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1. Employer and Employee_non-compete agreement_reasonableness a matter of law
The reasonableness of agreements not to compete is a matter of law, and the trial court
did not err by dismissing the jury in a declaratory judgment action to determine the validity of
medical non-compete agreements.
2. Employer and Employee_non-compete agreements_consideration_offer of
employment in merged company
Offers of new employment served as consideration for non-compete agreements where a
medical practice became part of a new entity.
3. Employer and Employee_medical non-compete agreements_no violation of public
policy per se
Non-compete agreements in physicians' employment contracts are not per se against
public policy.
4. Physicians and Surgeons_non-compete agreements_not against public policy
Medical non-compete agreements were not against public policy where the physicians
were able to pay the liquidated damages and had no plans to leave the area.
5. Appeal and Error_contention not argued_abandoned
Plaintiffs abandoned by not arguing an assignment of error that testimony of the purose of
a clause in a medical non-compete agreement was irrelevant.
6. Appeal and Error_assignment of error_overbroad
An overbroad assignment of error did not preserve for appellate review the contention
that a finding concerning a medical non-compete clause and AMA ethics was “contrary to law.”
7. Appeal and Error_assignment of error to conclusion_error not properly assigned to
underlying finding
The appellate court did not consider an assignment of error that concerned only the
validity of a medical non-compete agreement notwithstanding an AMA ethics provision where
plaintiffs did not properly assign error to underlying finding concerning that provision.
8. Costs_attorney fees_non-compete agreement_findings not sufficient
An award of attorney fees under N.C.G.S. § 6-21.2 in a declaratory judgment action
determining that a covenant not to compete and a liquidated damages provision in plaintiff
doctors' contract of employment were enforceable is remanded for appropriate factual findingswhere the trial court made no findings as to whether the employment contract is a “printed or
written instrument, signed or otherwise executed by the obligor, which evidences on its face a
legally enforceable obligation to pay money” or whether the contract relates to commercial
transactions within the meaning of the statute.
Ward and Smith, P.A., by Jenna Fruechtenicht Butler and John
M. Martin, for plaintiffs-appellants.
Nelson, Mullins, Riley, & Scarborough, L.L.P., by Noah H.
Huffstetler, III, and Catharine W. Cummer, and Murchison,
Taylor, & Gibson, P.L.L.C., by Michael Murchison and Andrew K.
McVey, for defendant-appellee.
CALABRIA, Judge.
Linda P. Calhoun, M.D., Mark T. Murphy, M.D., Hemantkumar
Patel, M.D., Praful N. Patel, M.D., and J. Robinson Harper, Jr.,
M.D., collectively (“plaintiffs”), appeal from a declaratory
judgment of the trial court, determining a covenant not to compete
and a liquidated damages provision were enforceable in an
employment agreement between plaintiffs and WHA Medical Clinic,
PLLC (“WHA”). We affirm in part and remand in part.
The trial court made, inter alia, the following findings of
fact:
1. [WHA] is a multi-specialty medical group of
approximately 60 physicians who provide both
primary and specialty care in southeastern
North Carolina.
2. [Plaintiffs] are physicians licensed to
practice medicine by the State of North
Carolina and are board-certified in
cardiology.
3. WHA was formed in 1996 as the successor toWilmington Health Associates, P.A.
(“Wilmington Health”). Prior to 1996, many of
the physicians who work for WHA were owners or
employees of Wilmington Health.
4. Harper joined Wilmington Health as an
employee physician in July 1990 and became a
shareholder in August 1993. Calhoun joined
Wilmington Health in January 1992 and became a
shareholder in January 1994. P. Patel joined
Wilmington Health in December 1994 and became
a member of WHA in December 1996. Harper,
Calhoun, and P. Patel shall be collectively
referred to as “Member Plaintiffs.”
5. At the time the Member Plaintiffs joined
Wilmington Health, their employment agreements
included restrictive covenants with liquidated
damages provisions that enabled the employee-
physician to stay and compete through payment
of a fixed sum designed to compensate
Wilmington Health for its investment in the
physician and the expenses associated with the
physician's departure. When Harper and P.
Patel originally joined Wilmington Health
prior to 1996, they signed such covenants
without objection.
6. The benefits of joining an established
practice such as Wilmington Health included a
guaranteed salary and benefits package, an
established patient and referral base,
association with well-regarded physicians,
staff, facilities, and equipment, licensing
and credentialing support, billing,
administrative[,] and financial
administration.
. . .
8. In August 1996, Wilmington Health and
Phycor Inc., a Tennessee physician practice
management company, entered into an agreement
to sell the assets of Wilmington Health to
PhyCor Inc. (“Asset Purchase Agreement”). The
Asset Purchase Agreement also required WHA,
the newly formed entity that employed the
physicians formerly employed by Wilmington
Health, to enter into a service agreement with
PhyCor of Wilmington, a subsidiary of PhyCor
Inc. (“Service Agreement”).
