In Cedar Valley Medical Specialists PC v. Wright, 940 NW.2d 442 (Iowa Ct. App. 2019), the Iowa Court of Appeals affirmed a district court bench trial judgment enforcing a liquidated damages provision in a physician non-compete agreement. The physician, Dr. Wright, signed a non-compete stating in part:
“For the two-year period commencing on the last day Professional is employed by Corporation and within 35 miles of Black Hawk County, Iowa, Professional agrees that Professional will not practice medicine or engage in any business or practice related to medicine . . . In the event of a breach by Professional of the provisions of this [Agreement], Professional agrees to pay Corporation as liquidated damages the greater of:
a. $100,000, or
b. The compensation paid by Corporation to Professional during the six months immediately preceding the termination of Professional’s employment.”
While employed by CVMS, Dr. Wright provided cardiovascular surgery call coverage services to Allen Hospital pursuant to a services agreement between CVMS and Allen Hospital. After Dr. Wright complained about the number of hours he was required to be on call, CVMS increased his number of vacation days and raised his annual salary to $400,000. Nevertheless, Dr. Wright announced that he would retire at the end of 2016. Allen Hospital then terminated its agreement with CVMS and both CVMS and Allen Hospital began recruiting for a new cardiothoracic surgeon. Shortly thereafter, Allen Hospital offered Dr. Wright a position to provide cardiothoracic surgery services until the hospital could find a permanent replacement.
While negotiating his employment Allen Hospital and Dr. Wright specifically discussed the liquidated damages provision. The hospital offered to help with payment if necessary, but ultimately agreed to set his compensation at $727,119 – over $327,000 more than he had been earning at CVMS. Dr. Wright worked slightly more than one year for Allen Hospital. The revenue CVMS has been earning from Allen Hospital, between $400,000 and $600,00 per year, was gone.
District Court Lawsuit
CVMS sued Dr. Wright and the case proceeded to a bench trial. The district court determined that the non-compete was enforceable, that Dr. Wright violated the agreement, and entered judgment in favor of CVMS in the amount of $215,631, presumably equal to the compensation paid to Dr. Wright in the six months preceding his resignation. Dr. Wright appealed.
Public Policy and the Court of Appeals Decision
The Iowa Court of Appeals noted that restrictive covenants involving physicians have been upheld as valid and enforceable in Iowa and that the restriction here was not contrary to public policy. It distinguished the facts in this case from those in Board of Regents v. Warren, 760 N.W.2d 209 (Iowa Ct. App. 2008) in which the court found that enforcing a non-compete for an oncologist would be prejudicial to the public interest due to the shortage of oncologists in the Cedar Rapids community. It also noted that unlike the hospital in Warren, CVMS was not seeking an injunction to prevent Dr. Wright from practicing in the area. Applying a reasonableness standard and weighing the balance of interests, the Court held that the Black Hawk County area could only support one cardiothoracic surgeon and that Dr. Wright’s breach caused economic harm to CVMS.
Liquidated Damages in Iowa
Finally, the Court applied the test from Rohlin Constr. Co. v. City of Hinton, 476 N.W.2d 78, 79 (Iowa 1991) to determine if a liquidated damages provision is enforceable or an impermissible penalty:
“The first factor is the anticipated or actual loss caused by the breach. The amount fixed is reasonable to the extent that it approximates the actual loss that has resulted from the particular breach, even though it may not approximate the loss that might have been anticipated under other possible breaches. Furthermore, the amount fixed is reasonable to the extent that it approximates the loss anticipated at the time of the making of the contract, even though it may not approximate the actual loss. The second factor is the difficulty of proof of loss. The greater the difficulty either of proving that loss has occurred or of establishing its amount with the requisite certainty, the easier it is to show that the amount fixed is reasonable.”
The fact that Dr. Wright was so highly compensated at Allen Hospital probably did not garner him sympathy from the court system. The decision in Cedar Valley Medical Specialists throws cold water on hopes by some that the Board of Regents v. Warren decision would lead to increased scrutiny of physician non-competes in Iowa under a public policy analysis. It also supports the use of liquidated damages clauses for non-competes in general which may be easier for Iowa employers to enforce as an alternative to seeking injunctive relief.
If you have questions about an Iowa Non-Compete Agreement contact the Non-Compete Attorneys at Trepanier MacGillis Battina P.A.
About the Author:
Trepanier MacGillis Battina is a non-compete law firm located in Minneapolis, Minnesota. Their non-compete law attorneys can be reached at 612.455.0500.