Rao v. Rao

• Decision Date: 21 October 1983
• Docket Number: Nos. 82-1954,82-1971,s. 82-1954
• Citation: 718 F.2d 219
• Parties: C.R. Mohan RAO, M.D., S.C., Plaintiff-Appellant, Counterdefendant-Cross- Appellee, v. M. Hari Kishan RAO, M.D., Defendant-Appellee, Counterplaintiff-Cross-Appellant, v. C.R. Mohan RAO, M.D., Counterdefendant-Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 219

718 F.2d 219

1 Indiv.Empl.Rts.Cas. 267

C.R. Mohan RAO, M.D., S.C., Plaintiff-Appellant, Counterdefendant-Cross- Appellee, v. M. Hari Kishan RAO, M.D., Defendant-Appellee, Counterplaintiff-Cross-Appellant, v. C.R. Mohan RAO, M.D., Counterdefendant-Cross-Appellee.

Nos. 82-1954, 82-1971.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 17, 1983.

Decided Sept. 23, 1983.

Rehearing and Rehearing En Banc Denied Oct. 21, 1983.

William J. Harte, and Norman J. Lerum, Pope, Ballard, Shepard & Fowle, Ltd., Chicago, Ill., for plaintiff-appellant, counterdefendant-cross-appellee.

Ronald Butler, Chicago, Ill., for defendant-appellee, counterplaintiff-cross-appellant.

Before PELL and ESCHBACH, Circuit Judges, and VAN PELT, Senior District Judge. ^*

ESCHBACH, Circuit Judge.

The primary issue in this diversity case is whether, under Illinois law, an employer may dismiss an employee without good cause and in bad faith and then enforce a restrictive covenant severely limiting the scope of the employee's professional practice. The secondary issue is whether an employee, who asserts that he is owed money under an employment contract, may circumvent the contract's arbitration clause by framing his claim as one sounding in tort. We resolve each issue in the negative; the restrictive covenant is unenforceable and the employee must take his claim for money to arbitration. Because the district court reached the same conclusions, the judgment under review is affirmed.

I. THE EMPLOYMENT RELATIONSHIP AND THE DISTRICT COURT PROCEEDINGS

C.R. Mohan Rao ("Mohan") is a thoracic and cardiovascular surgeon who has practiced in the Chicago area for twenty years. Mohan is the sole officer, director, and shareholder of C.R. Mohan Rao, M.D., S.C. ("Mohan Corporation"), a medical service corporation formed under the laws of Illinois, see Ill.Rev.Stat. ch. 32, Secs. 631-48. M. Hari Rao ("Hari"), also a thoracic and cardiovascular surgeon, came to Chicago and began working for Mohan Corporation in the spring of 1976.

After negotiations, Mohan Corporation and Hari entered into an employment agreement on December 20, 1977. This agreement, which related back to Hari's first day of employment, was for a term of two years and, absent a timely notice, was automatically renewed for two successive terms of one year each. The agreement specified Hari's compensation for the four years and provided that at the completion of four years of service, Hari was entitled to purchase fifty percent of Mohan Corporation's shares for one dollar. The agreement further provided that the employment relationship could be terminated by either party upon the giving of ninety-days notice and if Hari's employment was terminated "for any reason," Hari could "not practice medicine in any capacity at Holy Cross Hospital, Christ Hospital, and Palos Community Hospital" for two years. This restrictive covenant was to become void after Hari became a fifty-percent shareholder in Mohan Corporation.

Hari and Mohan appeared to work well together. Hari proved to be an able surgeon and Mohan assisted Hari in securing staff privileges at Holy Cross Hospital. Mohan introduced Hari to other physicians at the hospital and as these physicians gained confidence in Hari, the number of patients referred to Hari increased. Surgeons such as Hari and Mohan depend on referrals as the primary, if not exclusive, source of patients. As time passed Hari did more and more work at Holy Cross Hospital while Mohan performed most of his surgeries at other hospitals.

On December 21, 1979, Mohan sent Hari a letter noticing Mohan's intention to terminate Hari's current employment relationship with Mohan Corporation. Pursuant to the provisions of the employment agreement, this termination became effective in ninety days--ten days before Hari would have obtained a fifty-percent interest in Mohan Corporation for one dollar. Mohan's letter giving notice of termination also contained an invitation to negotiate a "new relationship" between the corporation and Hari.

A new employment agreement was not reached and Hari and Mohan went their separate ways. Hari continued to practice exclusively at Holy Cross Hospital and his income increased considerably as he worked for himself rather than Mohan Corporation. Meanwhile, Mohan continued his successful surgical practice and, because he had developed his practice elsewhere, rarely appeared at Holy Cross Hospital.

