Valley Medical Specialists v. Farber

• Decision Date: 18 June 1999
• Docket Number: No. CV-97-0488-PR.,CV-97-0488-PR.
• Citation: 194 Ariz. 363,982 P.2d 1277
• Parties: VALLEY MEDICAL SPECIALISTS, an Arizona professional corporation, Plaintiff-Appellant, v. Steven S. FARBER, D.O. and Susan H. Farber, husband and wife, Defendants-Appellees.
• Court: Arizona Supreme Court

982 P.2d 1277

194 Ariz. 363

VALLEY MEDICAL SPECIALISTS, an Arizona professional corporation, Plaintiff-Appellant, v. Steven S. FARBER, D.O. and Susan H. Farber, husband and wife, Defendants-Appellees.

No. CV-97-0488-PR.

Supreme Court of Arizona, En Banc.

June 18, 1999.

Lane Campbell & Nach, P.C. By: Richard N. Brandes and Renaud Cook & Drury By: LeslieAnn Haacke and Bell & O'Connor, P.C., Phoenix By: John Daniel Campbell III and David A. Joffe, Scottsdale, for Plaintiff-Appellant.

Snell & Wilmer By: Lonnie J. Williams, Jr. and Bryan Cave, L.L.P. By: Mark I. Harrison, Rodney W. Ott, Phoenix, for Defendants-Appellees.

OPINION

FELDMAN, Justice.

¶ 1 We granted review to determine whether the restrictive covenant between Dr. Steven Farber and Valley Medical Specialists is enforceable. We hold that it is not. Public policy concerns in this case outweigh Valley Medical's protectable interests in enforcing the agreement. We thus vacate the court of appeals' opinion, affirm the trial court's judgment, and remand to the court of appeals to resolve any remaining issues. We have jurisdiction pursuant to Arizona Constitution article VI, § 5(3) and A.R.S. § 12-120.24.

FACTS AND PROCEDURAL HISTORY

¶ 2 In 1985, Valley Medical Specialists ("VMS"), a professional corporation, hired Steven S. Farber, D.O., an internist and pulmonologist who, among other things, treated AIDS and HIV-positive patients and performed brachytherapy—a procedure that radiates the inside of the lung in lung cancer patients. Brachytherapy can only be performed at certain hospitals that have the necessary equipment. A few years after joining VMS, Dr. Farber became a shareholder and subsequently a minority officer and director. In 1991, the three directors, including Dr. Farber, entered into new stock and employment agreements. The employment agreement contained a restrictive covenant, the scope of which was amended over time.

¶ 3 In 1994, Dr. Farber left VMS and began practicing within the area defined by the restrictive covenant, which at that time read as follows:

The parties recognize that the duties to be rendered under the terms of this Agreement by the Employee are special, unique and of an extraordinary character. The Employee, in consideration of the compensation to be paid to him pursuant to the terms of this Agreement, expressly agrees to the following restrictive covenants:

(a) The Employee shall not, directly or indirectly:

(i) Request any present or future patients of the Employer to curtail or cancel their professional affiliation with the Employer;

(ii) Either separately, jointly, or in association with others, establish, engage in, or become interested in, as an employee, owner, partner, shareholder or otherwise, or furnish any information to, work for, or assist in any manner, anyone competing with, or who may compete with the Employer in the practice of medicine.

(iii) Disclose the identity of any past, present or future patients of the Employer to any other person, firm or corporation engaged in a medical practice the same as, similar to or in general competition with the medical services provided by the Employer.

(iv) Either separately, jointly or in association with others provide medical care or medical assistance for any person or persons who were patients or [sic] Employer during the period that Employee was in the hire of Employer.

* * *

(d) The restrictive covenants set forth herein shall continue during the term of this Agreement and for a period of three (3) years after the date of termination, for any reason, of this Agreement. The restrictive covenants set forth herein shall be binding upon the Employee in that geographical area encompassed within the boundaries measured by a five (5) mile radius of any office maintained or utilized by Employer at the time of execution of the Agreement or at any time thereafter.

(e) The Employee agrees that a violation on his part of any covenant set forth in this Paragraph 17 will cause such damage to the Employer as will be irreparable and for that reason, that Employee further agrees that the Employer shall be entitled, as a matter of right, and upon notice as provided in Paragraph 20 hereof, to an injunction from any court of competent jurisdiction, restraining any further violation of said covenants by Employee, his corporation, employees, partners or agents. Such right to injunctive remedies shall be in addition to and cumulative with any other rights and remedies the Employer may have pursuant to this Agreement or law, including, specifically with regard to the covenants set forth in subparagraph 17(a) above, the recovery of liquidated damages equal to forty percent (40%) of the gross receipts received for medical services provided by the Employee, or any employee, associate, partner, or corporation of the Employee during the term of this Agreement and for a period of three (3) years after the date of termination, for any reason, of this Agreement. The Employee expressly acknowledges and agrees that the covenants and agreement contained in this Paragraph 17 are minimum and reasonable in scope and are necessary to protect the legitimate interest of the Employer and its goodwill.

