Gomez v. Chua Medical Corp.

510 N.E.2d 191, 56 U.S.L.W. 2115, 2 I.E.R. Cas. (BNA) 490, 1987 Ind. App. LEXIS 2858

• Court: Indiana Court of Appeals
• Decided: July 14, 1987
• Docket: 3-1285 A 370
• Status: Published

Opinions

GARRARD, Presiding Judge.

The trial court awarded Chua Medical Corporation summary judgment on its claim that Dr. Gomez had violated a covenant against competition. On appeal Dr. Gomez' principal contention is that the covenant should not be enforced on summary judgment because of the nature of his termination by the medical corporation. In addition he challenges the validity of a restricted zone with a 30 mile radius and the provision for liquidated damages contained in the agreement.

The record discloses that the medical corporation had been in operation in Merrill-ville, Indiana since June 1976. On December 31, 1979 it employed Dr. Gomez to specialize in cardiovascular and thoracic surgery. The agreement was for a one year term, automatically renewable for a second year, and contained a covenant against competition in Lake and Porter Counties for three years.

In 1982 the parties amended Dr. Gomez' employment agreement. Salary was increased and reference to a specific term of employment was deleted. The parties agree that Dr. Gomez became an employee-at-will under the new agreement. The non-competition agreement was amended to provide the following:

"Upon termination of this agreement for any reason whatsoever, Erwin P. Gomez, M.D. or his corporation, agrees he will not compete, directly or indirectly, with the Cardiovascular Surgery Associates and/or Felipe S. Chua, M.D., as an officer, director, partner, employee or individually, in the practice of thoracic and cardiovascular surgery for a period of two (2) years from the date of termination of this agreement, within a thirty (30) mile radius of 7895 Broadway, Mer-rillville, Indiana 46410. It is conclusively agreed by the parties hereto that the above-described competitive restrictions of geographic location, occupational scope and time are reasonable, in that the majority of the patients of Dr. Felipe 8. Chua and his corporation are within such area, and that since no adequate remedy exists at law to enforce this provision, injunctive relief may be sought to enforce the terms of this paragraph. The undersigned parties furthermore agree that Dr. Erwin P. Gomez may practice within the restricted area following termination of this agreement, in violation of the foregoing paragraph upon Dr. Erwin P. Gomez's payment to the Chua Medical Corporation of the lump sum .of Fifty Thousand Dollars ($50,-000.00). Such lump sum is regarded by the parties hereto in good faith as liquidated damages, and the sum may be paid by Dr. Erwin P. Gomez in lieu of the Chua Medical Corporation's right to in-junctive relief, as liquidated damages in full."

On September 1, 1983 Dr. Gomez was notified that his employment was being terminated and he, in fact, left practice with the corporation in December of that year.

In January 1984 Dr. Gomez set up practice in cardiovascular and thoracic surgery in Merrillville, Indiana and the medical corporation brought this action seeking an injunction or, in the alternative, liquidated damages as provided by the agreement.

In Raymundo v. Hammond Clinic Assoc. (1983), Ind., 449 N.E.2d 276 our Supreme Court found enforceable a restrictive covenant given by a physician to the clinic which had employed him. The covenant prohibited competition for two years within a twenty-five mile radius of the City of Hammond.¹ The covenant contained a liquidated damages provision that called for payment of $25,000 if a breach occurred during the first year after termination and $15,000 if it occurred during the second year. See also Harris v. Primus (1983), Ind. App., 450 N.E.2d 80 and Ross Clinic v. Tabion (1981), Ind.App., 419 N.E.2d 219, which concern covenants against competition applied in the medical care field.

The principal issue raised in the present appeal is that Raymundo and the other Indiana decisions involve situations where the covenantor-employee voluntarily withdrew from the employment. Dr. Gomez urges the rule of enforceability should be different where the employee is terminated without cause.

In order to focus upon this question, we first consider the other arguments he presents on appeal.

We conclude that the area of re- . striction is not unreasonable. A thirty mile radius around the medical corporation's office would necessarily be very close to equivalent to the limitation of the city limits of Hammond plus twenty-five miles found reasonable in Raymundo. Affidavits supplying the names and addresses of some 1175 patients disclose a substantial patient base within the proscribed area. The area appears reasonable to protect the interests of the corporation.

