Sadler Clinic Association, P.A. v. Nora C. Hart, Tawfiq Gordy Alam, Sanjaykumar Patel, Temitope Soares and Benny Wang

In The

Court of Appeals
Ninth District of Texas at Beaumont
____________________
NO. 09-12-00086-CV
____________________

SADLER CLINIC ASSOCIATION, P.A., Appellant

V.

NORA C. HART, TAWFIQ GORDY ALAM,
SANJAYKUMAR PATEL, TEMITOPE SOARES AND BENNY WANG,
Appellees
_______________________________________________________ ______________

On Appeal from the 9th District Court
Montgomery County, Texas
Trial Cause No. 12-02-01579-CV
________________________________________________________ _____________

OPINION

In a suit against Dr. Nora C. Hart, the Sadler Clinic Association, P.A. sought

to enforce a noncompetition covenant in an employment contract. See Tex. Bus. &

Com. Code Ann. §§ 15.50-.52 (West 2011). Drs. Tawfiq G. Alam, Sanjaykumar

Patel, Temitope Soares, and Benny Wang intervened in the suit with a declaratory

judgment action to have the noncompetition covenant declared unenforceable.

Sadler and the physicians filed motions for summary judgment. The trial court

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determined the contract does not include a reasonable buyout clause and is

therefore unenforceable. The court also awarded the physicians attorney fees.

Sadler Clinic appealed.

We conclude the trial court erred in its construction of the contract and in the

court’s application of the Covenants Not To Compete Act. The contract includes a

buyout clause. If a party contends the buyout price is unreasonable, the party’s

remedy is to have a reasonable price determined by binding arbitration. We also

hold that in this proceeding the physicians’ entitlement to attorney fees is governed

by the Covenants Not To Compete Act. Fees not recoverable under that Act in this

proceeding are not recoverable under the Declaratory Judgments Act. The

judgment of the trial court is reversed and the cause is remanded for further

proceedings.

SUMMARY JUDGMENT REVIEW

In reviewing a summary judgment, a court determines whether the movant

established that no genuine issue of material fact exists and that the movant was

entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c); Mann Frankfort

Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex. 2009). When

the trial court grants one party’s motion and denies the opponent’s, the appellate

court considers the summary judgment evidence and determines the questions

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presented. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005);

Jones v. Strauss, 745 S.W.2d 898, 900 (Tex. 1988).

THE EMPLOYMENT CONTRACT

The individual employment contracts are substantively identical. Each

agreement contains a restrictive covenant prohibiting a departing physician from

competing with Sadler Clinic for eighteen months within a twenty-two mile radius

of the main Sadler facility.

Texas law requires that a covenant not to compete be ancillary to an

otherwise enforceable agreement. Tex. Bus. & Com. Code Ann. § 15.50(a); see

Marsh USA Inc. v. Cook, 354 S.W.3d 764, 775 (Tex. 2011). The physicians argue

the employment agreements are illusory and cannot support the enforcement of the

noncompetition covenant, because the employment agreements bind physicians to

certain obligations, but set forth no corresponding obligation for Sadler. Sadler

asserts it was required to provide the physicians with confidential information:

minutes from all board of directors’ meetings, including those involving strategic

and operational information; income distributions for all Sadler physicians;

contract information regarding drugs and supplies, including vendors and various

cost-pricing methods; reimbursement rates and credentialing information with

Sadler’s insurance carriers; medical coding and billing, and financial information;

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and Sadler’s patient accounting systems. The contracts here include a provision

that the physicians will not disclose confidential information the physicians are

“placed in a position by Clinic to become acquainted with[.]” See Alex Sheshunoff

Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 651-56 (Tex. 2006) (covenant

ancillary to agreement to preserve confidences). Sadler argues that at confidential

meetings the physicians could attend, the Sadler board discussed the location and

features of new facilities, the addition of new practice specialties, policies and

procedures about quality care, financial data, and negotiated rates for insurance

carriers. Dr. Robert Branstetter, chief executive officer of Sadler Clinic, stated by

affidavit that the doctors received and had access to confidential information “from

day one of their work at Sadler Clinic.” Branstetter expressed concern that “[t]he

confidential information provided to the physicians . . . may be used to compete for

patients in Sadler Clinic’s primary patient draw area, and to lure physicians away

to compete with Sadler in that area.”

The physicians maintain that Sadler did not own this information and that it

instead belonged to Sadler’s management company. But, as Branstetter stated in a

supplemental affidavit, “all management services provided by MCMC were under

contract with and at the request of Sadler Clinic.” He stated that “Montgomery

County Management Company must maintain the confidentiality of Sadler Clinic’s

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documents and information” and that “[e]ach of the doctors in this lawsuit is a

member of [MCMC], as well as a shareholder in Sadler Clinic.”

