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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
of legal doctrines and rules governing contract
formation and performance, and then illustrated
how these doctrines and rules apply in the corpo-
rate sector context. This simulation is designed
to help students understand how the various
topics covered in the contract law chapters con-
nect through use of a simulated legal dispute.
The simulation is intended to provide students
with as close as possible real-world experience
in applying legal doctrines and use of 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 ten-
able 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 hypo-
thetical U.S. state of Longville.
■ Part 2 is a set of two hypothetical case sum-
maries 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 pro-
vided to you by your instructor to be used in
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
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 that
she needed to sign it quickly to make things
“legal.” He emphasized that he would have to
have the document by the end of the day or
that, as it was a condition of her employment,
Blackwell’s payroll check could not be pro-
cessed until the document had been signed.
Blackwell reluctantly signed the document
and submitted it to Cohn.
7. In August 2009, Blackwell began to have con-
flicts 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 explain-
ing 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 2009, Blackwell continued to
handle a very heavy caseload seeing almost
twice as many patients as Cohn or Valjean.
In response to Blackwell’s plea for additional
staff, NA hired a new physician to help man-
age the caseload. Although Blackwell was
initially relieved, the situation at work con-
tinued 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 if 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 sub-
stantial shortage of neurologists in the south-
west region of Longville. However, Blackwell
never pursued these opportunities because she
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believed the restrictive covenant prevented her
from working in Galway.
10. In January 2010, Blackwell was granted her
paid leave to prepare for her board certifica-
tion and she took the exam in February 2010.
However, after she returned to the practice,
she began to feel even more isolated from the
other physicians.
11. On March 1, 2010, Blackwell, fed up with NA,
announced that she was giving NA 60-days
notice that she was leaving the practice to
join Galway Hospital in the City of Galway
and that her resignation was effective on
May 1, 2010. She anticipated starting at Gal-
way on June 1, 2010. Galway was forming a
new neurology practice group and they 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 resigna-
tion, 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)
Facts
■ This is the leading case on restrictive cove-
nants/noncompete 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 southeast-
ern 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 employ-
ment agreement that included a restrictive
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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 promotional strategies intended on market-
ing the practice and increasing the number of
referrals.
■ Relations between Wellspan and Bayliss dete-
riorated when they disagreed over Wellspan’s
expansion strategy. In February 2004, Bayliss
resigned his position at Wellspan and established
his OB/GYN practice only 5 miles from the
Wellspan practice. This was within the area cov-
ered under the restrictive covenant.
■ The state’s highest court considered the enforce-
ability of Wellspan’s restrictive covenant against
Bayliss.

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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