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BUSINESS LAW Restrictive Covenants in


Contracts: Neurology
SIMULATION
Associates, LLP v. Elizabeth
EXERCISE 1 Blackwell, M.D.

learning outcomes checklist


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.

Chapters 6 and 7 provided you with a variety The simulation is structured in three parts:
of legal doctrines and rules governing contract ■ Part 1 is a hypothetical fact pattern describing
formation and performance, and then illustrated events leading up to a legal dispute in the hypo-
how these doctrines and rules apply in the corpo- thetical U.S. state of Longville.
rate sector context. This simulation is designed
■ Part 2 is a set of two hypothetical case sum-
to help students understand how the various
topics covered in the contract law chapters con- maries from Longville appellate courts that
nect through use of a simulated legal dispute. provide a brief set of facts, several legal points,
The simulation is intended to provide students and short excerpts from the opinion itself.
with as close as possible real-world experience While these cases are hypothetical, they are
in applying legal doctrines and use of analytical based on actual cases from appellate courts in
and critical thinking skills. This simulation is a various states and represent the view of the
sequential decision-making exercise structured majority of state courts in the United States.
around a model in which the participants assume ■ Part 3 is an assignment sheet that will be pro-
a role in managing tasks and work toward a ten- vided to you by your instructor to be used in
able solution. conjunction with this simulation.

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PART 1: STIPULATED FACTS


1. In May 2005, Dr. Elizabeth Blackwell (“Black-
well”) 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 neuro-
logical medicine. Although she was offered
professional opportunities in several large hos-
pitals, 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 located 20 miles north of the
City of Galway, the largest city in Longville.
Although the pay was lower than 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 associ-
ated with larger medical providers.
2. NA was managed by the two partners,
Dr. Richard Cohn (“Cohn”) and Dr. Jean
Valjean (“Valjean”). While negotiating Black- In this simulation exercise, a physician in a health
well’s Employment Agreement, Cohn was care practice becomes involved in a dispute over
the primary contact and the parties agreed to a provision in her contract that restricted future
compensation terms, vacation, on-call duties employment.
(after hours), and a fringe benefit package.
The agreement included an arbitration clause
requiring that the parties agree to nonbinding that the document was standard procedure in
arbitration in the event of a dispute arising from medical practices and that he had been so busy
the Employment Agreement. The Employment during the negotiations period that he had for-
Agreement also provided for Blackwell to have gotten to mention it to Blackwell. He went
paid time off to study for and take the exami- on to explain that Blackwell should sign the
nations required to become board certified in document by the end of the workday and that
neurology. NA agreed to a $1,000 payment to this would “make the lawyers happy.”
be used for a course intended to help prepare 5. The document was titled “Addendum to
candidates for the test. Blackwell began her Contract—Restrictive Covenant and Noncom-
employment with NA on June 1, 2005. pete Clause” and read in pertinent part:
3. Immediately after hiring Blackwell, NA paid for Section 1: The parties hereby agree, in
Blackwell to accompany them to a medical con- consideration of the exchange of good,
ference at which they were scheduled to speak. valuable, and sufficient consideration, to
At the conference, Cohn and Valjean introduced be bound by the following provision:
her to a number of physicians in hopes of build- For a period of three years after the date
ing the referral base for the practice. of her separation from NA, Blackwell
4. In July 2005, Cohn approached Blackwell and agrees that she will not contract with
told her that he needed her to sign an addi- any provider of neurological services,
tional document that was supposed to be part nor compete in any way with NA, within
of her contract, but that Cohn had neglected a radius of 50 miles of NA’s practice
to mention during negotiations. He explained location. It is acknowledged that this

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restriction covers the entirety of the believed the restrictive covenant prevented her
southwestern region of Longville. from working in Galway.
6. Blackwell felt that she should have a lawyer 10. In January 2010, Blackwell was granted her
review the document, but Cohn insisted the paid leave to prepare for her board certifica-
addendum was normal procedure and that tion and she took the exam in February 2010.
she needed to sign it quickly to make things However, after she returned to the practice,
“legal.” He emphasized that he would have to she began to feel even more isolated from the
have the document by the end of the day or other physicians.
that, as it was a condition of her employment, 11. On March 1, 2010, Blackwell, fed up with NA,
Blackwell’s payroll check could not be pro- announced that she was giving NA 60-days
cessed until the document had been signed. notice that she was leaving the practice to
Blackwell reluctantly signed the document join Galway Hospital in the City of Galway
and submitted it to Cohn. and that her resignation was effective on
7. In August 2009, Blackwell began to have con- May 1, 2010. She anticipated starting at Gal-
flicts with Cohn and, to a lesser extent, Valjean. way on June 1, 2010. Galway was forming a
While Cohn and Valjean took frequent vacations new neurology practice group and they had
during the summer, Blackwell was left to staff offered to employ Blackwell as one of the
the practice alone. She felt overwhelmed and founding physicians in the group.
met with Cohn to discuss a more equitable work 12. Cohn immediately sent Blackwell a letter
schedule. Cohn refused any negotiation explain- informing her that he accepted her resigna-
ing that Blackwell was hired as a “workhorse” tion, but that she had responsibilities under
and that her salary was fair given the size of the her contract that prevented her from accepting
practice and market. Cohn urged Blackwell to a new position with a competitor.
continue her hard work and not to complain
about her work schedule. Eventually, explained
Cohn, Blackwell would become a partner in the PART 2: STATE OF LONGVILLE
practice and would enjoy the fruits of her labor. CASE LAW
8. In September 2009, Blackwell continued to
handle a very heavy caseload seeing almost Wellspan Hospital and Medical
twice as many patients as Cohn or Valjean.
In response to Blackwell’s plea for additional
Group v. Phillip Bayliss, M.D.,
staff, NA hired a new physician to help man- Supreme Court of the State of
age the caseload. Although Blackwell was
initially relieved, the situation at work con-
Longville (2005)
tinued to deteriorate. The workload was such Facts
that Cohn kept denying Blackwell’s request
■ This is the leading case on restrictive cove-
for time off to prepare for the upcoming board
certification exam advising her to put if off nants/noncompete agreements in the context of
until the caseload lightened up a bit. medical practices in the state of Longville. It
9. Blackwell began to receive phone calls from has not been modified or reversed since it was
recruiters trying to lure her away from the decided.
practice to work at a new neurology clinic ■ Wellspan is a not-for-profit health care system
in Galway Hospital (located in the City of located in Columbus County in the southeast-
Galway). The recruiters offered a significant ern portion of the state of Longville. Bayliss is
amount of money because there was a sub- a physician specializing in OB/GYN services.
stantial shortage of neurologists in the south- ■ Wellspan hired Bayliss as its medical director in
west region of Longville. However, Blackwell 2000 at which time Bayliss signed an employ-
never pursued these opportunities because she ment agreement that included a restrictive