The physicians argue that Sadler does not have a protectable interest in

patient records because Sadler is required to provide departing physicians with a

list of all patients seen within two years of the departure. See 22 Tex. Admin Code.

§ 165.5 (2011) (two years); see also Tex. Bus. & Com. Code Ann. §

15.50(b)(1)(A) (one year). The contract provides that the restrictive covenant shall

not be construed to deny the physicians the required patient information. But the

contract also provides that such confidential information as “operation methods

and information, accounting and financial information, marketing and pricing

information and materials, [and] internal publications and memoranda” are

protectable. The physicians agreed to protect the confidential information. The

employment agreements contain promises that are not illusory, and the covenants

not to compete are ancillary to an otherwise enforceable agreement. See Marsh

USA Inc., 354 S.W.3d 764, 774-80; Mann Frankfort, 289 S.W.3d at 849-52.

THE BUYOUT PROVISION

The employment agreements contain an “Option to Pay Liquidated

Damages” provision that allows the physicians to buyout of the noncompetition

covenant if they do not desire to be bound by it. The order granting the physicians’

5
motion for summary judgment states the ground on which the trial court granted

summary judgment: “[P]aragraph 13 of Physician’s Employment Agreement fails

to contain a reasonable buyout clause and is therefore unenforceable as a matter of

law.”

Sadler argues that the trial court is not authorized to second-guess what the

parties have determined is a reasonable amount. Sadler also argues that the

physicians did not show that the buyout amount was greater than necessary to

protect the goodwill or other business interests of Sadler or, if the provision is for

liquidated damages, that the provision amounts to an unenforceable penalty. 1

Section 15.50 of the Business and Commerce Code provides that a covenant

not to compete relating to the practice of medicine must “provide for a buy out of

the covenant by the physician at a reasonable price or, at the option of either party,

as determined by a mutually agreed upon arbitrator or, in the case of an inability to

agree, an arbitrator of the court whose decision shall be binding on the parties[.]”

Tex. Bus. & Com. Code Ann. § 15.50(b)(2). The physicians argue the buyout

clause is ambiguous and so “could not be enforced.” The “enforceability of a

covenant not to compete is a question of law.” Mann Frankfort, 289 S.W.3d at

848.

1
But see Tex. Bus. & Com. Code Ann. § 15.51(b).
6
 If the written instrument can be given a definite legal meaning, it is not

ambiguous. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). A court attempts to

give effect to the parties’ intent as expressed in the contract. Balandran v. Safeco

Ins. Co. of Am., 972 S.W.2d 738, 741 (Tex. 1998). The entire contract is examined

in an effort to harmonize and give effect to all the provisions so that none will be

rendered meaningless. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am.,

341 S.W.3d 323, 333 (Tex. 2011). An agreement subject to more than one

reasonable interpretation is ambiguous. See Pilarcik v. Emmons, 966 S.W.2d 474,

478 (Tex. 1998). To determine whether an agreement is ambiguous, a court looks

at the contract as a whole and considers the circumstances at the time of the

agreement. See Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940

S.W.2d 587, 589 (Tex. 1996). The parties’ offer of conflicting interpretations does

not necessarily establish ambiguity. See Praeger v. Wilson, 721 S.W.2d 597, 600

(Tex. App.—Fort Worth 1986, writ ref’d n.r.e.). And an agreement is not

ambiguous simply because the contract must be read carefully to be properly

understood. See Gomez v. Hartford Co. of the Midwest, 803 S.W.2d 438, 442 (Tex.

App.—El Paso 1991, writ denied).

The physicians assert that, using the language of the contract, there are

multiple interpretations of how to calculate a buyout. One alleged ambiguity

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relates to the meaning of the word “income” and the phrase “during the preceding

12 months. . . .” Under the contract at issue, if the physician desires to practice

medicine in violation of the covenant-not-to-compete provisions, the physician has

the option of paying Sadler a certain percentage of the “[i]ncome paid by Clinic to

Physician during the preceding 12 months as shown on the W-2 forms of Clinic[.]”

The amount varies with the length of employment and with the status of the

physician as a shareholder or employee. The contract explains the “damages are in

partial restitution for the loss or damage which Clinic will suffer as a result of such

breach and in partial recovery of its investment in the practice of Physician.”

