A case in which a restrictive covenant was enforced against an accountant who happened to be beneficiary under her deceased former employer’s will is among recent business divorce cases worthy of note.
Restrictive Covenant Given in Purchase Agreement Survives Death
A covenant not to compete given in connection with the sale of an accounting practice is enforceable against a beneficiary of will who happened to be a competitor of the practice that bought the deceased account. Here is what happened in McCarthy & Co, P.C. v. Steinberg, a case before a federal court in Pennsylvania. Harris Fox sold his accounting practice to the plaintiff with a multi-year restrictive covenant. The terms of the sale provided for payment of 25 percent of the revenue earned from Fox’s clients during the five-year period. The restrictive covenant remained in place for three years after the last payment under the sale agreement. The defendant, Judith Steinberg, had worked for Fox for 24 years and at the time of the sale, Fox had asked that plaintiff hire her. Steinberg stayed for four years, then resigned started practicing with a direct competitor.
Fox died before the end of the payout schedule. His will named Steinberg as the executor and as the direct beneficiary and assignee of her former employer’s interest in the sale agreement. (Out of curiosity, I read the complaint to see if there were other clues about the relationship that led to this lawsuit. Other than the long employment, nothing there.) Steinberg then sent a demand for the funds payable to Fox under the original agreement. The plaintiff purchaser sued to enforce the restrictive covenant.
Plaintiff’s argument was that as the direct beneficiary of Fox and as the assignee of the rights and obligations under the contract that she was now barred from competition. The district judge agreed with the plaintiff.
Plaintiff has sufficiently alleged that defendant, as an individual, breached the APA. Plaintiff alleges that: (a) the APA prohibited Fox from offering services to Seller’s former clients and accepting employment from plaintiff’s competitors; (b) defendant was “assigned Fox’s interest under the Agreement”; (c) defendant accepted the assignment of the APA by her assent to receive a performance promised by plaintiff; and (d) defendant “solicited and performed accounting services” for Seller’s former clients and accepted employment from Ehrlich, an entity which “competes directly” with plaintiff.
Automatic Renewal Provisions Create New Contracts and Restrictive Covenants
Connecticut has enacted a statute that specifically limits the enforceability of restrictive covenants to one year, taking effect with contracts executed after July 1, 2016. The defendant in Orthopedic & Neurosurgery Specialists, PLLC v. Peden had executed a contract in 2013 with a one-year term that automatically renewed. The physician, an orthopedic surgeon left when the practice became subject to the control of a group of non-physician investors.
The plaintiff sued to enforce the two-year restrictive covenant, claiming that because the agreement was executed well before July 1, 2016, the statute did not apply. The court disagreed. A contract that renews automatically creates a new contract at each renewal Thus the defendant was not employed under a contract for six years, but had been party to six successive one year contracts. And because the last of these was still in force and its renewal date was after the effective date of the statute, the fact that it was for two years instead of the one year permitted by the statute made it unenforceable.
Specialty of Surgeon is Grounds to Not Enforce Restrictive Covenant
The fact that a surgeon’s specialty was unique to the local community was ground to prevent enforcement of a covenant not to compete in this case out of the appeals a court case involving a cardiac surgeon in Ohio. Castillo-Sang v. Christ Hospital Cardiovascular Associates, LLC. The plaintiff in the case was a cardiothoracic surgeon specializing in minimally invasive mitral valve surgery. The surgeon resigned and filed a declaratory judgment seeking judicial determination that the restrictive covenant in his employment contract was not enforceable.
Under that agreement, the surgeon was barred from competing in the same county or any contiguous county where his former practice operated for a year. The trial found the covenant was unenforceable and enjoined the surgeons former practice from seeking enforcement. Ohio uses a nine-factor analysis when examining a restrictive covenant in an employment agreement.
(1) whether the agreement contains time and space limitations; (2) whether the employee is the sole contact with the customer; (3) whether the employee has confidential information or trade secrets; (4) whether the covenant seeks to limit only unfair competition or is designed more broadly to eliminate ordinary competition; (5) whether the agreement seeks to stifle the employee’s inherent skill and experience; (6) whether the benefit to the employer is disproportional to the detriment to the employee; (7) whether the agreement bars the employee’s sole means of support; (8) whether the skills that the agreement seeks to restrain were actually developed during the employment; and (9) whether the forbidden employment is merely incidental to the main employment.
The surgeon testified that he could not find work in Columbus, where he lived with his wife, a medical resident, and their three children. Commuting between Columbus and Cincinnati, where he received an offer outside of the geographic scope of the agreement was simply not practical, the surgeon claimed, because his practice dealt with life-threatening emergencies that required him to live near his surgical practice and kept him on constant call.
The surgeon prevailed in the case not because his skill was unique to the practice, but because it was unique to the community. The trial court found that the surgeon’s specialty was rare and that enforcement of an agreement not to compete when there were no other surgeons capable of providing the same specialty within the area was injurious to the public interest.
If you have any questions about these cases or need to discuss a business divorce issue involving owners or employees, feel free to contact me.