Reddy v. Community Health Foundation of Man

• Citation: 171 W.Va. 368,298 S.E.2d 906
• Decision Date: 15 December 1982
• Docket Number: No. 15453,15453
• Court: West Virginia Supreme Court
• Parties: , 1982-83 Trade Cases P 65,105 J.M. Yasa REDDY, M.D. v. COMMUNITY HEALTH FOUNDATION OF MAN, etc., et al.

Page 906

298 S.E.2d 906

171 W.Va. 368, 1982-83 Trade Cases P 65,105

J.M. Yasa REDDY, M.D. v. COMMUNITY HEALTH FOUNDATION OF MAN, etc., et al.

No. 15453.

Supreme Court of Appeals of West Virginia.

Dec. 15, 1982.

[171 W.Va. 370] Syllabus by the Court

1. A restrictive covenant or covenant not to compete in an employment contract is not per se violative of W.Va.Code, 47-18-3(a) [1978], the West Virginia Antitrust Act.

2. An employee covenant not to compete is unreasonable on its face if its time or area limitations are excessively broad, or where the covenant appears designed to

intimidate employees rather than to protect the employer's business, and a court should hold any such covenant void and unenforceable, and not undertake even a partial enforcement of it, bearing in mind, however, that a standard of "unreasonable on its face" is to be distinguished from the standard of "reasonableness" used in inquiries adopted by other authorities to address the minor instances of overbreadth to which restrictive covenants are naturally prone

3. An inherently reasonable restrictive covenant is presumptively enforceable in its entirety upon a showing by the employer that he has interests requiring protection from the employee.

4. An employee may rebut the presumptive enforceability of a restrictive covenant by showing: (1) that he has no "trade assets" of the employer to convert; (2) that such "trade assets" as he has belong to him and not to the employer; (3) that the employer could be equally well protected by a narrowed covenant; or (4) that the employer has had time to recoup any extraordinary investment in the employee.

5. In an action for injunctive relief to enforce a restrictive covenant in an employment contract the burden of proving the inherent reasonableness of the restrictive covenant, and of showing a need for protection by it, is on the employer; the burden of proving that an inherently reasonable covenant should not be enforced in its entirety is on the employee.

James M. Cagle, Charles R. Garten, Jr., Cagle, Garten & Wise, Logan, for appellant.

Edward I. Eiland, Eiland & Bennett, Logan, David T. Kennedy, Thornhill, Kennedy & Vaughan, Beckley, for appellees.

David P. Brown, Kingwood, for amicus curiae Preston Co. Health Council, Inc.

Kevin B. Burgess and Pat R. Hamilton, Oak Hill, for amicus curiae Hygeia Facilities Foundation, Inc.

Larry Harless, Charleston, for amicus curiae Dist. 17 and Local Union 8454, United Mine Workers of America.

NEELY, Justice:

Appellant, Yasa J.M. Reddy, M.D., came to the community of Man, West Virginia in July of 1977 to practice medicine. He began his practice as an emergency room physician at the Man Appalachian Regional Hospital, and began to see private patients using the hospital's inpatient facilities. When, in July of 1978, the hospital closed its inpatient services, Dr. Reddy was obliged to find office space in which to see his patients.

In February of 1979 Dr. Reddy entered into a contract with the Community Health Foundation of Man, West Virginia, Inc., our appellees. The Foundation is a nonprofit corporation chartered in 1967 for the purpose of providing good medical services to the Man area. The Foundation runs a clinic in Man that operates both from patient charges and from a federal grant that has provided between 120 and 140 thousand dollars annually over the past four years. The Foundation employs eight doctors, "retains" one, rents space to two more, and supports a staff of 34 lay personnel.

The contract between Dr. Reddy and the Foundation provided that the Foundation was to furnish Dr. Reddy all office space, supplies, instruments, and secretarial and other services necessary to support an orderly and proper practice of medicine. The Foundation agreed to pay Dr. Reddy a fixed amount per office visit at the clinic and per day of inpatient hospital treatment, and in turn, the Foundation became the owner of Dr. Reddy's receivable fees. Dr. Reddy was considered an independent contractor under the contract, which was to expire on 8 February 1980.