9. Simultaneous with the sale of assets, on
August 1, 1996, Harper and Calhoun executed
individual Payback Agreements, which were
separate and distinct from the employment
agreements at issue in this case. Pursuant to
the Payback Agreements, Harper and Calhounagreed to return all or a portion of their
PhyCor payouts if they did not remain with WHA
for a period of 4 years commencing August 1,
1996.
10. To protect PhyCor's investment in the
tangible and intangible assets of Wilmington
Health, the Service Agreement required WHA to
obtain and enforce restrictive covenants from
current and future physician members and
employees.
11. The Asset Purchase and Service Agreements
further provided that, if an individual
physician chose not to enter into the new
contracts containing restrictive covenants,
the compensation to WHA would be reduced and
that individual physician would not receive
any share of the PhyCor proceeds. At least
one physician, Lowell Shinn, chose not to sign
the new contract. Dr. Shinn did not receive a
payout and the compensation to WHA was
proportionately reduced.
12. On August 1, 1996, Calhoun and Harper
executed a Member Physician Services Agreement
setting forth the terms and conditions of
their employment with WHA. A First Amendment
to Member Physician Services Agreement was
executed on March 25, 1999.
13. In part, Paragraph 13 of the Member
Physician Services Agreements provides:
13. Covenant Not to Compete
13.1 Physician agrees that during the term of
this Agreement and for a period of eighteen
(18) months following the termination of
employment of Physician with the Company,
Physician will not Compete with the Company,
as defined below, or employ or solicit the
employment of any Restricted Employee, as
defined below.
13.2 For purposes of this restrictive
covenant, the following definitions apply:
. . .
B. “Restricted Employee” means any person that
was an employee of the Company at any time
during the twelve (12) months immediately
preceding the termination of employment of
Physician with the Company.
C. “Restricted Territory” means . . . New
Hanover, Pender, Brunswick, Onslow, Duplin,
Bladen and Columbus Counties if Physician is a
subspecialist or other non-primary care
physician. . . .
13.4 Physician agrees that a breach by
Physician of this restrictive covenant would
cause irreparable damage to the Company and
that, in the event of a breach or threatened
breach by Physician, the Company shall be
entitled to preliminary and permanent
injunctions restraining Physician from
breaching or continuing to breach this
restrictive covenant.
. . .
13.8 In the event the Physician desires to
practice in violation of this restrictive
covenant, Physician shall have the option of
paying to the Company the following liquidated
damages in advance of practicing in violation
of the covenant. Physician shall pay to the
Company as liquidated damages an amount equal
to the greater of (i) Physician's “average
annual income” as shown on the W-2 or K-1
forms prepared by Wilmington Health
Associates, P.A. (“WHA”) or the Company for
the two most recent years preceding
termination of Physician's employment, or (ii)
Physician's share of the total gross proceeds
payable to WHA pursuant to the Asset Purchase
Agreement between WHA and PhyCor of
Wilmington, Inc. (“PhyCor”), including the
amount of any liabilities of WHA assumed by
PhyCor pursuant to the Asset Purchase
Agreement, and Physician's share of sums
payable to the Company pursuant to Article 12
of the Service Agreement.
14. The liquidated damages provision ensured
that physicians who profited from the PhyCor
transaction were required to repay, at a
minimum, the amount of gross proceeds they
received under the Asset Purchase and Service
Agreements, should they depart and compete
with WHA.
15. Such liquidated damages provisions were
included because the damage caused by the
departure and subsequent immediate competition
by physicians depends upon several factors and
is difficult to determine in advance. A
departing physician's prior net contribution
to corporate overhead, the volume of patients
and patient revenues lost to the departing
physician's new practice, the length of time
and cost associated with recruiting
replacement physicians, the time it takes anew replacement physician to become a fully
productive contributor to the group, and the
ability of the remaining physicians in the
group to assume the care of patients who wish
to remain with the group all affect the extent
of WHA's damages.
. . .
17. Each Member Plaintiff had a choice:
Either agree to the new contract and receive a
payout, or, not agree to the new contract and
consequently forego said payout. . . .
18. Plaintiffs Harper, Calhoun, and P. Patel
chose to sign the new contract with the
restrictive covenants and subsequently
received the following individual payouts:
Harper received $287,350, Calhoun received
$267,171, and P. Patel received $245,730[.]
. . .
20. In December of 1999, WHA hired plaintiff
H. Patel, an electrophysiology cardiologist.
On December 29, 1999, H. Patel executed an
Employee Physician Services Agreement that
sets forth the terms and conditions of his
employment with WHA. H. Patel began practice
at WHA as an employee physician in the summer
of 2000.
21. Also in late 1999, WHA hired plaintiff
Murphy. On November 23, 1999, Murphy executed
an Employee Physician Services Agreement that
set forth the terms and conditions of his
employment with WHA. Murphy began practice at
WHA as an employee-physician in 2000.
22. Paragraph 17 of the Employee Physician
Services Agreement is titled “Restrictive
Covenant” and is identical to Paragraph 13 of
the Member Physician Services Agreements (the
Employee Physician Services Agreements and
Member Physician Services Agreements will be
collectively referred to as “Employment
Agreements”). H. Patel's and Murphy's
employment agreements contained the same
provisions regarding hiring of “restricted
employees” and confidentiality as the Member
Physician Services Agreements.