The physicians argue the phrase “preceding 12 months” could mean the 12

months immediately prior to the end of the working relationship, which may be

different from the 12 months reflected on the last year’s W-2 form. The contract

provides that the physician must pay to clinic as liquidated damages an amount

based on the length of employment. For those physicians who are clinic

shareholders, each “condition” or section includes the phrase “the Income paid by

Clinic to Physician during the preceding 12 months as shown on the W-2 forms of

Clinic.” It is apparent that the preceding 12 months is a reference to the 12 months

reflected on the last W-2 form of the Clinic.

The physicians also argue the contract does not specify whether the income

8
is gross income or “reported W-2 wages.” The contract defines “income,”

however, as “income for federal income tax purposes,” and the contract specifies

the income paid by clinic to Physicians as shown on the W-2 forms of Clinic. It is

apparent the contract refers to the gross pay reported on the W-2 form. “[F]or

federal income tax purposes,” the amount of gross pay is the starting point. If the

parties had intended to use a different number that allowed for a reduction for

deductions, exclusions or taxes withheld, the parties would have included that

calculation in the contract. We are not persuaded by the physicians’ argument that

they “established that the Buyout Clause was ambiguous and could not be

enforced.”

A REASONABLE PRICE

The statute requires that the covenant provide for a buyout by the physician

at a reasonable price, and that is the issue addressed by the trial court. See Tex.

Bus. & Com. Code Ann. § 15.50(b)(2). The physicians argue the buyout clause is

unenforceable because it sets forth an arbitrary and unreasonable value that has no

relationship to the damages Sadler would incur if a physician violated the

noncompetition covenant.

Reasonable price is not defined in the statute, but the ordinary meaning of

price is not the same as that for damages. Price is the “amount of money or other

9
consideration asked for or given in exchange for something else; the cost at which

something is bought or sold.” Black’s Law Dictionary 1308 (9th ed. 2009). The

term damages refers to “[m]oney claimed by, or ordered to be paid to, a person as

compensation for loss or injury[.]” Black’s Law Dictionary 445 (9th ed. 2009). The

term liquidated damages generally refers to an acceptable measure of damages

stipulated in advance in the event of a breach of contract. Flores v. Millennium

Interests, Ltd., 185 S.W.3d 427, 431 (Tex. 2005); Valence Operating Co., 164

S.W.3d at 664 (“Liquidated damages clauses fix in advance the compensation to a

party accruing from the failure to perform specified contractual obligations. . . .”).

A valid liquidated damages amount may represent a reasonable buyout price

in a particular case, but though the concepts may be closely related in this context,

they are not necessarily identical. And though it is not clear how a physician’s

annual gross income would relate directly to Sadler’s lost profits, the Legislature’s

choice of words -- “price,” rather than “damages” or “lost profits” -- may make a

difference in determining a reasonable buyout amount under the circumstances.

As originally introduced, the legislative bill provided that a reasonable price

was to be “determined by a mutually agreed upon arbitrator.” House Comm. on

Pub. Health, Bill Analysis, Tex. H.B. 3285, 76th Leg. R.S. (1999). The final

version of the bill removed the requirement of arbitration if the parties agreed on a

10
reasonable price, and added the provision that if the parties could not agree on the

arbitrator, the court would appoint one. 2

Parties agree to an amount or formula at the time they sign the contract.

Although intervening circumstances may make the amount seem unreasonable at

the time the buyout provision is sought to be implemented, the statute does not

give the trial court authority to reform the price. See Tex. Bus. & Com. Code Ann.

§§ 15.50, 15.51. The statute does give the trial court the authority to “reform the

covenant to the extent necessary to cause the limitations contained in the covenant

as to time, geographical area, and scope of activity to be restrained to be

reasonable and to impose a restraint that is not greater than necessary to protect the

goodwill or other business interest of the promisee . . . .” Tex. Bus. & Com. Code

Ann. § 15.51(c). The relief that may be granted to the employer after reformation is

limited to injunctive relief. Id. But the absence of damages as a remedy for the

employer after reformation does not mean a physician is precluded from exercising

a valid buyout option to avoid entry of an injunction prohibiting competition. See

id. §§ 15.50(b)(2), 15.51(c). Section 15.50(b)(2) provides arbitration as relief from

an unreasonable stipulated price. The Legislature anticipated that the price may be

in dispute, for whatever reason, at the time of the buyout, whether the limitations
2
See Act of May 26, 1999, 76th Leg. R.S., ch. 1574, § 1, 1999 Tex. Gen.
Laws 5408, 5409.
11
are reformed or not, and in that event provided for binding arbitration to determine

the price to be paid.

