Pathology Consultants v. Gratton

• Decision Date: 18 January 1984
• Docket Number: No. 69146,69146
• Citation: Pathology Consultants v. Gratton, 343 N.W.2d 428 (Iowa 1984)
• Parties: PATHOLOGY CONSULTANTS and Black Hawk Medical Laboratories, P.C., Appellants, v. Christopher A. GRATTON; Christopher A. Gratton, M.D., P.C.; James D. Collins, Jr.; and James D. Collins, Jr., M.D., P.C., Appellees.
• Court: Iowa Supreme Court

Page 428

343 N.W.2d 428

PATHOLOGY CONSULTANTS and Black Hawk Medical Laboratories, P.C., Appellants, v.Christopher A. GRATTON; Christopher A. Gratton, M.D., P.C.; James D. Collins, Jr.; and James D. Collins, Jr., M.D., P.C., Appellees.

No. 69146.

Supreme Court of Iowa.

Jan. 18, 1984.

Rehearing Denied Feb. 10, 1984.

H. Daniel Holm, Jr., of Ball, Kirk & Holm, P.C., Waterloo, for appellants.

Patrick M. Roby and Mark L. Zaiger of Shuttleworth & Ingersoll, Cedar Rapids, for appellees.

Considered by REYNOLDSON, C.J., and UHLENHOPP, McCORMICK, SCHULTZ and WOLLE, JJ.

SCHULTZ, Justice.

This appeal involves several contractual disputes arising out of a covenant not to interfere with contractual arrangements and two different covenants not to compete.The district court denied the plaintiffs relief on their multi-count petition that sought to enforce these covenants.We affirm.

The present controversy was precipitated by the break up of a Waterloo partnership of pathologists, Pathology Consultants (PathCon), and the stockholders of a corporation, Black Hawk Medical Laboratories, P.C., (BHML).At the time of the split, the partners of PathCon, Dr. Gilbert R. Clark, Dr. James D. Collins, Jr., and Dr. Henry B. Lowsma, were also the sole stockholders of BHML.Dr. Christopher Gratton was then an employee of both the partnership and the corporation.Prior to the breakup, the partners of PathCon and its four employees were the only practicing pathologists in the Waterloo area and exclusively serviced all of the metropolitan area hospitals--Allen Memorial Hospital (Allen), Saint Francis Hospital and Schoitz Memorial Hospital in Waterloo and Sartori Memorial Hospital (Sartori) in Cedar Falls.They also served numerous hospitals in nearby communities including Virginia Gay Hospital (Virginia Gay) at Vinton.

PathCon earned its revenues by providing pathological services to the hospitals' laboratories.In return for these services, the hospitals paid PathCon a percentage of their gross laboratory receipts.Although Drs. Clark and Collins had individual contracts with two hospitals, Allen and St. Francis, the revenue from each contract was funneled directly into the partnership.Under these two contracts, the partner independently negotiated the percentage that would be paid by the particular hospital he served.Any disparity in revenues from these hospitals did not create an unevenness in the income of the partners since the partnership's net income was divided equally without regard to source.

Dr. Collins had an individual contract with Allen and also worked part-time at Virginia Gay.Dr. Gratton, as an employee of PathCon, worked at Allen with Collins.

BHML was formed in 1966 by the then PathCon partners.Since its inception, BHML operated as an independent laboratory in competition with the various hospital laboratories.BHML's income was derived from laboratory work referred from the hospitals served by PathCon and from referrals by individual physicians.Although the four metro hospitals have their own laboratories, much of each hospital's laboratory work was diverted to BHML.

In 1980 friction developed between Dr. Collins and the other two members of the partnership.In particular, the other two partners believed that Allen Hospital (contracted and serviced by Collins) was not generating sufficient income and that too few laboratory tests were being referred from Allen to BHML.Because Collins did not share this view, he withdrew from the partnership and the ownership of BHML on February 9, 1980.Under the partnership agreement, Collins had the right to continue his relationship with Allen in an individual capacity.Additionally, the partners informally agreed that he could continue serving Virginia Gay.

The parties decided that Collins' termination should be effective at the end of February.At the instigation of Collins, Dr. Gratton resigned from his employment on February 12.Because Gratton worked full time at Allen, PathCon and BHML had little need for his services.Accordingly, they agreed to his termination and had their attorneys draw up a written waiver.This waiver was subsequently executed by PathCon and BHML and released Gratton from the covenant not to compete in each employment contract.