23. In addition, Paragraph 14 of Murphy's and
H. Patel's Employee Physician Services
Agreements, titled “Compliance with Rules and
Regulations,” provides in part:
Physician shall comply with all rules and
regulations as may be established and modified
by the Managers of Company from time to timepertaining the business and medical practice
of Company. Notwithstanding the foregoing,
Physician and Company shall be obligated to
follow all requirements of local, state, and
federal laws and regulations relating to the
practice of medicine and treatment of patients
and no provision of this Agreement shall be
enforceable by Company or Physician or any
court of competent jurisdiction where local,
state or federal laws and regulations and/or
the AMA Code of Professional Ethics prohibits
and/or discourages the conduct described in or
intent of the provision(s) sought to be
enforced.
24. Diane Atkinson, the Executive Director of
WHA, testified that the above provision was
included in WHA's employee physician
agreements to assuage concerns of potential
physician candidates that WHA's contracts gave
WHA the power to direct physicians to take
unnecessary medical measures. She indicated
that this provision was not intended to
absolve the restrictive covenant.
25. At the time Murphy and H. Patel executed
their Employee Physician Services Agreements
and at the time of their departure from WHA,
Policy E-9.02 of the AMA Code of Medical
Ethics provided: Covenants-not-to-compete
restrict competition, disrupt continuity of
care, and potentially deprive the public of
medical services. The (AMA) Council on
Ethical and Judicial Affairs discourages any
agreement which restricts the right of a
physician to practice medicine for a specified
period of time or in a specified area upon
termination of employment, partnership or
corporate agreement. Restrictive covenants
are unethical if they are excessive in
geographic scope or duration in the
circumstances presented, or if they fail to
make reasonable accommodation of patients'
choice of physician.
. . .
28. WHA serves patients from each of the 7
counties reflected in the restrictive
covenants, and the Plaintiffs treated patients
from all 7 counties.
29. Plaintiffs are all intelligent, well-
educated adults who freely and voluntarily
entered into their respective Member Physician
Services and/or Employment Agreements withWHA. . . .
30. In the fall of 2000, WHA negotiated a
termination of its relationship with PhyCor
and agreed to pay over $8 million to
repurchase the rights that PhyCor and PhyCor
of Wilmington had acquired under the Asset
Purchase and Service Agreements.
. . .
32. In the summer of 2001, Plaintiffs began
meeting to discuss forming a separate
cardiology practice in New Hanover County,
North Carolina.
. . .
35. [A pro forma conducted by a certified
public accountant] projected that each
Plaintiff could earn approximately one million
dollars in their first full year of practice,
substantially more than they were earning at
WHA. [The accountant] also provided Plaintiffs
with an analysis of the after-tax cost of the
liquidated damages that the Plaintiffs would
owe WHA under Plaintiffs' employment
agreement. This analysis showed that the
projected increase in the Plaintiffs' earnings
would be several times more than required to
pay their liquidated damages.
36. On December 3, 2001, Harper met with the
remaining WHA cardiologists and WHA's
president. The purpose of this meeting was
for Harper to inform WHA of Plaintiffs'
decision to consider leaving WHA. Plaintiffs
had originally planned to meet on the evening
of January 8, 2002 and then proceed with
terminating their employment with WHA. . . .
WHA terminated Harper on January 8, the day
before he planned to resign. On January 10,
2002, Calhoun, P. Patel, H. Patel, and Murphy
all submitted their ninety-day resignation
notice to WHA as required by their respective
Employment Agreements.
37. On or about January 10, 2002, the
Plaintiffs executed Articles of Organization
for their new practice and shortly thereafter
executed an Operating Agreement. Also, on or
about January 10, 2002, the Plaintiffs
executed a “Memorandum of Understanding” for
their new practice. Said document includes a
covenant that requires any doctor who leaves
the practice before April 1, 2005, to continue
to pay his or her proportionate share of the
expenses through that date.
. . . 39. On or about April 10, 2002, the
Plaintiffs opened their cardiology practice in
New Hanover County, North Carolina under the
name Wilmington Cardiology, PLLC. Without
dispute, the Plaintiffs provide physician
services in the “Restricted Territory” as
defined in their respective agreements with
WHA. Plaintiffs have never paid WHA, nor
offered to pay WHA, any amount so that the
Plaintiffs may compete without violating their
Agreements with WHA. However, in response to
Judge Jones's April 18, 2002 order, the
Plaintiffs have posted a bond in the amount of
liquidated damages.
40. Plaintiffs Calhoun, H. Patel, and P.
Patel testified at the hearing that they had
no plans to leave the area and, if the
covenant not to compete was determined to be
enforceable, they were prepared to take all
necessary steps to ensure continued presence
in the medical community and continued
treatment of patients, even if that meant
paying the liquidated damages agreed to in
their contracts with WHA.
