaranteed salary and benefits package, an established patient and referral base, association with well-regarded physicians, staff, facilities, and equipment, licensing and credentialing support, billing, administrative[,] and financial administration.
...
8. In August 1996, Wilmington Health and Phycor Inc., a Tennessee physician practice management company, entered into an agreement to sell the assets of Wilmington Health to PhyCor Inc. ("Asset Purchase Agreement"). The Asset Purchase Agreement also required WHA, the newly formed entity that employed the physicians formerly employed by Wilmington Health, to enter into a service agreement with PhyCor of Wilmington, a subsidiary of PhyCor Inc. ("Service Agreement").
9. Simultaneous with the sale of assets, on August 1, 1996, Harper and Calhoun executed individual Payback Agreements, which were separate and distinct from the employment agreements at issue in this case. Pursuant to the Payback Agreements, Harper and Calhoun agreed to return all or a portion of their PhyCor payouts if they did not remain with WHA for a period of 4 years commencing August 1, 1996.
10. To protect PhyCor's investment in the tangible and intangible assets of Wilmington Health, the Service Agreement required WHA to obtain and enforce restrictive covenants from current and future physician members and employees.
11. The Asset Purchase and Service Agreements further provided that, if an individual physician chose not to enter into the new contracts containing restrictive covenants, the compensation to WHA would be reduced and that individual physician would not receive any share of the PhyCor proceeds. At least one physician, Lowell Shinn, chose not to sign the new contract. Dr. Shinn did not receive a payout and the compensation to WHA was proportionately reduced.
12. On August 1, 1996, Calhoun and Harper executed a Member Physician Services Agreement setting forth the terms and conditions of their employment with WHA. A First Amendment to Member Physician Services Agreement was executed on March 25, 1999. 13. In part, Paragraph 13 of the Member Physician Services Agreements provides:
13. Covenant Not to Compete
13.1 Physician agrees that during the term of this Agreement and for a period of eighteen (18) months following the termination of employment of Physician with the Company, Physician will not Compete with the Company, as defined below, or employ or solicit the employment of any Restricted Employee, as defined below.
13.2 For purposes of this restrictive covenant, the following definitions apply:
...
B. "Restricted Employee" means any person that was an employee of the Company at any time during the twelve (12) months immediately preceding the termination of employment of Physician with the Company.
C. "Restricted Territory" means ... New Hanover, Pender, Brunswick, Onslow, Duplin, Bladen and Columbus Counties if Physician is a subspecialist or other non-primary care physician.
...
13.4 Physician agrees that a breach by Physician of this restrictive covenant would cause irreparable damage to the Company and that, in the event of a breach or threatened breach by Physician, the Company shall be entitled to preliminary and permanent injunctions restraining Physician from breaching or continuing to breach this restrictive covenant.
...
13.8 In the event the Physician desires to practice in violation of this restrictive covenant, Physician shall have the option of paying to the Company the following liquidated damages in advance of practicing in violation of the covenant. Physician shall pay to the Company as liquidated damages an amount equal to the greater of (i) Physician's "average annual income" as shown on the W-2 or K-1 forms prepared by Wilmington Health Associates, P.A. ("WHA") or the Company for the two most recent years preceding termination of Physician's employment, or (ii) Physician's share of the total gross proceeds payable to WHA pursuant to the Asset Purchase Agreement between WHA and PhyCor of Wilmington, Inc. ("PhyCor"), including the amount of any liabilities of WHA assumed by PhyCor pursuant to the Asset Purchase Agreement, and Physician's share of sums payable to the Company pursuant to Article 12 of the Service Agreement.
14. The liquidated damages provision ensured that physicians who profited from the PhyCor transaction were required to repay, at a minimum, the amount of gross proceeds they received under the Asset Purchase and Service Agreements, should they depart and compete with WHA.
15. Such liquidated damages provisions were included because the damage caused by the departure and subsequent immediate competition by physicians depends upon several factors and is difficult to determine in advance. A departing physician's prior net contribution to corporate overhead, the volume of patients and patient revenues lost to the departing physician's new practice, the length of time and cost associated with recruiting replacement physicians, the time it takes a new replacement physician to become a fully productive contributor to the group, and the ability of the remaining physicians in the group to assume the care of patients who wish to remain with the group all affect the extent of WHA's damages.
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17. Each Member Plaintiff had a choice: Either agree to the new contract and receive a payout, or, not agree to the new contract and consequently forego said payout....
18. Plaintiffs Harper, Calhoun, and P. Patel chose to sign the new contract with the restrictive covenants and subsequently received the following individual payouts: Harper received $287,350, Calhoun received $267,171, and P. Patel received $245,730[.]
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20. In December of 1999, WHA hired plaintiff H. Patel, an electrophysiology cardiologist. On December 29, 1999, H. Patel executed an Employee Physician Services Agreement that sets forth the terms and conditions of his employment with WHA. H. Patel began practice at WHA as an employee physician in the summer of 2000.
21. Also in late 1999, WHA hired plaintiff Murphy. On November 23, 1999, Murphy executed an Employee Physician Services Agreement that set forth the terms and conditions of his employment with WHA. Murphy began practice at WHA as an employee-physician in 2000.
22. Paragraph 17 of the Employee Physician Services Agreement is titled "Restrictive Covenant" and is identical to Paragraph 13 of the Member Physician Services Agreements (the Employee Physician Services Agreements and Member Physician Services Agreements will be collectively referred to as "Employment Agreements"). H. Patel's and Murphy's employment agreements contained the same provisions regarding hiring of "restricted employees" and confidentiality as the Member Physician Services Agreements.
23. In addition, Paragraph 14 of Murphy's and H. Patel's Employee Physician Services Agreements, titled "Compliance with Rules and Regulations," provides in part Physician shall comply with all rules and regulations as may be established and modified by the Managers of Company from time to time pertaining the business and medical practice of Company. Notwithstanding the foregoing, Physician and Company shall be obligated...
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