The agreement here includes a buyout provision. The covenant does not

include an express reference to the arbitration option, but that is not fatal to the

agreement and does not preclude arbitration of the issue of reasonable price. See

Tex. Bus. & Com. Code Ann. § 15.50(b)(2). We presume that the parties

contracted with knowledge of the statute’s arbitration provision concerning the

price, and that the parties intended the statute’s application in determining a

reasonable price. See generally Danciger Oil & Ref. Co. of Tex. v. Powell, 154

S.W.2d 632, 635 (Tex. 1941) (An implied covenant “must arise from the presumed

intention of the parties as gathered from the instrument as a whole.”).3

Under the statute, if the physician elects to compete despite signing a valid

noncompetition covenant with a buyout provision, the physician must pay the

agreed amount or elect to have a reasonable price determined by an arbitrator. See

Tex. Bus. & Com. Code Ann. § 15.50(b)(2). The statute does not give the trial

3
The physicians cite an unpublished opinion by this Court where we
concluded that section 15.50(b)(2) did not “interject” an agreement to arbitrate. See
Gulf Coast Cardiology Group, P.A. v. Samman, No. 09-02-009CV, 2002 WL
1877175, at *1 (Tex. App.—Beaumont Aug. 15, 2002, pet. denied) (not designated
for publication). The employment agreement in that case had no buyout provision,
however. See also Tex. R. App. P. 47.7(b) (Unpublished opinion prior to January
1, 2003, has “no precedential value[.]”).
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court the role of determining a reasonable price. See id. § 15.51(c). An arbitrator is

given that role. See id. § 15.50(b)(2). We hold the trial court erred in declaring the

entire covenant not to compete unenforceable because the court believed the

stipulated buyout price was unreasonable. The proper remedy was binding

arbitration to determine a reasonable price. 4 Issue one is sustained.

THE LIMITATIONS IN THE COVENANT

Sadler asks that this Court render judgment enforcing the covenant not to

compete. Sadler argues that the covenants “as a matter of law contain reasonable

limitations.” The summary judgment record includes some evidence, however, that

a geographic limitation of ten miles or possibly less may adequately protect Sadler.

The covenant provides a twenty-two mile geographic limitation. The trial court

originally denied Sadler’s request for a temporary injunction because “the

geographical area of the noncompete provision is not reasonable as to Dr. Hart, a

family practice doctor.” The trial court did not reform the contract, although the

statute requires reformation “to the extent necessary” to cause the limitations “to

be reasonable[.]” Id. § 15.51(c). Any reformation occurs before the issue of

reasonable price is determined. The cause must be remanded for the trial court’s

4
The statute provides that either party may choose arbitration to determine a
reasonable price. See Tex. Bus. & Com. Code Ann. § 15.50(b)(2).
13
initial determination of the reasonableness of the limitations, and for reformation if

necessary. See Tex. Bus. & Com. Code Ann. § 15.51(c).

But apparently the restricted period -- during which the physicians were

precluded from competing -- may have expired during the litigation. The contract

contains a tolling provision during a breach, but under the contract the tolling

period is “not to exceed” an additional eighteen months. The tolling period may

have expired as to some, if not all, of the physicians. Sadler asks that we equitably

toll the time period further, and presents two reasons.

First, Sadler argues that at least one physician has “practiced without

interruption in violation of the noncompete[,]” and that the time period of a

covenant not to compete can be equitably extended if the violations were

“continuous and persistent.” Compare Farmer v. Holley, 237 S.W.3d 758, 761

(Tex. App.—Waco 2007, pet. denied) (Record did not support assertion that

violations were continuous and persistent.). But in this case the contract contains

its own tolling provision extending the restricted period during a breach. We

decline to grant an equitable extension because of a breach when the parties

expressly agreed in the contract as to the time of tolling during a breach.

Second, Sadler argues we should rule that the time period of the

noncompetition covenant has been equitably tolled during the pendency of the

14
litigation. Compare RenewData Corp. v. Strickler, No. 03-05-00273-CV, 2006 WL

504998, at *5, (Tex. App.—Austin Mar. 3, 2006, no pet.) (mem. op.) (Delays in

the enforcement were not simply “inherent to litigation[.]”). While this reason

relates to a breach, it focuses more directly on court inaction over which a party

has no control. Following federal court precedent, an appellate court could leave

initial consideration of the applicability of this reason for an equitable extension to

the trial court on remand. See Guy Carpenter & Co. v. Provenzale, 334 F.3d 459,

464 (5th Cir. 2003) (power of federal district court “under Texas law” to craft

injunction in light of court’s delay in deciding motion to reconsider). The Texas

Supreme Court has indicated that the issue of reformation becomes moot after the

term of the noncompetition covenant has expired. See Weatherford Oil Tool Co. v.