41. As required by the April 18, 2002 order,
Plaintiffs posted a Letter of Credit with the
Clerk of Superior Court of New Hanover County
in the amount of One Million Five Hundred
Fifty-Nine Thousand Seven Hundred Sixty-Seven
Dollars ($1,559,767.00). As a result,
Plaintiffs demonstrated the ability to pay the
liquidated damages set forth in the
restrictive covenant.
. . .
43. Plaintiffs failed to demonstrate they
were unable to pay liquidated damages or that
they would leave Wilmington or otherwise cease
practicing if they are required to pay the
liquidated damages set forth in their
respective agreements.
. . .
51. In general, the Plaintiffs comprise a
collection of uniquely qualified and talented
and skilled physicians. Without dispute, the
Plaintiffs provide valuable medical services
to a substantial patient base in the
“Restricted Area.” The Court acknowledges
that a Doctor-Patient relationship is a
relationship of trust and is developed over
time and that patients can be adversely
affected if this relationship is disrupted.
The Court also acknowledges that a patient'sright to choose his own doctor is especially
important to the quality of healthcare
provided. Patients should have the right to
continuity of healthcare by a doctor of their
own choosing. Categorically preventing the
Plaintiffs from practicing medicine in the
“Restricted Area” would cause a substantial
health risk to actual and prospective patients
in need of the Plaintiffs' services.
52. However, in this case, the Plaintiffs
were provided with a simple choice: Pay the
liquidated damages and practice in the
“Restricted Area;” or, practice in violation
of the terms of their respective employment
contracts and subject themselves to
litigation. The Plaintiffs chose the latter.
. . .
53. The liquidated damages set forth in
Plaintiff's agreement are conservative
compared to the actual damages WHA had already
sustained after 12 months of the 18 month
restricted period. In the first 12 months
since Plaintiffs left WHA to open their
competing practice, WHA's cardiology
department suffered a decrease in gross
professional and ancillary charges of $7.7
million, equating to a $2.9 million decrease
in net revenues. Using the departing
cardiologists' past net contribution to
corporate overhead of 51.6 percent of net
collections, the net loss to WHA for this 12-
month period alone approximates $1,520,483.
Despite aggressive recruiting, it took WHA
approximately six months to recruit two
replacement cardiologists. As of the trial
date, WHA had already expended $128,795 in
efforts to recruit replacement cardiologists.
Thus, the net losses in the 12-month period
from Plaintiffs' departure to the time of
trial alone exceed $1,641,278 compared to
liquidated damages of $1,587,157.
. . .
57. The amounts stipulated in Plaintiffs'
respective agreements as liquidated damages
were a reasonable estimate of the damages that
would probably be caused by a breach of their
covenants.
. . .
59. The amounts stipulated in Plaintiffs'
respective agreements as liquidated damages
are reasonably proportionate to the damageswhich have actually been caused by Plaintiffs'
breach of their respective covenants.
Based on these and other related findings, the trial court
concluded:
2. Plaintiffs' agreements allow them to
practice in the “Restricted Area” upon payment
of specified liquidated damages and therefore
said agreements are not subject to strict
scrutiny as to reasonableness and public
policy. Nevertheless, said agreements survive
a strict scrutiny examination as to
reasonableness and public policy.
3. Plaintiffs' agreements are each based on
valuable consideration.
4. The enforcement of the liquidated damages
provisions in the agreements between
Plaintiffs and WHA create no substantial
question of potential harm to the public
health and consequently said agreements are
not void as against public policy.
5. The restrictive covenants contained in the
agreements between Plaintiffs and WHA are
reasonable as to time and territory
restrictions and are based on a legitimate
business purpose.
6. The liquidated damages provisions and
restrictive covenants contained in the
employment agreements of Plaintiffs Murphy and
H. Patel are enforceable notwithstanding
Policy E-9.02 of the AMA Code of Medical
Ethics.
7. The liquidated damages set forth in each
of the Plaintiffs' employment agreements with
WHA are reasonable in amount and do not
constitute a penalty.
8. Each Plaintiff has breached
[his or her] respective agreements with WHA by
competing with WHA in the restricted area
within 18 months of the termination of [his or
her] employment.
. . .
10. Plaintiffs are obligated to pay the
liquidated damages set forth in their
respective employment agreements with WHA.
11. Section 6-21.2 of the North Carolina
General Statutes allows for the recovery of
attorneys' fees for the failure of Plaintiffs
to pay their liquidated damages upon demand
from Defendant. In the Court's discretion,the Court determines that the Defendant is
entitled to an award of attorney fees.
Plaintiffs appeal.
