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Court of Appeals of Arkansas En Banc
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No. CA 96-156
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19 Ark. App. 137, 718
S.W.2d 111, 1986.AR.0043462< http://www.versuslaw.com>
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October 29, 1986
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DR. DAVID DUFFNER
V.
DR. JOE PAUL ALBERTY AND DR. JOHN
WIDEMAN
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SYLLABUS BY THE COURT
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1. COVENANTS - COVENANT NOT TO COMPETE - REQUIREMENTS FOR
ENFORCEABILITY. - In order for a covenant not to compete to be
enforceable, three requirements must be met: (1) the covenantee must have
a valid interest to protect; (2) the geographical restriction must not be
overly broad; and (3) a reasonable time limit must be
imposed.
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2. COVENANTS - COVENANT NOT TO COMPETE - WHEN IT WILL NOT BE ENFORCED.
- A covenant not to compete will not be enforced unless the covenantee has
a legitimate interest to be protected by such an agreement; the law will
not enforce a contract merely to prohibit ordinary
competition.
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3. CONTRACTS - CONTRACTS IN RESTRAINT OF TRADE - REASONABLENESS TEST.
- The test of reasonableness of contracts in restraint of trade is that
the restraint imposed upon one party must not be greater than is
reasonably necessary for the protection of the other, and not so great as
to injure a public interest.
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4. CONTRACTS - CONTRACTS IN PARTIAL RESTRAINT OF TRADE - VALIDITY. -
Contracts in partial restraint of trade, where ancillary to a sale of a
business or profession with its goodwill, are valid to the extent
reasonably necessary to the purchaser's protection, and are looked upon
with greater favor than such an agreement ancillary to an
employer-employee or professional association relationship.
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5. COVENANTS - COVENANT NOT TO COMPETE GROWING OUT OF EMPLOYMENT OR
OTHER ASSOCIATIONAL RELATIONSHIP - WHEN VALID. - Where a covenant not to
compete grows out of an employment or other associational relationship,
the courts have found an interest sufficient to warrant enforcement of the
covenant only in those cases where the covenantee provided special
training, or made available trade secrets, confidential business
information or customer lists, and then only if it is found that the
associate was able to use information so obtained to gain an unfair
competitive advantage.
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6. COVENANTS - COVENANTS NOT TO COMPETE - VALIDITY DETERMINED |
[19 ArkApp Page 138] ON
CASE-BY-CASE BASIS. - The validity of covenants not to compete depends
upon the facts and circumstances of each particular case.
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7. CONTRACTS - CONTRACTS BETWEEN INDIVIDUALS MUST GIVE WAY WHERE
MATTERS OF PUBLIC POLICY ARE INVOLVED. - Although contracts between
individuals ought not to be entered into lightly, all other considerations
must give way where matters of public policy are involved.
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8. CONTRACTS - ORTHOPEDIC SURGEON'S CONTRACT NOT TO COMPETE -
UNREASONABLE RESTRAINT OF TRADE. - A contract provision prohibiting
appellant, an orthopedic surgeon, from practicing medicine within thirty
miles of the city where he has been practicing constitutes undue
interference with the interests of the public right of availability of the
orthopedic surgeon it prefers to use, and the covenant's enforcement would
result in an unreasonable restraint of trade.
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9. CONTRACTS - WITHDRAWAL OF ORTHOPEDIC SURGEON FROM PROFESSIONAL
ASSOCIATION - REMAINING SURGEONS' GOODWILL INTACT. - Where appellant, an
orthopedic surgeon, left the offices of appellees, also orthopedic
surgeons, appellees' goodwill remained with them, and it is only in those
instances where goodwill has, for valid consideration, been transferred
that the purchaser has a legitimate pecuniary interest in protecting
against its being drained by competition from the seller.
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10. CONTRACTS - COVENANT OF ORTHOPEDIC SURGEON NOT TO COMPETE
PROHIBITS ORDINARY COMPETITION. - Where the evidence did not show that
appellant maintained a personal relationship or acquaintance with
appellees" patients or that their "stock of patients" was appropriated by
the appellant when he left their offices, but, to the contrary, the
evidence showed that appellees' income increased after appellant left the
association, the enforcement of the covenant not to compete would merely
prohibit ordinary competition.