Campbell, 340 S.W.2d 950, 952 (Tex. 1960). One court has concluded that

Weatherford means that a Texas “court will not extend the period provided in a

restrictive covenant contained in an employment contract.” Rimes v. Club Corp. of

Am., 542 S.W.2d 909, 912 (Tex. Civ. App.—Dallas 1976, writ ref’d n.r.e.). While

we do not believe Weatherford addressed the reason articulated by the federal

court in Provenzale, we nevertheless decline to grant an equitable extension under

the circumstances here. The parties to this contract apparently anticipated delay

due to litigation resulting from a possible breach, and provided for a maximum

15
tolling period in the contract.

If the trial court reforms the limitations, however, damages are not available.

See Tex. Bus. & Com. Code Ann. § 15.51(c). Injunctive relief would remain

available, assuming the restricted period for the specific physician has not expired.

See id. But if a limitation must be reformed, yet injunctive relief is not available

because of the expiration of the time provided in the covenant, reformation may be

a futile exercise. See John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80, 85

(Tex. App.—Houston [14th Dist.] 1996, writ denied) (Expiration of covenant so

“any reformation of that provision by the trial court would have been an exercise in

futility.”). However, if on remand the limitations are determined to be reasonable

for a specific physician and need not be reformed, and the physician nevertheless

has chosen to compete in violation of a valid noncompetition covenant, the

physician must pay a reasonable buyout price to be determined by an arbitrator,

assuming the parties do not agree the stipulated buyout price is reasonable. If an

injunction is still available to enforce a reformed agreement as to a particular

physician, the issue of a reasonable buyout price would then also be arbitrable on

remand.

Issue two is therefore sustained in part and overruled in part. The cause will

be remanded to the trial court for the determination of the matters set out in our

16
discussion of issue two. However, to the extent Sadler asks this Court to grant an

extension and to also enforce the covenant before the trial court considers the

reasonableness of the limitations, issue two is overruled.

ATTORNEY FEES

In issue three, Sadler argues that the physicians did not establish their

entitlement to attorney fees under section 15.51 of the Act. Sadler argues the

Covenants Not To Compete Act preempts recovery of attorney fees under the

Declaratory Judgments Act. The physicians in a footnote in their brief state they

“did not pursue an award of attorneys’ fees under the provision in Section 15.51 of

the Covenants Not to Compete Act.” Instead, the physicians argue they are entitled

to recover attorney fees under the Declaratory Judgments Act. 5 See Tex. Civ. Prac.

& Rem. Code Ann. § 37.009 (West 2008).

The procedures and remedies in an action to enforce a covenant not to

compete provided by section 15.51 “are exclusive and preempt” proceedings and

remedies “under common law or otherwise.” Tex. Bus. & Com. Code Ann. §

15.52; see Perez v. Tex. Disposal Sys., Inc., 103 S.W.3d 591, 592-94 (Tex. App.—
5
In issue four, Sadler argues that if fees are recoverable under the
Declaratory Judgments Act, the physicians were required to segregate “recoverable
fees from the nonrecoverable fees.” See Tony Gullo Motors I, L.P. v. Chapa, 212
S.W.3d 299, 313-14 (Tex. 2006). We do not reach issue four because of our
resolution of issue three.

17
San Antonio 2003, pet. denied) (attorney fee provision exclusive). In its suit

against Hart, Sadler sought to enforce the covenant. The physicians intervened in

that suit with a declaratory judgment action. Sadler sought to enforce the covenant,

and the physicians sought to avoid the covenant through their motion for summary

judgment. The terms of the Covenants Not To Compete Act govern the dispute

over the enforcement of the covenant. The physicians did not pursue an award of

attorney fees under section 15.51 in their motion for summary judgment, and do

not argue that there is no genuine issue of material fact concerning liability for

attorney fees under section 15.51(c). In this proceeding, the exclusivity and

preemption provision of the Covenants Not To Compete Act precludes an award of

attorney fees under the Declaratory Judgments Act. See Tex. Bus. & Com. Code

Ann. § 15.52; see also generally MBM Fin. Corp. v. Woodlands Operating Co.,

L.P., 292 S.W.3d 660, 669 (Tex. 2009) (“[T]he rule is that a party cannot use the

[Declaratory Judgments] Act as a vehicle to obtain otherwise impermissible

attorney’s fees.”). Issue three is therefore sustained. We reverse the trial court’s

judgment, and remand the cause for further proceedings consistent with this

opinion.

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 REVERSED AND REMANDED.

________________________________
DAVID GAULTNEY
Justice
Submitted on January 10, 2013
Opinion Delivered June 13, 2013

Before McKeithen, C.J., Gaultney and Horton, JJ.

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