I. Right to Trial by Jury
[1] We initially address plaintiffs' argument that the trial
court erred in dismissing the jury and serving as the finder of
fact because plaintiffs had a statutory right to trial by jury on
all issues of fact. Plaintiffs instituted this action pursuant to
the North Carolina Declaratory Judgment Act, N.C. Gen. Stat. § 1-
253, et seq. (2005). The Declaratory Judgment Act states, “When a
proceeding under this Article involves the determination of an
issue of fact, such issue may be determined in the same manner as
issues of fact are tried and determined in other civil actions in
the court in which the proceeding is pending.” N.C. Gen. Stat. §
1-261 (2005). This Court has held, under the Declaratory Judgment
Act, the trial court may determine only questions of law absent a
waiver of jury trial. Hall v. Hall, 35 N.C. App. 664, 665, 242
S.E.2d 170, 172 (1978). The only factual determination of the
trial court that plaintiffs challenge in this portion of their
brief is that the trial court “made the decisive Findings of Fact
on the public policy issue.” However, “[s]ince the determinative
question is one of public policy, the reasonableness and validity
of the contract is a question for the court and not for the jury,
to be determined from the contract itself and admitted or proven
facts relevant to the decision.” Kadis v. Britt, 224 N.C. 154,
158, 29 S.E.2d 543, 545 (1944). See also Farr Assocs. v. Baskin,
138 N.C. App. 276, 279, 530 S.E.2d 878, 881 (2000) (“[t]hereasonableness of a non-compete agreement is a matter of law for
the court to decide”). Accordingly, the trial court did not err in
dismissing the jury, and this assignment of error is without merit.
II. Valuable consideration
[2] Plaintiffs next argue that the trial court erred in
concluding that the agreements of Calhoun and Harper were based on
valuable consideration. We disagree.
Our standard of review of a declaratory judgment is the same
as in other cases. N.C. Gen. Stat. § 1-258 (2005). Accordingly,
in a declaratory judgment action where the trial court decides
questions of fact, we review the challenged findings of fact and
determine whether they are supported by competent evidence.
Insurance Co. v. Allison, 51 N.C. App. 654, 657, 277 S.E.2d 473,
475 (1981). If we determine that the challenged findings are
supported by competent evidence, they are conclusive on appeal.
Finch v. Wachovia Bank & Tr. Co., 156 N.C. App. 343, 346-47, 577
S.E.2d 306, 308-09 (2003) (citations omitted). We review the trial
court's conclusions of law de novo. McConnell v. McConnell, 151
N.C. App. 622, 626, 566 S.E.2d 801, 804 (2002).
Under North Carolina law, covenants not to compete are valid
and enforceable if: “(1) in writing; (2) made part of a contract of
employment; (3) based on valuable consideration; (4) reasonable
both as to time and territory; and (5) not against public policy.”
QSP, Inc. v. Hair, 152 N.C. App. 174, 176, 566 S.E.2d 851, 852
(2002). This Court has held, “the promise of new employment is
valuable consideration and will support an otherwise valid covenantnot to compete contained in the initial employment contract.”
Wilmar, Inc. v. Corsillo, 24 N.C. App. 271, 273, 210 S.E.2d 427,
429 (1974) (citations omitted). However, “[w]hen the employment
relationship is established before the covenant not to compete is
executed, there must be separate consideration to support the
covenant, such as a pay raise or other employment benefits or
advantages for the employee.” Stevenson v. Parsons, 96 N.C. App.
93, 97, 384 S.E.2d 291, 292-93 (1989) (citations omitted).
When a company buys-out another company and offers that
company's personnel an employment contract, the offer of new
employment constitutes valuable consideration supporting a
restrictive covenant in the employment contract. QSP, Inc., 152
N.C. App. at 178, 566 S.E.2d at 854 (“QSP's buyout, once effective,
would have left defendant unemployed but for QSP's offer of
employment to defendant and defendant's subsequent acceptance.
This offer . . . was an offer of new employment and therefore
constituted valuable consideration”). Thus, when WHA, the newly
formed entity that employed the physicians formerly employed by
Wilmington Health, offered new employment to Harper and Calhoun,
this amounted to valuable consideration sufficient to support the
restrictive covenants at issue in this case. Since Harper's and
Calhoun's covenants not to compete were supported by valuable
consideration, WHA's offer of new employment, we need not reach the
issue of whether the trial court violated the parol evidence rule
in admitting evidence of other consideration supporting the
covenants not to compete.III. Validity of the Covenants Not to Compete
[3] Plaintiffs argue that non-competition provisions in
physician employment agreements should be deemed per se against
public policy. Our courts have long held, covenants not to compete
are not per se unenforceable, United Laboratories, Inc. v.
Kuykendall, 322 N.C. 643, 648, 370 S.E.2d 375, 379 (1988), and
“medical doctors are by no means immune from such agreements.”
Iredell Digestive Disease Clinic, P.A. v. Petrozza, 92 N.C. App.
21, 30, 373 S.E.2d 449, 454 (1988). See also Eastern Carolina
Internal Med., P.A. v. Faidas, 149 N.C. App. 940, 945, 564 S.E.2d
53, 56 (2002), affirmed per curiam, 356 N.C. 607, 572 S.E.2d 780
(2002). Accordingly, this assignment of error is without merit.
[4] Plaintiffs next argue that “the trial court committed
reversible error in concluding as a matter of law that the
restrictive covenants were not [strictly scrutinized] as to public
policy.” “Covenants not to compete restrain trade and are
scrutinized strictly.” Kennedy v. Kennedy, 160 N.C. App. 1, 9, 584
S.E.2d 328, 333 (2003). However, forfeiture clauses are not
strictly scrutinized. Faidas, 149 N.C. App. at 945, 564 S.E.2d at
56.
