Wichita Clinic, P.A. v. Louis

• Decision Date: 13 June 2008
• Docket Number: No. 97,495.,97,495.
• Citation: 185 P.3d 946
• Parties: WICHITA CLINIC, P.A., Appellant, v. Michelle M. LOUIS, D.O., Appellee.
• Court: Kansas Court of Appeals

185 P.3d 946

WICHITA CLINIC, P.A., Appellant, v. Michelle M. LOUIS, D.O., Appellee.

No. 97,495.

Court of Appeals of Kansas.

June 13, 2008.

Gary L. Ayers and Holly A. Dyer, of Foulston Siefkin LLP, of Wichita, for appellant.

Gary M. Austerman and Christopher A. McElgunn, of Klenda, Mitchell, Austerman & Zuercher, L.L.C., of Wichita, for appellee.

Before HILL, P.J., GREEN and STANDRIDGE, JJ.

GREEN, J.

Wichita Clinic, P.A., (the Clinic) appeals from a judgment of the trial court holding that its restrictive covenant in an employment agreement was unreasonable and unenforceable. Applying the factors in determining whether to enforce a restrictive covenant not to compete, we determine that the covenant should have been enforced. In addition, the Clinic appeals the trial court's ruling that it breached the employment agreement and that the breach precluded its claim for specific performance against Michelle M. Louis, D.O. We determine that although the Clinic breached the employment agreement, the breach did not preclude the Clinic's claim for specific performance. Accordingly, we reverse and remand for entry of judgment consistent with this opinion.

On July 10, 1991, the Clinic and Dr. Louis, entered into an employment agreement (the agreement). Dr. Louis was hired with a 2-year guaranteed salary of $80,000 annually, a $5,000 signing bonus, and additional compensation for student loan payments. The agreement set forth compensation, benefits, and division of expenses. Finally, the agreement contained a restrictive covenant. The agreement was drafted by the Clinic.

Dr. Louis terminated her employment with the Clinic at the end of August or September 2004, and began working with Lakepoint Family Physicians in September 2004. On December 28, 2004, the Clinic filed a petition for breach of the agreement because Dr. Louis had continued to practice in Sedgwick County and had failed to pay liquidated damages in violation of the restrictive covenant. The Clinic asked for specific performance of the agreement, an accounting of all of Dr. Louis' earnings, and consequential damages.

In her answer and counterclaim, Dr. Louis raised an affirmative defense: that because the agreement was vague and ambiguous, it must be construed against the Clinic. She also claimed that the restrictive covenant was unreasonable in scope and duration, created an undue burden, did not protect a legitimate business interest, and was contrary to public policy. She also argued that the Clinic was not entitled to damages and was barred by estoppel and waiver. In her counterclaim, Dr. Louis argued that the Clinic had breached the agreement by unilaterally modifying the agreement in 2003 and assessing the costs of physician assistants and other health care assistants to her. She alleged that she did not agree to the modification.

In its answer, the Clinic asserted that Dr. Louis' counterclaim was barred by accord and satisfaction, payment, estoppel and waiver, and failure to state a claim upon which relief could be granted.

On March 29, 2006, Dr. Louis moved for summary judgment. She argued that the agreement did not define "earnings" in the liquidated damages formula and asserted that the reasonable interpretation was gross pay or salary. Dr. Louis maintained that expanding the scope of meaning of "earnings" created an unenforceable penalty. Moreover, Dr. Louis asserted the noncompete provision was invalid because it only sought to prohibit ordinary competition and did not protect a legitimate business interest.

The Clinic moved for summary judgment on Dr. Louis' counterclaim and asserted "earnings" meant all earnings Dr. Louis collected after termination. Moreover, the Clinic argued that assessing liquidated damages based on all of Dr. Louis' earnings did not create an unenforceable penalty. The Clinic further asserted that the restrictive covenant protected its legitimate business interest in its patient referral system. Finally, the Clinic asserted that Dr. Louis' counterclaim failed because there was no breach of the contract under the plain language of the agreement.

Dr. Louis replied to the Clinic's summary judgment motion and raised essentially the same issues as in her summary judgment motion. She also objected to the Clinic's motion because she was not allowed 21 days to reply.

The trial court denied both the Clinic's summary judgment motion on Dr. Louis' counterclaim and Dr. Louis' summary judgment motion because the definition of "earnings" in the restrictive covenant could not be determined on the uncontroverted facts in the motions.

Before trial, Dr. Louis filed a motion in limine to prohibit introduction of parol evidence concerning the definition of "earnings" and to limit evidence concerning the parties' course of conduct to their interactions with each other. The court granted the motion in part and denied the motion in part.

