BUSINESS LAW SIMULATION EXERCISE 1 Cphib jonesinGetty Images Page 320 Restrictive Covenants in Contracts: Neurology Associates, LLP v. Elizabeth Blackwell, M.D. Learning Objectives After studying this simulation, students who have mastered the material will be able to: 1. Explain the legal doctrines that govern the use of restrictive covenants. 2. Interpret and apply the rules set forth in current case law. 3. Articulate a cogent argument for each party/side in the dispute. 4. Negotiate a tenable solution as an alternative to a judicial forum. 4 Chapters 6 and [4 7 provided you with a variety of legal doctrines and rules governing contract formation and performance and then illustrated how these doctrines and rules apply in the corporate sector context. This simulation is designed to help you understand how the various topics covered in the contract law chapters connect. By focusing on a simulated legal dispute, you will replicate a real-world experience by applying legal doctrines and using analytical and critical-thinking skills. This simulation is a sequential decision-making exercise structured around a model in which the participants assume a role in managing tasks and work toward a tenable solution. The simulation is structured in three parts: " Part 1 is a hypothetical fact pattern describing events leading up to a legal dispute in the hypothetical U.S. state of Longville. Part 2 is a set of two hypothetical case summaries from Longville appellate courts that provide a brief set of facts, several legal points, and short excerpts from the opinion itself. While these cases are hypothetical, they are based on actual cases from appellate courts in various states and represent the view of the majority of state courts in the United States. Part 3 is an assignment sheet that will be provided to you by your instructor to be used in conjunction with this simulation. Part 1: Stipulated Facts 1. In May 2015, Dr. Elizabeth Blackwell ( Blackwell) had earned her medical doctor degree and completed all necessary requirements to receive a license to practice medicine in the state of Longville. She specialized in neurological medicine. Although she was offered professional opportunities in several large hospitals, she pursued an employment offer with Neurological Associates, LLC (NA). NA is a two-physician practice located in a small town in the southwestern area of the state of Longville and 20 miles north of Galway, the largest city in Longville. Although the pay was lower than that in the larger hospitals, Blackwell wanted to be close to her family and did not wish to engage in a practice that required the strenuous schedules associated with larger medical providers. 2. NA was managed by two partners, Dr. Richard Cohn (Cohn) and Dr. Jean Valjean (Valjean). While negotiating Blackwell's employment agreement, Cohn was the primary contact and the parties agreed to compensation terms, vacation, on-call duties (after hours). and a fringe benefit package. The employment agreement included an arbitration clause requiring that the parties agree to nonbinding arbitration in the event of a dispute arising from the agreement. It also provided for Blackwell to have paid time off to study for and take the examinations required to become board-certified in neurology. NA agreed to a $1,000 payment to be used for a course intended to help prepare candidates for the test. Blackwell began her employment with NA on June 1, 2015. Page 321In this simulation exercise, a physician in a health care practice becomes involved in a dispute over a provision in her contract that restricted future employment. Jetta Productions/Getty Images 3. Immediately after hiring Blackwell, NA paid for Blackwell to accompany the partners to a medical conference at which they were scheduled to speak. At the conference, Cohn and Valjean introduced her to a number of physicians in hopes of building the referral base for the practice. 4. In July 2015, Cohn approached Blackwell and told her that he needed her to sign an additional document that was supposed to be part of her contract but that he had neglected to mention during negotiations. He explained that the document was standard procedure in medical practices and that he had been so busy during the negotiation period that he had forgotten to mention it to Blackwell. He went on to explain that Blackwell should sign the document by the end of the workday and that this would "make the lawyers happy." 5. The document was titled "Addendum to Contract-Restrictive Covenant and Noncompete Clause" and read in pertinent part Section J: The parties hereby agree, in consideration of the exchange of good, valuable, and sufficient consideration, to be bound by the following provision: For a period of three years after the date of her separation from NA, Blackwell agrees that she will not contract with any provider of neurological services, nor compete in any way with NA, within a radus of 50 miles of NA'S practice location. It is acknowledged that this restriction covers the caffrey of the southwestern region of Longville. 6. Blackwell felt that she should have a lawyer review the document, but Cohn insisted the addendum was normal procedure and she needed to sign it quickly to make things "legal." He emphasized that he would have to have the signed document by the end of the day or, as it was a condition of her employment, Blackwell's payroll check could not be processed until the document was signed. Blackwell reluctantly signed the document and submitted it to Cohn. 7. In August 2015, Blackwell began to have conflicts with Cohn and, to a lesser extent, Valjean. While Cohn and Valjean took frequent vacations during the summer, Blackwell was left to staff the practice alone. She felt overwhelmed and met with Cohn to discuss a more equitable work schedule. Cohn refused any negotiation, explaining that Blackwell was hired as a "workhorse" and that her salary was fair given the size of the practice and market. Cohn urged Blackwell to continue her hard work and not to complain about her work schedule. Eventually, explained Cohn, Blackwell would become a partner in the practice and would enjoy the fruits of her labor.8. In September 