In Faidas, a panel of this Court held that a provision in an
employment contract whereby a physician had to pay a sum of money
if he competed against his former employer in three particular
counties within one year following his termination of employment
was a forfeiture clause rather than a covenant not to compete. Id.
Judge Wynn argued in dissent, the instant case concerns not the forfeiture
of future or prospective post-termination
benefits paid by the employer, but the
required payment by the employee of a large
sum to the employer as compensation for
'competing' with the employer. I fail to see
a meaningful distinction between the 'Cost
Sharing' provision at issue herein and a
traditional covenant not to compete coupled
with a damages provision for breach thereof,
as both involve a restraint of trade based
upon a disincentive to compete in the form of
damages required to be paid by the former
employee.
Id., 149 N.C. App. at 950, 564 S.E.2d at 58-59. On appeal as of
right, our Supreme Court per curiam affirmed the majority opinion
in Faidas. 356 N.C. 607, 572 S.E.2d 780 (2002).
Although we note the incongruous results substantively between
our facts and the facts of Faidas, in form, the provisions at issue
in this case are a non-compete clause and a damages provision. See
Hudson v. Insurance Co., 23 N.C. App. 501, 502, 209 S.E.2d 416, 417
(1974) (“A covenant not to compete, is a provision embodied in an
employment contract whereby an employee promises not to engage in
competitive employment with his employer after termination of
employment”). Paragraph 13.1 of the agreement, stated supra,
contains an unequivocal non-compete clause, and Paragraph 13.8,
supra, contains a damages provision “[i]n the event the Physician
desires to practice in violation [of the non-compete clause].”
(Emphasis added). Accordingly, under established case law, the
provisions are strictly scrutinized as to reasonableness and public
policy. See Kennedy, supra.
The trial court concluded, “Plaintiffs' agreements allow them
to practice in the 'Restricted Area' upon payment of specifiedliquidated damages and therefore said agreements are not subject to
strict scrutiny as to reasonableness and public policy.
Nevertheless, said agreements survive a strict scrutiny examination
as to reasonableness and public policy.” Plaintiffs challenge the
trial court's determination that the restrictive covenants are
valid when strictly scrutinized. Specifically, plaintiffs argue,
“the undisputed evidence and the trial court's findings of fact
nos. 45-51, established that if [plaintiffs] were prevented from
practicing medicine, such enforcement not only had the potential to
cause, but also actually would cause, substantial harm to public
health.” We disagree.
The test for determining whether a covenant not to compete
violates public policy was set forth in Petrozza:
If ordering the covenantor to honor his
contractual obligation would create a
substantial question of potential harm to the
public health, that the public interests
outweigh the contract interests of the
covenantee, and the court will refuse to
enforce the covenant. But if ordering the
covenantor to honor his agreement will merely
inconvenience the public without causing
substantial harm, then the covenantee is
entitled to have his contract enforced.
Iredell Digestive Disease Clinic v. Petrozza, 92 N.C. App. 21, 27-
28, 373 S.E.2d 449, 453 (1988) (citations omitted). This Court
considers the following factors in determining the risk of
substantial harm to the public: “the shortage of specialists in
the field in the restricted area, the impact of . . . establishing
a monopoly . . . in the area, including the impact on fees in the
future and the availability of a doctor at all times foremergencies, and the public interest in having a choice in the
selection of a physician.” Statesville Medical Group v. Dickey,
106 N.C. App. 669, 673, 418 S.E.2d 256, 259 (1992) (citations
omitted). The trial court made findings 40-44, stated supra, that
establish that there is no potential harm to public health given
that the physicians were able to pay the liquidated damages and had
no plans to leave the area. Plaintiffs assign error to these
findings as having “no bearing on the issue of whether enforcement
of the restrictive covenants creates a substantial question of
potential harm to public health.” However, the issue of
plaintiffs' ability to pay, coupled with their intent to remain in
the area even if ordered to pay, directly relates to the issue of
whether enforcement of the contract will harm public health.
Additionally, the trial court's findings regarding WHA's financial
investment and the benefits plaintiffs received from practicing
with WHA are not irrelevant since they relate to whether the
liquidated damages provision is reasonable in amount.
Given that there is no potential harm to public health on
these facts, there is strong public policy in favor of enforcing
the provisions at issue:
[P]ublic policy requires the enforcement of
contracts deliberately made which do not
clearly contravene some positive law or rule
of public morals. Since the right of private
contract is no small part of the liberty of
the citizen, the usual and most important
function of courts is to enforce and maintain
contracts rather than to enable parties to
escape their obligations[.]
Land Co. v. Wood, 40 N.C. App. 133, 141, 252 S.E.2d 546, 552 (1979)
(internal citation and quotation omitted). For the foregoing
reasons, we hold that the trial court did not err in determining
that the covenant not to compete at issue was not against public
policy and should be enforced.