The paths of Mohan and Hari, however, reconverged in court. Mohan Corporation brought this action seeking specific enforcement of the employment agreement's restrictive covenant or, in the alternative, liquidated damages arising from Hari's continued practice at Holy Cross Hospital. Hari counterclaimed against Mohan Corporation for unpaid compensation owing to Hari under the employment agreement. Hari also made two claims against Mohan individually--one for tortiously inducing Mohan Corporation to breach its contractual duty to compensate Hari fully, and one for tortiously converting this unpaid compensation to Mohan's personal use.

Because the employment agreement contains a clause stating that any dispute between the parties shall be resolved by compulsory arbitration, the district court stayed proceedings on and compelled arbitration of Hari's contractual claim against Mohan Corporation. The arbitration clause, however, applies only to the contracting parties--Hari and Mohan Corporation. The district court therefore held for trial Hari's tort claims against Mohan individually and Mohan Corporation's claim seeking enforcement of the restrictive covenant.

The district judge, who sat as the trier-of-fact, made his factual findings from the bench immediately after the trial ended. Although Mohan Corporation and Hari assert that the district judge erred in matters of law, no relevant factual finding is challenged as clearly erroneous. The district judge's findings, therefore, will serve as the starting point for our legal analysis.

The district judge found that Hari performed professionally to everyone's satisfaction, proved to be a competent surgeon, did not damage Mohan Corporation's reputation, and was a good employee. Mohan, therefore, did not terminate Hari's employment because Hari's performance was inadequate; indeed in the letter of termination Mohan invited Hari to continue to work for Mohan Corporation. Mohan terminated Hari's employment because, according to the district judge, Mohan did not want Hari to exercise his contractual right to obtain a fifty-percent interest in the corporation. Mohan testified, in fact, that he never intended to permit Hari to acquire fifty percent of Mohan Corporation's shares. The district judge further found that Mohan used the restrictive covenant provision as a bargaining tool to induce Hari to renegotiate his employment agreement with Mohan Corporation. This bargaining tool was not an insignificant matter because if Hari is precluded from practicing at Holy Cross Hospital, Hari's practice will be severely limited and the opportunities that Hari gained from his association with Mohan will be lost.

The district judge further found that at the time the employment agreement was executed, no one contemplated that Mohan Corporation could enforce the restrictive covenant in the event that Hari was dismissed to prevent him from becoming a fifty-percent shareholder. The court found that:

I don't believe that any of them thought that this was the way it was going to work out. I don't think that there was a doctor who came in here who, if they had had this contract, would have thought they could take the position that Mohan Rao is taking now. You know I heard one of [Mohan Corporation's witnesses] say it would be malicious to take that position.

Finally, the district judge characterized as "bad faith" Mohan Corporation's attempt to enforce the restrictive covenant in this case.

As a matter of law, the district court interpreted the employment agreement as not permitting Mohan Corporation to invoke the restrictive covenant where Hari was dismissed so that he would not become a fifty percent shareholder in the corporation. Alternatively the court held that if the contract's terms did permit the invocation of the restrictive covenant in this case, the covenant would be unenforceable under Illinois law. Ruling on Hari's claim against Mohan for inducing Mohan Corporation to breach its contractual duties, the court held that Mohan Corporation is, in essence, Mohan; therefore Mohan could not tortiously induce himself to breach a contract. The district court also entered judgment in favor of Mohan on Hari's claim of conversion.

II. THE RESTRICTIVE COVENANT

The employment agreement states that the restrictive covenant will become effective if Hari's employment is terminated "for any reason." We suppose that a bad reason is still a reason; therefore, by the explicit terms of the contract, Mohan Corporation is entitled to enforce the restrictive covenant even though Hari was not dismissed for a good cause. Because the district court did not so interpret the contract, the court must have discerned and relied on an implied contractual term--a promise of good faith.

Under Illinois law, "in every contract both parties promise to act in good faith." Osten v. Shah, 104 Ill.App.3d 784, 786, 60 Ill.Dec. 497, 499, 433 N.E.2d 294, 296 (1982); see Stevenson v. ITT Harper, Inc., 51 Ill.App.3d 568, 573, 9 Ill.Dec. 304, 310, 366 N.E.2d 561, 567 (1977). The concept of "good faith" has its most natural and common application to the situation where one party exercises discretionary authority in a manner that affects the rights and duties of the other party. "Good faith between contracting parties requires that a party vested with contractual discretion must exercise his discretion reasonably and may not do so arbitrarily or capriciously." Foster Enterprises v. Germania Federal Savings and Loan Association, 97 Ill.App.3d...