2015, Blackwell continued to handle a very heavy caseload, seeing almost twice as many patients as Cohn or Page 322 Valjean. In response to Blackwell's plea for additional staff, NA hired a new physician to help manage the caseload. Although Blackwell was initially relieved, the situation at work continued to deteriorate. The workload was such that Cohn kept denying Blackwell's request for time off to prepare for the upcoming board certification exam, advising her to put it off until the caseload lightened up a bit. 9. Blackwell began to receive phone calls from recruiters trying to lure her away from the practice to work at a new neurology clinic in Galway Hospital (located in the city of Galway). The recruiters offered a significant amount of money because there was a substantial shortage of neurologists in the southwest region of Longville. However, Blackwell never pursued these opportunities because she believed the restrictive covenant prevented her from working in Galway. 10. In January 2016, Blackwell was granted her paid leave to prepare for her board certification, and she took the exam in February 2016. However, after she returned to the practice, she began to feel even more isolated from the other physicians. 11. On March 1, 2016, Blackwell, fed up with NA, announced that she was giving NA 60 days' notice that she was leaving the practice to join Galway Hospital and that her resignation would be effective on May 1, 2016. She anticipated starting at Galway on June 1, 2016. Galway was forming a new neurology practice group, and it had offered to employ Blackwell as one of the founding physicians in the group. 12. Cohn immediately sent Blackwell a letter informing her that he accepted her resignation but that she had responsibilities under her contract that prevented her from accepting a new position with a competitor. Part 2: State of Longville Case Law Wellspan Hospital and Medical Group v. Phillip Bayliss, M.D. Supreme Court of the State of Longville (2005) - This is the leading case on restrictive covenantsoncompete agreements in the context of medical practices in the state of Longville. It has not been modified or reversed since it was decided. Wellspan is a not-for-profit health care system located in Columbus County in the southeastern portion of the state of Longville. Bayliss is a physician specializing in OB/GYN services. Wellspan hired Bayliss as its medical director in 2000, at which time Bayliss signed an employment agreement that included a restrictive covenant under which Bayliss agreed not to engage in medical practice in Columbus County and five other contiguous counties (this covered the entire southeastern region of Longville) for a period of two years after the separation of employment between Wellspan and Bayliss. Wellspan invested over $1 million in equipping Bayliss's practice, hiring additional physicians, and undertaking promotional strategies intended on marketing the practice and increasing the number of referrals. Relations between Wellspan and Bayliss deteriorated when they disagreed over Wellspan's expansion strategy. In February 2004, Bayliss resigned his position at Wellspan and established his OB/GYN practice only five miles from the Wellspan practice. This was within the area covered under the restrictive covenant. . The state's highest court considered the enforceability of Wellspan's restrictive covenant against Bayliss. POINTS OF LAW AND OPINION EXCERPTS Point (a) The Longville state courts will enforce a restrictive covenant only if it is reasonably necessary to protect the legitimate interests of the employer, and courts either may strike down a covenant altogether or may reform (known as barelining) a covenant if it is overbroad in some Way. Pape 323Excerpt (a) "Courts in the State of Longville have historically been reluctant to enforce contracts that place restraints on trade or on the ability of an individual to earn a living, however, postemployment noncompetition covenants are not per se unreasonable or unenforceable." Legal Speak >)) Threshold Requirement A requirement that must be met by the plaintiff prior to the court engaging in further legal analysis to determine the rights of the parties. Point (b) The threshold requirement for enforceability of a covenant is that the employer must be protecting a legitimate business interest. The primary legitimate business interests that Longville courts have held to be protectable in a covenant are (1) trade secrets or confidential business information, (2) customer goodwill, and (3) investments in the employee. Excerpt (b1) "A Inde seever is a legitimate business interest because it may include a compilation of information which is used in one's business that gives one an opportunity to obtain an advantage over competitors. A trade secret does not include an employee's aptitude, skill, dexterity, manual and mental ability, or other subjective knowledge. In addition, if a competitor could obtain the information by legitimate means, it will not b given protection as a trade secret." Excerpt (b2) "The interest protected under the umbrella of goodwow is a business's positive reputation. Goodwill represents a preexisting relationship arising from a continuous course of business which is expected to continue indefinitely. A business's goodwill is considered a protectible interest even when the goodwill has been acquired through the efforts of an employee. The concept of customer goodwill as a protectible interest has been applied to patient relationships when the noncompetition covenant at issue involves a health care professional. This court has cited the erosion of the ex-employer's patient relationships as one factor in the decision to enforce a restrictive covenant." Excerpt (b.3) "A third protectible interest recognized by Longville courts is the efforts and financial resources invested by an employer to provide to its employees specialized training in the methods of the employer's business. In a past case, the defendant was a salesman of securities who had received extensive and continuous training from his employer, particularly with respect to methods and problems in the sale of mutual fund shares. He then