IV. The Effect of AMA's Code of Medical Ethics on Validity of the
Restrictive Covenants
[5] As stated supra, Paragraph 14 of H. Patel's and Murphy's
employment contract stated, “no provision of this Agreement shall
be enforceable by Company or Physician or any court of competent
jurisdiction where local, state or federal laws and regulations
and/or the AMA Code of Professional Ethics prohibits and/or
discourages the conduct described in or intent of the provision(s)
sought to be enforced.” (Emphasis added). The trial court made
findings that relate to the provision as follows:
24. Diane Atkinson, the Executive Director of
WHA, testified that the above provision was
included in WHA's employee physician
agreements to assuage concerns of potential
physician candidates that WHA's contracts gave
WHA the power to direct physicians to take
unnecessary medical measures. She indicated
that this provision was not intended to
absolve the restrictive covenant.
25. At the time Murphy and H. Patel executed
their Employee Physician Services Agreements
and at the time of their departure from WHA,
Policy E-9.02 of the AMA Code of Medical
Ethics provided: Covenants-not-to-compete
restrict competition, disrupt continuity of
care, and potentially deprive the public of
medical services. The (AMA) Council on
Ethical and Judicial Affairs discourages any
agreement which restricts the right of a
physician to practice medicine for a specified
period of time or in a specified area upon
termination of employment, partnership or
corporate agreement. Restrictive covenantsare unethical if they are excessive in
geographic scope or duration in the
circumstances presented, or if they fail to
make reasonable accommodation of patients'
choice of physician. (Emphasis in original).
Plaintiffs argue that the trial court improperly admitted evidence
of the purpose behind including Paragraph 14 in the employment
contract. The related assignment of error states, “The Court's
Finding of Fact No. 24 in the Order and Final Judgment pertaining
to Defendant-Appellee's alleged purpose or intent for including
Paragraph 14 in the employment agreements of Drs. Murphy and H.
Patel, on the grounds such finding is irrelevant and contrary to
the law.” In their brief, plaintiffs do not argue that testimony
relating to the purpose of Paragraph 14 was irrelevant but rather
that the testimony was inadmissible under the parol evidence rule
and could not be used to interpret an unambiguous provision of the
contract. Since plaintiffs have failed to argue their portion of
the assignment of error that stated the testimony was irrelevant,
this portion of the assignment of error is abandoned pursuant to
N.C. R. App. P. 28(b)(6) (2006).
[6] Plaintiffs have also failed to preserve the portion of
their assignment of error that stated finding 24 is “contrary to
the law.” North Carolina Rule of Appellate Procedure 10 states:
(a) . . . [T]he scope of review on appeal is
confined to a consideration of those
assignments of error set out in the record on
appeal in accordance with this Rule 10. . . .
(c)(1) . . . Each assignment of error shall,
so far as practicable, be confined to a single
issue of law; and shall state plainly,
concisely and without argumentation the legal
basis upon which error is assigned.
N.C. R. App. P. 10(a), 10(c)(1) (2006) (emphasis added).
“Assignments of error that are . . . broad, vague, and unspecific
. . . do not comply with the North Carolina Rules of Appellate
Procedure.” May v. Down East Homes of Beulaville, Inc., 175 N.C.
App. 416, 417, 623 S.E.2d 345, 346 (2006). Because the assignment
of error at issue states that the challenged finding was “contrary
to law” without stating any specific reason that the finding is
“contrary to law” it fails to identify the issues briefed on
appeal. See id. (holding that assignments of error stating that
the trial court's rulings were “contrary to the caselaw of the
jurisdiction” failed to properly preserve a plaintiffs' arguments
for appellate review); Wetchin v. Ocean Side Corp., 167 N.C. App.
756, 759, 606 S.E.2d 407, 409 (2005) (“This assignment--like a
hoopskirt--covers everything and touches nothing” (citation and
quotations omitted)). Since plaintiffs failed to properly preserve
this argument, we do not address it. See Viar v. N.C. Dep't of
Transp., 359 N.C. 400, 401, 610 S.E.2d 360, 360 (2005) (“The North
Carolina Rules of Appellate Procedure are mandatory and failure to
follow these rules will subject an appeal to dismissal” (citation
and quotations omitted)).
[7] Plaintiffs also argue that the trial court erred in
failing to declare as a matter of law that the restrictive
covenants were unenforceable based on Paragraph 14 and the AMA Code
of Medical Ethics. Specifically, plaintiffs contend: 1) Paragraph
14 of the agreement was unenforceable if the AMA Code of Medical
Ethics discouraged the provision, and 2) the AMA Code of MedicalEthics discouraged “any agreement which restricts the right of a
physician to practice medicine for a specified period of time or in
a specified area upon termination of employment, partnership or
corporate agreement.” Plaintiffs additionally argue that the
contract language was unambiguous and thus a matter of law for the
court to decide, citing Young v. Lumber Co., 147 N.C. 20, 31, 60
S.E. 654, 656 (1908). In the applicable assignment of error,
plaintiffs fail to assign error to the denial of their motion for
summary judgment on this issue or assign error on the basis that
the trial court erred in failing to consider this issue as a matter
of law. Rather, the assignment of error states,
The Court's Conclusion of Law No. 6 in the
Order and Final Judgment that the liquidated
damages provisions and restrictive covenants
contained in the employment agreements of Drs.
