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Court rules non-compete clauses unenforceable in breach of contract
The Indiana Court of Appeals recently held in a lawsuit over physician employment contracts that if the employer breaches a “material term” of an employment contract, the non-compete clause cannot be enforced against the physician.
The unfolding story
In January 1998, cardiologist Ralph Millsaps, M.D., and pediatric cardiologist Julio Morera, M.D., signed employment agreements with Ohio Valley Heartcare, Inc. (OVHC), a cardiovascular medical practice primarily located in Evansville. The agreement included a non-compete clause and a provision that the practice would provide billing and collection services.
In February 2005, Dr. Millsaps expressed written concern to OVHC about financial and management issues and requested an audit. Later, it was revealed the practice failed to process nearly $2 million in patient billings in 2004 and 2005.
In August and September 2005, Drs. Morera and Millsaps provided written notice of their resignations and filed a lawsuit against OVHC seeking to set aside the non-compete clauses and damages for breach of the agreement. OVHC counter-sued.
The first ruling
The trial court ruled:
- The two-year time limit in the clauses was reasonable.
- The geographic restriction of 31 counties in Indiana, Kentucky and Illinois was overly broad. The court restricted the doctors to four Indiana counties and one in Kentucky.
- The scope provision prohibiting them from practicing medicine altogether was too broad. The court restricted the scope to cardiovascular services only.
- OVHC had complied with its obligations and was not in breach.
- Drs. Millsaps and Morera did not have to pay OVHC’s costs and attorney fees.
The appeal
The Indiana Court of Appeals addressed whether OVHC breached the employment agreement. The court noted effects of the billing problems: employee resignations and terminations, a past-due bank note, increased overhead and decreased physician compensation of $5,000 each for 22 months.
The court implied that the obligation to provide timely billing and collection services was a material term of the agreement, which OVHC did not contest or comply with.
The appellate court reversed the trial court, concluding OVHC “breached the Agreement by failing to provide timely and competent billing and collection services. Consequently, it may not enforce the Agreement...”
OVHC filed a petition May 14 to transfer the case to the Indiana Supreme Court. Parties to the suit must now wait to learn whether that higher court will agree to hear the case.
Thoughts on the case
Julie Reed, ISMA legal counsel, noted, “Although Indiana courts routinely evaluate the reasonableness of non-compete clauses, this case goes a step further, saying both sides have to hold up their end of the bargain. If one side breaches the agreement in a material way, it loses the benefit of that bargain.”
What constitutes a material breach must be evaluated on a case-by-case basis. “In this case, $2 million dollars in omitted billings was enough,” noted Reed.
“I’m somewhat disappointed that the court did not look at the bigger picture,” said Dr. Millsaps. The court noted the breach of contract and did not examine other issues in the case pertaining to physician covenants.
Dr. Millsaps believes strongly there are better methods than non-compete clauses that can be used when contracting to hire physicians. He suggested using loans or portions of a newly hired physician’s pay as a guarantee of commitment. If a physician leaves early, the loan must be repaid; if he stays, it is forgiven. He called that a “reasonable penalty.”
Upon learning that OVHC had filed for appeal to the Indiana Supreme Court, Dr. Millsaps again said he was “disappointed,” but feels hopeful that the Court of Appeals would not be overruled.
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