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Appeal from the Sebastian Chancery Court, Fort Smith District; Bernice
Kizer, Chancellor; reversed.
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Harper, Young, Smith & Maurras, by: S. Walton Maurras, and House,
Wallace, Nelson & Jewell, P.A., by: Philip Dixon, for
appellant.
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Sexton, Nolan, Robb & Caddell, P.A., by: Sam Sexton, Jr., for
appellees.
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The opinion of the court was delivered by: George K. Cracraft, Chief
Judge. [19 ArkApp Page 139]
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David Duffner appeals from an order of the Sebastian County Chancery
Court enforcing a covenant not to compete and enjoining him from the
practice of medicine within a radius of thirty miles from the offices of
Joe Paul Alberty and John Wideman for a period of twelve months from the
date of entry of the order. The appellant contends that the covenant is
void and unenforceable because it violates the public policy of this state
which prohibits unreasonable restraints of trade. We agree.
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[1-3] Covenants not to compete are not looked upon with favor by the
law. In order for such a covenant to be enforceable, three requirements
must be met: (1) the covenantee must have a valid interest to protect; (2)
the geographical restriction must not be overly broad; and (3) a
reasonable time limit must be imposed. Rebsamen Ins. v. Milton, 269 Ark.
737, 600 S.W.2d 441 (Ark. App. 1980). It is not argued that the geographic
restriction was overbroad or that the time limitation was unreasonable.
Appellant contends only that there was not a sufficient interference with
appellees' business interests to warrant enforcement of the covenant. It
is clear that such covenants will not be enforced unless a covenantee had
a legitimate interest to be protected by such an agreement and that the
law will not enforce a contract merely to prohibit ordinary competition.
Import Motors, Inc. v. Luker, 268 Ark. 1045, 599 S.W.2d 398 (1980). The
test of reasonableness of contracts in restraint of trade is that the
restraint imposed upon one party must not be greater than is reasonably
necessary for the protection of the other, and not so great as to injure a
public interest.
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[4-6] Contracts in partial restraint of trade, where ancillary to a
sale of a business or profession with its goodwill, are valid to the
extent reasonably necessary to the purchaser's protection, and are looked
upon with greater favor than such an agreement ancillary to an
employer-employee or professional association relationship. Madison Bank
& Trust v. First National Bank of Huntsville, 276 Ark. 405, 635 S.W.2d
268 (1982); Marshall v. Irby, 203 Ark. 795, 158 S.W.2d 693 (1942); Easley
v. Sky, Inc., 15 Ark. App. 64, 689 S.W.2d 356 (1985). Where the covenant
grows out of an employment or other associational relationship, the courts
have found an interest sufficient to warrant enforcement of the covenant
only in those cases where the covenantee provided special training, or
made available trade secrets, confidential |
[19 ArkApp Page 140]
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business information or customer lists, and then only if it is found
that the associate was able to use information so obtained to gain an
unfair competitive advantage. See Orkin Exterminating Co., Inc. v. Weaver,
257 Ark. 926, 521 S.W.2d 69 (1975); Rector-Phillips-Morse, Inc. v. Vroman,
253 Ark. 750, 489 S.W.2d 1 (1973); All-State Supply, Inc. v. Fisher, 252
Ark. 962, 483 S.W.2d 210 (1972); Girard v. Rebsamen Ins. Co., 14 Ark. App.
154, 685 S.W.2d 526 (1985). The validity of these covenants depends upon
the facts and circumstances of each particular case. Evans Laboratories,
Inc. v. Melder, 262 Ark. 868, 562 S.W.2d 62 (1978).