The first controversy arose when Sartori Hospital, after an unsuccessful attempt to renegotiate its contract with Dr. Clark, terminated its relationship with PathCon on June 16, 1980.After an interim arrangement with Allen Hospital, Sartori and Collins, P.C., entered into a pathology contract on July 1, 1980.Shortly thereafter, laboratory referrals to BHML from Allen, Sartori, and Virginia Gay declined.At about the same time, Collins began doing laboratory work for individual physicians at Allen Hospital.

PathCon and BHML filed a multi-count action against Collins, Gratton and their professional corporation.Their claims against Collins were based on alleged breaches of his contracts with PathCon and BHML, respectively.The claims against Gratton were centered on the validity of the waiver releasing Gratton from his covenant not to compete.As noted earlier, the district court denied all of plaintiffs' various claims for relief.

On appeal, the issues have been narrowed.In particular, we must decide whether (1) Collins breached his partnership agreement either by interfering with PathCon's contractual relationship with Sartori Hospital or by subsequently entering into a contractual relationship with Sartori; (2) Collins breached his employment contract with BHML by competing with the corporation after his withdrawal from ownership; (3)plaintiffs' waiver of Gratton's covenant not to compete was the result of a mutual mistake by the parties or plaintiffs' unilateral mistake coupled with fraud or inequitable conduct on the part of the defendants; and (4)the trial court erred in evidentiary rulings during discovery proceedings concerning certain material in the possession of the Collins' attorney.

I.Breach of partnership agreement either by interference with or assumption of the Sartori contract.The alleged breach of the partnership agreement arose from the termination of the PathCon-Sartori contract.This written contract for pathology services was unlike the St. Francis contract with Dr. Clark and the Allen contract with Dr. Collins for similar services since PathCon was a party to contract rather than an individual partner.The term of the contract was year to year; however, either party had the express right to terminate it upon giving ninety days' notice.Sartori exercised this option and terminated its relationship with PathCon on June 16, 1980.It entered into a pathology contract with Dr. Collins on July 1, 1980.PathCon contends that Collins breached the partnership agreement in two ways: first by interfering with its contractual relationship with Sartori Hospital and second, by entering into a contractual relationship with Sartori.These claims were based on paragraph 15 of the 1979amendments to the partnership agreement.

The precipitating reason for the amendment was the retirement of a senior partner and the desire of Drs. Clark and Collins to have an employee, Dr. Lowsma, join them in the existing partnership.Since the partnership wanted to protect its existing contracts with hospitals from any further activity of an expelled or withdrawing partner, paragraph 15 was inserted.This paragraph provides in pertinent part:

Dr. Gilbert R. Clark has a contractual arrangement with St. Francis Hospital in Waterloo, Iowa, to operate the Pathology Department therein and Dr. James D. Collins, Jr., has a contractual arrangement to operate the Pathology Department in Allen Memorial Hospital in Waterloo, Iowa.The partnership had different contractual arrangements with the remaining hospitals mentioned previously for the overseeing or supervision or operation of the Pathology Departments within the various hospitals.In the event that either Dr. Gilbert R. Clark or Dr. James D. Collins, Jr., withdraws or is expelled from the partnership, neither the partnership nor the remaining members in the partnership shall attempt to interfere with the contractual relationship between either of these physicians and the hospital with which he has a contractual arrangement nor obtain a contractual arrangement with either of said hospitals.In the event that any of the partners retires, withdraws, or is expelled, he will not interfere with the partnership's contractual arrangements with the hospitals having a contractual relationship with the partnership nor will he attempt to enter into a contractual relationship with any of such hospitals.

....

If an expelled or withdrawing partner shall assume professional responsibility for a pathology laboratory under contract to Pathology Consultants or any of the individual partners remaining in the partnership, he or it shall pay to Pathology Consultants an amount equal to that which the Pathology Laboratory which he or it assumes professional responsibility for paid for professional pathology services in the prior fiscal year.The payment of said sums shall be made within twenty-four months of the date that the expelled or withdrawing partner shall assume such a relationship.

....(emphasis added)

The trial court rejected PathCon's claim that Collins interfered with the Sartori contract and, in fact, determined that Collins was careful not to do so.Instead, the court found that the contract was terminated by Sartori because of its own dissatisfaction with PathCon's performance.It went on to find that Collins did not enter into a relationship with the hospital while the PathCon-Sartori contract was in effect.

Based on our de novo review of the record, we must agree.The record is devoid of any direct evidence of overt attempts by Collins to interfere with PathCon's existing contract.Nevertheless, PathCon insists its interference claim is established by evidence of...