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covenant under which Bayliss agreed not to ■ Relations between Wellspan and Bayliss dete-
engage in medical practice in Columbus County riorated when they disagreed over Wellspan’s
and five other contiguous counties (this covered expansion strategy. In February 2004, Bayliss
the entire southeastern region of Longville) for resigned his position at Wellspan and established
a period of two years after the separation of his OB/GYN practice only 5 miles from the
employment between Wellspan and Bayliss. Wellspan practice. This was within the area cov-
■ Wellspan invested over $1 million in equipping ered under the restrictive covenant.
Bayliss’s practice, hiring additional physicians, ■ The state’s highest court considered the enforce-
and promotional strategies intended on market- ability of Wellspan’s restrictive covenant against
ing the practice and increasing the number of Bayliss.
referrals.

POINTS OF LAW AND OPINION EXCERPTS


Point (a)
The state of Longville courts will enforce a restrictive covenant only if it is reasonably
necessary to protect the legitimate interests of the employer and courts may either strike
down a covenant altogether or may reform (known as bluelining) a covenant if it is
overbroad in some way.
Excerpt (a)
“Courts in the State of Longville have historically been reluctant to enforce con-
tracts 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.”

Point (b)
The threshold requirement for enforceability of a covenant is that the employer must Legal Speak >))
be protecting a legitimate business interest. The primary legitimate business interests Threshold
that Longville courts have held to be protectible in a covenant are (1) trade secrets or Requirement A
confidential business information, (2) customer goodwill, and (3) investments in the requirement that
employee. must be met by the
plaintiff prior to the
Excerpt (b1)
court engaging in
“A trade secret is legitimate business interest because it may include a compilation of further legal analysis
information which is used in one’s business that gives one an opportunity to obtain an to determine the rights
advantage over competitors. A trade secret does not include an employee’s aptitude, of the parties.
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 be given
protection as a trade secret.”
Excerpt (b2)
“The interest protected under the umbrella of goodwill 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

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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 (b3)
“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 protectible business interest
when a medical practice can demonstrate that they have invested in the production and
generation of such a base.
Excerpt (c)
“Recognizing a patient referral base as a protected interest and of 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 protectible interest is met, the next step in the analysis is
to apply two balancing tests: (1) the employer’s protectible 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.”

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Held
Because Wellspan has shown that they have a legitimate business interest in protecting
their patient referral base, and that the court has determined that the restriction is tailored
to those interests, and that no public harm will be suffered by enforcement of the restric-
tion, the court finds in favor of Wellspan.

Regional General Hospital v. Anesthesiology Associates, Inc.,


Appellate Court of the State of Longville (2007)
Facts
■ 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 postem-
ployment restrictive covenant wherein Employees agreed to the following restrictions:
(1) that for a period of two years from separation from AAI, ex-Employees would not Legal Speak >))
contract with or compete against AAI at any facility where AAI was currently the pro- Declaratory
vider of anesthesiology services, and (2) that for a period of one year from separation, Judgment A remedy
ex-Employees agreed not to contract or compete against AAI at any facility where AAI used to determine
has provided services for the last 12 months ending on the period of the Employee’s the rights of the
departure date. Because AAI provided services to more than 35 hospitals in five differ- parties in a set of
ent states, the geographic restrictions effectively covered a five-state region. circumstances (such
■ Regional let the agreement with AAI expire and offered direct employment to several as the enforceability
AAI Employees. Fearing that Employees of AAI would not accept these employment of a contract) and
offers for fear of a lawsuit by AAI based on breach of the restrictive covenant, Regional is binding on the
filed suit against AAI seeking a declaratory judgment that the covenant was unenforce- litigants even though
able because it was overly broad in scope and duration and unduly restricted the AAI no damages were
Employees from accepting employment with Regional. awarded.

POINTS OF LAW AND OPINION EXCERPTS


Point (a)
In accordance with the Supreme Court of Longville’s decision in Wellspan v. Bayliss, this
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 the legitimate business interest, the restriction must be narrowly enough
tailored 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 to set it aside entirely.
Except (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

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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 nature 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 AAI. AAI’s restrictive covenants in its employment agreements were
reasonably related to AAI’s business interests and were not overly broad.

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