(Emphasis added.)

¶ 4 VMS filed a complaint against Dr. Farber seeking (1) preliminary and permanent injunctions enjoining Dr. Farber from violating the restrictive covenant, (2) liquidated damages for breach of the employment agreement, and (3) damages for breach of fiduciary duty, conversion of patient files and confidential information, and intentional interference with contractual and/or business relations.

¶ 5 Following six days of testimony and argument, the trial court denied VMS's request for a preliminary injunction, finding that the restrictive covenant violated public policy or, alternatively, was unenforceable because it was too broad. Specifically, the court found that: any covenant over six months would be unreasonable; the five-mile radius from each of the three VMS offices was unreasonable because it covered a total of 235 square miles; and the restriction was unreasonable because it did not provide an exception for emergency medical aid and was not limited to pulmonology.

¶ 6 The court of appeals reversed, concluding that a modified covenant was reasonable. Valley Med. Specialists v. Farber, 190 Ariz. 563, 950 P.2d 1184 (App.1997). The court noted that there were eight hospitals outside the restricted area where Dr. Farber could practice. Id. at 567, 950 P.2d at 1188. Although the covenant made no exceptions for emergency medicine, the court held that the severability clause permitted the trial court to modify the covenant so Dr. Farber could provide emergency services within the restricted area. Id. (citing Phoenix Orthopaedic Surgeons, Ltd. v. Peairs ("Peairs"), 164 Ariz. 54, 61, 790 P.2d 752, 759 (App. 1989)). Moreover, VMS was allowed to stipulate that Dr. Farber could perform brachytherapy and treat AIDS and HIV patients within the restricted area, again even though the covenant contained no such exceptions. Valley Med. Specialists, 190 Ariz. at 567, 950 P.2d at 1188.

¶ 7 The court of appeals found the restriction, when so modified, reasonable as to time and place. Although non-emergency patients might be required to travel further to see Dr. Farber, they could continue to see him if they were willing to drive that far. Id. at 567-68, 950 P.2d at 1188-89. Three years was reasonable because the record contained testimony that it might take Dr. Farber's replacement three to five years to develop his pulmonary practice referral sources to the level they were when Dr. Farber resigned. Id.

¶ 8 The court found that the restrictive covenant did not violate public policy, believing that courts must not unnecessarily restrict the freedom of contract. Id. at 568, 950 P.2d at 1189. Moreover, the record was void of any evidence that the availability of pulmonologists in the restricted area would be inadequate without Dr. Farber. Id.

DISCUSSION

A. Standard of review

¶ 9 There is some dispute over what standard of review should be applied to the trial court's decision. Dr. Farber contends the court of appeals usurped the trial court's discretion by applying a de novo standard. Granting or denying a preliminary injunction is within the sound discretion of the trial court, and its decision will not be reversed absent an abuse of that discretion. Financial Assocs., Inc. v. Hub Properties, Inc., 143 Ariz. 543, 545, 694 P.2d 831, 833 (App.1984). The trial judge's factual findings are reviewed on a clearly erroneous standard. See Rule 52(a), Ariz.R.Civ.P.

¶ 10 VMS contends, however, that the court of appeals correctly applied a de novo standard. Mixed findings of fact and law are reviewed de novo. Indeed, some courts have held that the determination of whether a restrictive covenant is reasonable is a question of law. See, e.g., Gann v. Morris, 122 Ariz. 517, 518, 596 P.2d 43, 44 (App.1979)

; Raymundo v. Hammond Clinic Ass'n, 449 N.E.2d 276, 280 (Ind.1983).

¶ 11 It is true that the ultimate question of reasonableness is a question of law. But reasonableness is a fact-intensive inquiry that depends on weighing the totality of the circumstances. Bryceland v. Northey, 160 Ariz. 213, 217, 772 P.2d 36, 40 (App.1989) ("Each case hinges on its own particular facts."); Olliver/Pilcher Ins. v. Daniels, 148 Ariz. 530, 532, 715 P.2d 1218, 1220 (1986). Thus, we will give substantial deference both to the trial court's findings of fact and its application of law to fact, reviewing the former on a clearly erroneous standard and the latter for abuse of discretion.

B. History of restrictive covenants

¶ 12 A brief reference to basic principles is appropriate. Historically, covenants not to compete were viewed as restraints of trade and were invalid at common law. Ohio Urology, Inc. v. Poll, 72 Ohio App.3d 446, 594 N.E.2d 1027, 1031 (1991); see generally Harlan M. Blake, Employee Agreements...