During the bench trial, Dr. Louis moved for a directed verdict, arguing that the Clinic did not present evidence of the parties' intent when the agreement was signed. The court denied the motion and found there was some evidence showing that Dr. Louis had an appreciation of the meaning of the restrictive covenant. After Dr. Louis rested, the Clinic moved for a directed verdict on Dr. Louis' breach of contract claim and asserted that Dr. Louis had failed to show that she had sustained damages because of the breach. The court denied the motion with respect to the breach. Moreover, the court determined that Dr. Louis had demonstrated changes in the overhead calculations in the way the supporting staff and other expenses were handled by the Clinic.

At the conclusion of the trial, the court denied the Clinic's request for specific performance and for an accounting of Dr. Louis' post-termination earnings. The court also held that Dr. Louis was estopped from claiming that the Clinic had breached the agreement. In short, the court made seven specific findings: (1) that the agreement must be strictly construed against the Clinic; (2) that the restrictive covenant was not injurious to the public welfare; (3) that the territorial restriction was reasonable; (4) that the covenant did not protect a legitimate business interest; (5) that the covenant's time restriction created an undue burden and was unreasonable; (6) that because the liquidated damages provision in the covenant was intended to prevent ordinary competition, it was unreasonable and unenforceable; and (7) that although the Clinic breached the agreement, Dr. Louis did not prove actual damages.

Did the Trial Court Err in Finding the Restrictive Covenant Was Unenforceable?

The Clinic argues that the trial court erroneously determined that the employment agreement, including the restrictive covenant, was unreasonable and unenforceable. The Clinic asserts that Kansas has long recognized the validity of restrictive covenants in the physician practice context. See Idbeis v. Wichita Surgical Specialists, P.A., 279 Kan. 755, 775, 112 P.3d 81 (2005); Weber v. Tillman, 259 Kan. 457, 465, 469, 475, 913 P.2d 84 (1996); Foltz v. Struxness, 168 Kan. 714, 721, 215 P.2d 133 (1950); Graham v. Cirocco, 31 Kan.App.2d 563, 572, 69 P.3d 194, rev. denied 276 Kan. 968 (2003).

Contracts should be presumed legal, and the party challenging the contract has the burden to prove it is illegal. Kansas Gas & Electric Co. v. Will Investments, Inc., 261 Kan. 125, 129, 928 P.2d 73 (1996). Courts have the duty to sustain the legality of a contract in whole or in part when the contract was fairly entered into and it is reasonably possible to do so, rather than seeking loopholes and technical legal grounds for defeating the contract's intended purpose. The paramount public policy is that freedom of contract should not be interfered with lightly. Idbeis, 279 Kan. at 770, 112 P.3d 81; Miller v. Foulston, Siefkin, Powers & Eberhardt, 246 Kan. 450, 462-63, 790 P.2d 404 (1990). Additionally, parties have wide discretion in fixing the terms of employment contracts, and when the contract is not illegal or unreasonable, it should be honored and enforced by the courts. Weinzirl v. The Wells Group, Inc., 234 Kan. 1016, 1019, 677 P.2d 1004 (1984); see also Augusta Medical Complex, Inc. v. Blue Cross, 227 Kan. 469, 475, 608 P.2d 890 (1980) (competent parties can contract on their own terms provided the contract is not illegal or contrary to public policy; absent fraud, mistake, or duress, the parties are bound by its terms).

The interpretation and legal effect of a written contract are matters of law over which this court has unlimited review. Conner v. Occidental Fire & Cas. Co., 281 Kan. 875, 881, 135 P.3d 1230 (2006). This court may construe a written contract and determine its legal effect, regardless of the trial court's construction. Unrau v. Kidron Bethel Retirement Services, Inc., 271 Kan. 743, 763, 27 P.3d 1 (2001). Nevertheless, if the trial court has made findings of fact and conclusions of law, this court determines whether the factual findings are supported by substantial competent evidence and whether those findings supported the conclusions of law. This court has unlimited review of the conclusions of law. LSF Franchise REO I v. Emporia Restaurants, Inc., 283 Kan. 13, 19, 152 P.3d 34 (2007). Substantial evidence possesses both relevance and substance, and it provides a substantial basis of fact from which the issues can reasonably be determined. Evenson Trucking Co. v. Aranda, 280 Kan. 821, 836, 127 P.3d 292 (2006).

The primary rule of contract interpretation is to ascertain the parties' intent. If the terms of the contract are clear, the parties' intent should be determined from the language of the contract itself without applying the rules of construction. Anderson v. Dillard's Inc., 283 Kan. 432, 436, 153 P.3d 550 (2007). Moreover, interpretation of contractual provisions should not be reached merely by isolating one particular sentence or provision, but the entire...