On 1 June 1979 Dr. Reddy's contract was amended by a second contract, identical to the first except that it adjusted Dr. Reddy's compensation downward. The Foundation was having trouble collecting its bills, and the doctors were asked to help by reducing their compensation. A third contract, similar to the previous ones, was entered into by the parties on 29 January 1980. This contract once again diminished Dr. Reddy's Twelfth: Restrictive Covenant. The physician covenants and agrees that he will not practice medicine within a radius of thirty (30) air miles of Man, West Virginia, for a period of three (3) years, after the termination of said agreement with the Foundation, which restrictive covenant shall be effective regardless of whether this agreement is terminated by action of either the Foundation or the physician or the expiration of the period provided for therein.

                compensation and, for the first time, included a restrictive covenant. 1  This contract expired on 8 February 1981, and on the following day the parties entered into their fourth contract.  The fourth contract also contained a restrictive covenant, identical to the covenant in the third contract.  It is this covenant whose validity is disputed before us now.  Its terms provide
                

In its decision below, the Circuit Court of Logan County declared the covenant valid and enforceable, and issued an injunction enforcing it in its entirety.

This case presents some perplexing factual problems. The first is that Dr. Reddy was practicing medicine in Man before he solicited the clinic to provide him with office space. He testified that approximately half of his current clinic patients are private patients brought by him to the Foundation clinic from his previous practice. The second is that both before and after signing the restrictive covenant Dr. Reddy worked on a regular basis in the local hospital's emergency room as an emergency room doctor. At no point did the Foundation or anyone representing the Foundation discourage him from continuing his practice there. Third, Dr. Reddy was not an employee of the Foundation, but was one of two doctors "retained" by the Foundation to supplement its regular staff of eight "employed" doctors. Fourth, the evidence, although not conclusive, does tend to support Dr. Reddy's assertion that he did not read the restrictive covenant at the time he signed the third contract. Dr. Reddy testified that the covenant was pointed out to him first by the other "retained" doctor at the Foundation. He did not believe he had signed such a covenant, which prompted the other doctor to point out the provision to him. Dr. Reddy testified that he immediately requested a meeting and asked to be released from the covenant, and the clinic's administrator corroborates Dr. Reddy's testimony that such a meeting did in fact take place, that at the meeting the reasons for the covenant were explained to Dr. Reddy, and that he was not released from the covenant.

Because the record below was not developed sufficiently to provide a factual basis for a thorough application of our following discussion, this case must be reversed and remanded to the court below for a new trial at which an order consistent with this opinion may be entered.

I UNLAWFUL RESTRAINT AND CONSIDERATION

A number of arguments presented to this Court are without merit, and may be quickly dispatched. The first is appellant's contention that the contract provision is in restraint of trade and is, therefore, unlawful under the West Virginia Antitrust Act, W.Va.Code, 47-18-3(a) [1978]. This argument fails to recognize that the phrase "in restraint of trade" is a term of art. Most contracts are deliberately entered into to restrain trade in some fashion. Franchise agreements, agreements to buy or sell a certain commodity at a specified time and price, employment agreements, agreements between management and unions--all operate as limitations on unrestricted trade without being unlawful restraints.

The old common law rule ² that a covenant not to compete operates as a restraint on trade, and is therefore void and unenforceable, has been replaced by the modern rule that an anticompetitive covenant will be upheld if supported by consideration, ancillary to a lawful contract, and both reasonable and consistent with the public interest. Annot., 62 A.L.R.3d 1014 (1975). It is axiomatic that an employee's covenant not to compete with his employer is not a per se violation of antitrust law, see, P. Areeda and D.F. Turner, Antitrust Law, vol. III, § 703(b) (1978); S. Williston, Contracts, 3rd ed., § 1643 (1972); Note, "The Antitrust Implications of Employee Noncompete Agreements: A Labor Market Analysis," 66 Minn.L.Rev. 519 (1982) ("Although the language of the Act clearly supports an argument that enforcement of noncompete agreements violates the antitrust laws, all post-employment restraints litigated under that section have been eventually upheld." Id., 524), and there is no West Virginia authority to support any proposition to the contrary. See Helms Boys, Inc. v. Brady, 171 W.Va. 66, 297 S.E.2d 840 (1982); Environmental Products Co. Inc. v. Duncan, 168 W.Va. 349, 285 S.E.2d 889 (1981); Pemco Corp. v. Rose, 163 W.Va. 420, 257 S.E.2d 885 (1979), all decided without resort to antitrust analysis after the West Virginia antitrust statute was enacted. In fact, as we discuss below, there are situations in which enforceable restrictive covenants are essential to an effective marketplace, not inimical to one.

Equally unsound is appellant's theory that the anti-competition provision fails for lack of new consideration. Although we agree with appellant that the restrictive covenant benefits the Foundation only, we observe that it is not an isolated provision. When Dr. Reddy's contract expired on 8 February 1981 his contractual relationship with the Foundation was severed. The...