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Here, Dr. Joe Paul Alberty and Dr. John Wideman were orthopedic
surgeons who had been engaged in the practice of their profession in Fort
Smith, Arkansas, as partners for many years. Appellant completed his
residency training in orthopedic surgery in June of 1984, at a clinic in
Temple, Texas, and afterwards determined to locate in Fort Smith and
associate himself with the appellees. The terms and conditions of
appellant's association with the appellees' practice was reduced to a
letter agreement. It is not questioned that all of those involved were
fully aware of the document's provisions. Under the terms of the agreement
the appellees agreed to pay all general expenses and certain specific
expenses listed in the agreement were to be paid by the physician who
incurred them. Each physician was assigned a private office and paid rent
to the Alberty-Wideman partnership. Certain portions of the office and the
medical equipment owned by the partnership were to be used in common and
the practice would be organized as an association of individual
professional associations, but appellant would initially practice as a
sole proprietorship. Call schedules would be shared equally. At the end of
one year the appellant would arrange financing to buy his share of the
equity in the furniture and equipment and would have an option to purchase
an interest in the condominium offices. The agreement contained a covenant
that should the appellant desire to leave the group he would not practice
within a radius of thirty miles of the offices of the appellees for a
period of one year from the date of termination. It was agreed that the
appellant would be furnished rent and overhead at no expense for the first
three months, at one-third the normal rate during the fourth month, and
two-thirds that rate in the fifth month. Appellant would begin |
[19 ArkApp Page 141]
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paying his equal share beginning with the sixth month. There was no
agreement to share income or new patients with the appellant and
individual billings were made and collected for services rendered by each
physician. Appellant practiced with appellees under this arrangement until
late in the spring of 1985, when he joined another orthopedic clinic which
conducted its practice in the same building in which the appellees'
offices were located.
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During the twelve-month period following the commencement of the
association, the appellant treated 1207 patients and it was undisputed
that during the first nine months of that association his personal
receipts were in excess of $300,000.00. After leaving the association with
appellees, the appellant requested of them the files on twenty-eight
patients, which he testified had been treated by him while the association
continued and were receiving follow-up medical attention only. The
chancellor specifically found that during the continuance of the agreement
the appellant "had access to the confidential patient files of the
plaintiffs, had use of plaintiffs' office furniture and equipment, and
utilized for his own benefit the good professional reputation and goodwill
of the plaintiffs." The chancellor found the restrictive covenant to be
reasonable and that the appellees had a valid and enforceable right to
protect their substantial investment in their medical practice, and to
protect their established medical clientele. An injunction was entered
restraining the appellant from engaging in the practice of medicine within
a radius of thirty miles from appellees' offices for a period of twelve
months commencing on the date of the decree.
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[7, 8] Although contracts between individuals ought not to be entered
into lightly, all other considerations must give way where matters of
public policy are involved. From our review of all the facts and
circumstances, we are of the opinion that the contract provision
prohibiting appellant from practicing medicine within thirty miles of the
City of Fort Smith constitutes an undue interference with the interests of
the public right of availability of the orthopedic surgeon it prefers to
use and that the covenant's enforcement would result in an unreasonable
restraint of trade.
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[9] Here the contract did not relate to the sale of a business and its
goodwill. The appellees' goodwill remained with them. |
[19 ArkApp Page 142]
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The benefits which the appellant obtained from the reputation and
goodwill of his former associates would be no greater than that of an
employee in any other established business. It is only in those instances
where goodwill has, for valid consideration, been transferred that the
purchaser has a legitimate pecuniary interest in protecting against its
being drained by competition from the seller.
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Nor were any trade secrets, formulas, methods, or devices which gave
appellant an advantage over the appellees involved here. At the time he
joined the association he had received his training and skills elsewhere
and brought them with him. There is nothing in the record to indicate that
he learned any trade secret or surgical procedures from the appellees
which were not readily available to other orthopedic surgeons. To the
contrary, the record reflects that while in the association he performed
some orthopedic surgical procedures which the appellees did not
perform.
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Although the chancellor found that the appellant had access to
appellees' confidential patient files, there was no evidence that he
attempted to memorize them or use information from those files to entice
any of their former patients to become patients of his new association.
Although there was evidence that he obtained the files on twenty-eight
persons from the appellees, it was explained that these were not new
patients but those who were receiving follow-up medical attention after
having undergone surgery by the appellant during his association with the
appellees. Other than those twenty-eight persons receiving post-operative
care, he testified that he had not seen more than two of appellees' former
patients.
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[10] We cannot conclude from the evidence that appellant maintained a
personal relationship or acquaintance with appellees' patients or that
their "stock of patients" was appropriated by the appellant when he left
their offices. There was also evidence that appellees' income increased
after appellant left the association. We conclude that the enforcement of
this covenant would do no more than prohibit ordinary
competition.
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Reversed. |
[19 ArkApp Page 143]
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