Murphy and H. Patel are enforceable
notwithstanding Policy E-9.02 of the AMA Code
of Medical Ethics, on the grounds Paragraph 14
of the employment agreements of Drs. Murphy
and H. Patel renders the restrictive covenant
void and unenforceable as a result of Policy
E-9.02 of the AMA Code of Medical Ethics.
It is significant that plaintiffs did not assign error based on the
trial court's failure to determine the issue as a matter of law
because, as explained supra, plaintiffs have failed to properly
assign error to finding 24, regarding the intent behind Paragraph
14 and, thus, finding 24 is binding on appeal. Koufman v. Koufman,
330 N.C. 93, 97, 408 S.E.2d 729, 731 (1991). Finding 24
establishes that Paragraph 14 “was not intended to absolve the
restrictive covenant.” Since this finding addresses the issue of
the intent behind the provision and is binding on appeal, itsupports the trial court's conclusion that “[t]he . . . restrictive
covenants contained in the employment agreements of Plaintiffs
Murphy and H. Patel are enforceable notwithstanding Policy E-9.02
of the AMA Code of Medical Ethics.” Accordingly, given that
plaintiffs did not assign error based on the trial court's failure
to determine this issue as a matter of law, we do not address this
issue on appeal. See Viar, supra.
V. Counsel Fees
[8] Plaintiffs next argue that the trial court erred in
awarding counsel fees to WHA because there is no statutory
authority supporting an award of counsel fees on these facts.
Specifically, plaintiffs contend that the General Assembly intended
N.C. Gen. Stat. § 6-21.2 (2005) to apply to “commercial
transactions” and that employer-employee agreements do not amount
to a “commercial transaction.”
(See footnote 1)
The general rule in this state is “a successful litigant may
not recover attorneys' fees, whether as costs or as an item of
damages, unless such a recovery is expressly authorized by
statute.” Southland Amusements and Vending, Inc. v. Rourk, 143
N.C. App. 88, 94, 545 S.E.2d 254, 257 (2001) (internal quotations
omitted). Defendant contends that statutory authority for counsel
fees on these facts arises under N.C. Gen. Stat. § 6-21.2 (2005),
which states: Obligations to pay attorneys' fees upon any
note, conditional sale contract or other
evidence of indebtedness, in addition to the
legal rate of interest or finance charges
specified therein, shall be valid and
enforceable, and collectible as part of such
debt, if such note, contract or other evidence
of indebtedness be collected by or through an
attorney at law after maturity . . .
Id. In Enterprises, Inc. v. Equipment Co., our Supreme Court
considered N.C. Gen. Stat. § 6-21.2 and stated, since the statute
is remedial, it “should be construed liberally to accomplish the
purpose of the Legislature and to bring within it all cases fairly
falling within its intended scope.” 300 N.C. 286, 293, 266 S.E.2d
812, 817 (1980). Our Supreme Court further clarified the
legislature's intended scope:
Although G.S. 6-21.2 was not itself codified
as a constituent section of Chapter 25 of the
General Statutes (the Uniform Commercial
Code), we believe its legislative history
clearly demonstrates that it was intended to
supplement those principles of law generally
applicable to commercial transactions. As
with the Uniform Commercial Code in general,
it would appear that some of the purposes
underlying the enactment of G.S. 6-21.2 are
“to simplify, clarify, and modernize the law
governing commercial transactions” among the
various jurisdictions, and “to permit the
continued expansion of commercial practices
through custom, usage, and agreement of the
parties . . . .” G.S. 25-1-102(2)(a) and (b).
300 N.C. 286, 293, 266 S.E.2d 812, 817 (1980). Within this
framework, our Supreme Court specifically held, “evidence of
indebtedness” includes “any printed or written instrument, signed
or otherwise executed by the obligor(s), which evidences on its
face a legally enforceable obligation to pay money.” Enterprises,
Inc., 300 N.C. at 294, 266 S.E.2d at 817. Our review of the trial court's order reveals that it made no
findings of fact whether the contract at issue is a “printed or
written instrument, signed or otherwise executed by the obligor(s),
which evidences on its face a legally enforceable obligation to pay
money” or whether this contract relates to commercial transactions.
These determinations are questions of fact that should not be
initially decided by this Court. Eddings v. Southern Orthopedic &
Musculoskeletal Assocs., 356 N.C. 285, 569 S.E.2d 645 (2002), per
curiam reversing for the reasons stated in 147 N.C. App. 375, 385,
555 S.E.2d 649, 656 (2001) (Greene, J., dissenting). Accordingly,
we remand this matter to the trial court for appropriate factual
determinations.
Plaintiffs have failed to argue their remaining assignments of
error on appeal, and we deem them abandoned pursuant to N.C. R.
App. P. 28(b)(6) (2006). Because of our resolution of plaintiffs'
assignments of error, we need not address WHA's cross-assignments
of error.
Affirmed in part; remanded in part.
Judges BRYANT and STEELMAN concur.
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