Secondly, we disagree with the contention that the liquidated damages provision should have been held unenforceable as merely imposing a penalty.

Citing Beiser v. Kerr (1939), 107 Ind. App. 1, 20 N.E.2d 666, the Supreme Court in Raymundo affirmed that cases such as these are especially adapted to adopting provisions for liquidated damages. It stated that the validity of such provisions will be upheld unless the amount agreed upon is grossly disproportionate to the loss which may result from the breach or is unconscionably in excess of the loss which the agreement seeks to avert. 449 N.E.2d at 288, 284.

The evidence in the present case disclosed that Dr. Gomez produced more than $720,000 in surgical fees during his four years' employment with the corporation.² His competition commenced virtually as soon as he left Chua. We cannot say the liquidated damages figure was unreasonable pursuant to Raymundo. The provision was valid.

Thus, we turn to the principal contention on appeal. Dr. Gomez acknowledges that contracts for employment-at-will are valid in Indiana, and that persons so employed may be terminated at the choice of their employers. See, eg., Campbell v. Eli Lilly Co. (1980), Ind.App., 413 N.E.2d 1054; Martin v. Platt (1979), 179 Ind.App. 688, 886 N.E.2d 1026. He also acknowledges that he was so employed and that the corporation was entitled to terminate him. He asserts, however, that the fact he was terminated without cause creates such an issue concerning the reasonableness of the covenant that summary judgment should have been precluded or granted in his favor.³

Despite our public policy opposing contracts in restraint of trade, reasonable covenants against competition given by employees or sellers of a business are enforceable. The covenant, however, must be reasonable in its time and space limitations, and the types of conduct or activity regulated. It must also be responsive to a legitimate interest of the covenantee which might be protected. These determinations of reasonableness are interrelated and are to be resolved by the court as a question of law. Raymundo, 449 N.E.2d at 280; Frederick v. Professional Bldg. Main. Indus., Inc. (1976), 168 Ind. App. 647, 648, 344 N.E.2d 299, 301.

Dr. Gomez argues that the reasonableness of the restrictive covenant is dependent upon the nature of his termination. He urges that for the corporation to have terminated him for other than good cause renders the covenant unreasonable and, therefore, unenforceable.

Admittedly, no prior Indiana cases have expressly considered what effect the form of termination has upon the reasonableness of the covenant.⁴

There appear to be four basic alternatives: (1) the employee voluntarily leaves the employment; (2) the employee is discharged for good cause; (8) the employee is discharged in bad faith; and (4) the employee is terminated, but neither good cause nor bad faith appear to exist. (This would also cover the expiration of a contracted term of employment.)

Most of the decided cases involve the situation, as in Raymundo, where the employee voluntarily leaves the employment. Clearly, the covenants are enforceable in such circumstances.⁵

Dr. Gomez concedes and the opinions appear to acknowledge that this would also be the case where the employee is discharged "for cause," although dispute might exist concerning what conduct amounted to "cause." See, eg., Rao v. Rao (7th Cir.1983), 718 F.2d 219, 224. Under such a situation the employee's conduct may compel dismissal and the employer's legitimate interest in protecting its "good will" continues to make enforcement reasonable.

Where the employee is discharged in "bad faith" it appears the covenant will not be enforced, but this generally occurs through the operation of equity.

Since a suit to enforce a restrictive covenant by injunction is likened to specific performance, equitable defenses such as "clean hands" and the requirement that one who seeks equity must do equity apply. They will bar enforcement of the covenant where bad faith is shown.⁶ Security Services, Inc. v. Priest (Tex.Civ.App.1974), 507 S.W.2d 592; Dutch Maid Bakeries, Inc. v. Schleicher (1942), 58 Wyo. 374, 131 P.2d 630.

However, in Rao, supra, the Seventh Circuit did not expressly rely on the maxims of equity to deny enforcement of a restrictive covenant where a physician was terminated by his medical corporation employer to prevent him from qualifying to exercise a contractual right to obtain fifty percent ownership of the medical corporation.

Tilinois law implies a covenant to act in good faith into every contract, and the court said this required a party vested with contractual discretion (to terminate employment) to exercise that discretion reasonably and not arbitrarily. The court also said that when an employer terminated an employee without good cause it did not appear that a restrictive covenant would be reasonably necessary to protect the employer's interests. (The employer could protect his good will by simply not dismissing a good employee. 718 F.2d 224.)

