Tag Archives: non-compete agreement

March 13, 2018

Physician’s Noncompete Unenforceable After He Dissents To Merger

By Mark Wiletsky

Are physician noncompete agreements enforceable? They can be, depending on the circumstances, though there are few reported decisions in Colorado analyzing such agreements. In one recent case, the Colorado Court of Appeals concluded that, following a merger, the surviving physicians entity could not enforce a noncompete provision against a dissenting shareholder-physician. The Court also concluded that an amount of damages calculated under a liquidated damages clause in the agreement must be reasonably related to an actual injury suffered by the entity as a result of the physician’s departure and competition, not simply a prospective injury estimated at the time the contract was created. Crocker v. Greater Colorado Anesthesia, P.C., 2018 COA 33.

Noncompete and Liquidated Damages Provision

Anesthesiologist Michael Crocker was a shareholder in, and employee of, Greater Colorado Anesthesia, P.C. (Old GCA). In April 2013, Dr. Crocker signed a shareholder employment agreement with Old GCA that contained a noncompete provision. In relevant part, the noncompete stated that if Dr. Crocker competed with Old GCA by participating in the practice of anesthesia within fifteen miles of a hospital serviced by Old GCA in the two years following termination of the agreement, he would be liable for liquidated damages as calculated by a stated formula. The restricted geographic area included nearly all of the Denver metro area, from Broomfield on the north to Castle Rock on the south. The agreement further stated that the liquidated damages provision would survive termination of the agreement for a period of two years, or until all amounts due by the employee to the company were paid in full.

Physician Objects To Merger

In January 2015, the shareholder-physicians of Old GCA faced a vote on whether to approve a merger that would result in a 90-doctor corporation. In exchange for accepting a 21.3% reduction in pay and making a five-year employment commitment, the shareholder-physicians would receive a substantial lump sum of cash plus stock. Dr. Crocker voted against the merger and provided notice under Colorado law that he would demand payment for his share of Old GCA in exercise of his dissenter’s rights. The other shareholder-physicians approved the merger resulting in a new corporation (New GCA).

Dr. Crocker never worked at New GCA. In March 2015, he signed an employment agreement with a different anesthesia group that included providing services at Parker Adventist Hospital, which was within GCA’s noncompete restricted area. Old GCA sent him $100 for his share in the group, which he refused. New GCA sought to enforce Dr. Crocker’s noncompete provision, seeking liquidated damages under the stated formula, while Dr. Crocker sought a higher valuation of his share in Old GCA.

Physician’s Shareholder Rights Were Intertwined With Employee Rights

The Colorado Court of Appeals noted that generally, a noncompete provision will survive a merger, allowing the surviving entity to enforce the noncompete restrictions. But it drew a line in Dr. Crocker’s scenario, finding that his shareholder rights were wed to his rights as an employee. He could not be an employee without being a shareholder, and he could not be a shareholder without being an employee. Consequently, when he exercised his dissenter’s rights in opposing the merger and sought payment for his share in Old GCA, Dr. Crocker was forced to quit his employment with GCA. Therefore, the Court stated that it could not construe the enforceability of the noncompete provision without consideration of Dr. Crocker’s rights as a dissenter. Finding no prior authority evaluating a noncompete under such circumstances, the Court decided that it could only enforce the noncompete if it is reasonable, and to be reasonable, it must not impose hardship on the employee.

Noncompete Unreasonable Due to Hardship on Employee

Because an anesthesiologist must live within approximately 30 minutes of where he or she works, enforcement of the Old GCA noncompete provision against Dr. Crocker would require that he either move outside of the restricted geographic area or pay liquidated damages to GCA. The Court stated that enforcement in that circumstance would “further penalize [Dr.] Crocker’s exercise of his right to dissent, rather than protect him from the conduct of the majority.” The Court ruled that the noncompete provision imposed a hardship on Dr. Crocker and therefore was unreasonable. Read more >>

November 17, 2014

When Key Employees Go To A Competitor

Wiletsky_MBy Mark Wiletsky 

Your executives and top salespeople have access to your most valuable business strategies, sales contacts, growth plans and innovations.  What do you do when one (or more) of your key employees leaves to work for a competitor?  Without the correct agreements in place to protect your proprietary information, you may have little recourse. 

Don’t Rely on a Court to Protect Your Business Information 

When a key employee leaves to go to a competitor, the former employer often scrambles to seek a court injunction to prevent the employee from working for the competitor and to stop the employee from disclosing or using trade secrets and confidential information.  But courts are not always willing to prevent an employee from moving on, especially if the company does not have a reasonable and otherwise enforceable non-compete agreement in place. 

In a recent case in Colorado, a high level executive used his company-issued laptop to send an email containing his business contacts to his personal email address as he began negotiating to work for a competitor.  He also downloaded some business information onto a personal external hard drive and thumb drive and kept physical copies of certain business documents in a box in his car.  About three weeks later, the competitor hired the executive. 

There was no evidence that the competitor requested or obtained from the executive any confidential information, the executive had signed only a nondisclosure agreement with his former employer, and the executive agreed to an injunction preventing him from using his former employers confidential information or trade secrets.  Nevertheless, the former employer asked the federal court in Colorado to prevent the executive from working as the competitor’s President for one year, arguing that he had threatened or would inevitably disclose its trade secrets in his new job.  Despite the executive’s decision to transfer information to his personal devices just before leaving the company, the court denied the company’s request, citing a lack of evidence that the executive had or would use his former company’s trade secrets to its competitive disadvantage.  Cargill Inc. v. Kuan, No. 14-cv-2325 (D.Colo. Oct. 20, 2014).  The judge noted that enjoining the executive from working for the competitor would, in effect, afford his former employer something it could have obtained or bargained for: a covenant not-to-compete. 

Employment-Related Agreements to Consider 

Keeping proprietary information confidential can be key to the future prosperity and competitiveness of your business.  You can help protect that information from walking out the door by having key employees sign one or more of the following agreements: 

  • Non-compete agreement: the restriction on working for a competitor must be reasonable in time and geographic scope, and comply with other applicable state law requirements;
  • Confidentiality agreement: requires employees to keep secret your company’s trade secrets and other proprietary information;
  • Non-solicitation agreement: restricts an employee from soliciting customers (who must be defined in the agreement) or from soliciting other employees to go to work elsewhere; and
  • Assignment of inventions: any products, inventions, innovations and other developments created during the worker’s employment are assigned to and owned by the company. 

Depending on the circumstances, you may want to incorporate some or all of these provisions into a single agreement, and you may need to address varying state law requirements (or choice of law and venue issues) depending on where your employees are located.  However, be careful to tailor your agreements to each type of key employee.  For example, the non-compete for your CEO or general manager may need different restrictions than a similar agreement for your Regional Sales Manager.  And be sure not to use a non-compete with all employees—including lower level ones who have no need for such post-employment restrictions—because it will diminish your justification for asking a higher-level employee to sign the same or similar agreement. 

The bottom line is that you need to be proactive in protecting your vital assets, including your confidential information and your key employees.  Taking steps now to implement proper agreements will go a long way in protecting your business down the road when key employees decide to depart.

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