voluntarily left his position with his employer and started his own business selling mutual fund shares. The court enforced the noncompetition covenant at issue, enjoining the defendant from engaging in the business of selling mutual fund shares in Pennsylvania. The court found merit in the argument that it would be inequitable for the defendant to start a new business in direct competition with his ex-employer after having received extensive, specialized training in the methods and problems of the business directly from his ex-employer."Point (c) A medical practice's patient referral base is a legitimate protectable business interest when a medical practice can demonstrate that it has invested in the production and generation of such a base. Page 324 Excerpt (c) "A patient referral base is a protected interest, [and] protecting the investments required to develop such a base is consistent with our holding in other employer-employee situations outside the health care field. In the context of a noncompetition covenant, we think that the referral bases of a specialized medical care institution are analogous to a physician's patient relationships or an employer's customer relationships. Viewed in such light, recognition of a patient referral base as a protected interest fits squarely within Longville case law." Point (d) If the threshold requirement of protectable interest is met, the next step in the analysis is to apply two balancing tests: (1) the employer's protectable interest balanced against the employee's interest in earning a living and (2) the employee and employer interests with the interests of the public. Excerpt (d1) "In weighing the competing interests of employer and employee, the court must engage in an analysis of reasonableness. First, the covenant must be reasonably necessary for the protection of the employer. In addition, the temporal and geographical restrictions imposed on the ex- employee must be reasonably limited." Excerpt (d2) "Regarding the second balancing test, in the context of noncompete agreements among physicians, the interests of the public are defined as a function of the availability of appropriate medical services to the community. Since there is no evidence of a lack of availability of OB/GYN physicians within the restricted area, the interests of the public are served and, thus, enforcement of the covenant against Bayliss does not result in public harm." Held Because Wellspan had shown that it had a legitimate business interest in protecting its patient referral base and because the court had determined that the restriction was tailored to those interests and that no public harm would be suffered by enforcement of the restriction, the court found in favor of Wellspan Regional General Hospital v. Anesthesiology Associates, Inc. Appellate Court of the State of Longville (2007) Facts Legal Speak >)) Declaratory Judgment A remedy used to determine the rights of the parties in a set of circumstances (such as the enforceability of a contract) that is binding on the litigants even though no damages were awarded. Anesthesiology Associates, Inc. (AAI), is a medical practice that employs physicians and certified registered nurse anesthetists (employees). In January 2002, AAI entered into a contract with Regional General Hospital (Regional ) to provide mutually agreed-upon services to Regional's patients. " The employment agreements that AAI has with its employees contained a postemployment restrictive covenant wherein employees agreed to the following restrictions: (1) that for a period of two years from separation from AAl, ex-employees would not contract with or compete against AAl at any facility where AAI was currently the provider of anesthesiology services and (2) that for a period of one year from separation, ex-employees agreed not to contract or compete against AAl at any facility where AAl has provided services for the last 12 months ending on the period of the employee's departure date. Because AAl provided services to more than 35 hospitals in five different states, the geographic restrictions effectively covered a five-state region. Page 325" Regional let the agreement with AAl expire and offered direct employment to several AAI employees. Fearing that employees of AAl would not accept these employment offers for fear of a lawsuit by AAI based on breach of the restrictive covenant, Regional filed suit against AAl seeking a declaratory judgment that the covenant was unenforceable because it was overly broad in scope and duration and unduly restricted AAl employees from accepting employment with Regional. POINTS OF LAW AND OPINION EXCERPTS Point (a) In accordance with the Longville Supreme Court's decision in Wellspan . Saydiss, the court will enforce a restrictive covenant only if it is reasonably necessary to protect the legitimate interests of the employer. Point (b) In addition to serving a legitimate business interest, the restriction must be tailored narrowly enough so that it is reasonably necessary to protect the interest of the employer. If an employer does not compete in a particular geographic area, enforcement of a covenant in that area is not reasonably necessary for the employer's protection. Any restriction that is overly broad in geographic scope and duration renders it unenforceable, and courts have the authority to either pare back the restriction or set it aside entirely. Excerpt (b1) "In determining reasonableness of scope and duration, we must balance the interest the employer seeks to protect against the important interest of the employee in being able to earn a living in her chosen profession. The court finds that neither the time limitations, nor the territorial scope of the agreement are overly broad or unreasonable. Furthermore, although the noncompete clause covers five states in scope, such restriction is reasonable given the regional aofare of their current hospital clientele. In this case, the restrictions are narrowly tailored to be limited only to certain providers within that region." Held In favor of AAL. AAI's restrictive covenants in its employment agreements were reasonably related to AAl's business interests and were not overly broad. Page 326