Admittedly, in the case before us there is no allegation or showing that Chua was engaging in bad faith in terminating Dr. Gomez when it did. Thus, the question becomes reduced to whether we should deny enforceability unless the employer can establish a valid reason for discharge.⁷

For several reasons we believe the answer is "no." We should not deny enforceability of an otherwise reasonable covenant upon the basis that the termination of an at-will employee is essentially arbitrary and that no reasonable basis for enforcement exists unless the employer can demonstrate "good cause."

First of all, we think the language of Rao should not be applied to situations where there is no evidence of bad faith. To apply the dictum concerning the employer's protectible interest to the fact-sensgitive reason for his actual discharge would not be helpful since in the long run it would necessarily result in scrutiny of all reasons for discharge and perhaps other factual analy-ses as to whether enforcement would "really" protect good will. It is a sufficient answer to that question that the employer have established his good will interest and that it has become protectible because the covenantor has been or wishes to become either an employee or a seller of the business.

Secondly, we need not ignore the facts that requirements of discharge for cause foster disputes, grievances and lawsuits over whether proper cause exists. On the other hand, the so-called personality clash or subtle differences in the value systems of the principals may prevent formation of a truly good business relationship, even though no objective "cause'" for termination can be pointed out. The concept of employment at will accommodates these variances and variations, and we see no reason why it should automatically preclude protection by restrictive covenant.

Finally, we respect and believe in individual freedom to contract. That freedom, if it is to be real, must necessarily include the' freedom to enter into enforceable contracts that are unwise or even foolish. As the court pointed out in Raymundo, in this state there is strong public interest in the freedom of individuals to contract. If an individual agrees to be bound by a covenant against competition under cireum-stances where he is terminated at will, we see no compelling reason to deny enforcement of his promise.

If the termination is made in bad faith, equity may be called upon to deny enforcement, but neither equity nor the law will deny enforcement upon the basis that the employer must establish that a discharge was made in good faith, or for good cause.

Dr. Gomez voluntarily agreed to the covenant before us. Nothing indicates he was misled concerning its meaning. It was reasonable as to time and space limitations and activity regulated.⁸

It follows that the summary judgment was properly granted.

Affirmed.

STATON, J., concurs. SULLIVAN, J., concurs and files separate opinion in which GARRARD, P.J., concurs.

1 . Except for the cities of Calumet City and Lansing, land lying in Illinois was excluded.

2 . The parties' experience before entering the second agreement bears directly on the reasonableness of the damages provision. While the earnings experience after the covenant is certainly not controlling, it is circumstantial evidence from which reasonableness may also be . inferred.

3 . In the trial court each side filed an affidavit asserting that party's bare conclusion that there was or was not good cause for the termination. Neither affidavit was entitled to consideration on this point. Indiana Rules of Procedure, Trial Rule 56; Podgorny v. Great Central Ins. Co. (1974), 160 Ind.App. 244, 311 N.E.2d 640. Thus, as presented to the court, neither good faith in the sense of just cause nor bad faith was established as an issue.

4 . A covenant was recently enforced in Field v. Alexander & Alexander of Ind., Inc. (1987), Ind. App., 503 N.E.2d 627, where the employee was discharged.

5 . The balance of our examination assumes that the covenant would be otherwise reasonable as to time, space and activity.

6 . Martin v. Murphy (1891), 129 Ind. 464, 28 N.E. 1118, and Duckwall v. Rees (1949), 119 Ind.App. 474, 86 N.E.2d 460 held a provision for liquidated damages provided an adequate remedy at law so as to defeat a suit in equity for specific performance. We nevertheless have no hesitation in concluding that equitable defenses may be asserted in defense of an action to enforce a covenant against competition, whether the basis therefor arises from the basically equitable nature of the proceeding, or from the reformed procedure combining law and equity.

See State ex rel. Bradshaw v. Probate Ct. (1947), 225 Ind. 268, 73 N.E.2d 769.

7 . We have purposely avoided delving into definitions of "good cause" or "just cause" for purposes of this opinion.

8 . No issues were presented concerning the reasonableness of the time limitation or the breadth of the activity regulated.