cases, commentary and news related to restrictive covenants
Wednesday, April 14, 2010
Supreme Court of Alaska Addresses First Sale of Business Non-Compete Case (Wenzell v. Ingrim)
Sale of business non-compete disputes are far less frequent than those in the employment context. For good reason; most such cases present very few novel questions regarding enforceability.
However, that is not always the case. In a dispute involving the sale of a dentist's practice, the Supreme Court of Alaska addressed its first sale of busines non-compete case, one with a fascinating set of facts and legal issues.
In 2006, Dr. Guy Ingrim sold his dentistry practice to Dominic Wenzell for the sum of $500,000. The price was allocated between goodwill, supplies and a non-compete. The terms of the non-compete were not that different than what one typically sees in a medical practice sale: 5-year term, with a radius of 15 miles for the first two years of the covenant, and 10 miles for the last three years. The activity restriction in the agreement barred Ingrim from engaging in the "practice of dentistry" within the proscribed territory. The agreement contained a fixed liquidated damages clause setting the price of breach at $250,000.
Ingrim moved to Mexico, but after his marriage fell apart, he came back to Alaska. Around 2007, he took a job with the Alaska Native Medical Center, a federally funded clinic that provides free dental services to Native Americans. Ingrim contended that this did not constitute the practice of dentistry, as that term was defined in the purchase agreement.
The Court disagreed and wisely held that it did meet the standard American Dental Association definition for "practice of dentistry." However, further proving that he who wears the white-hat stands to prevail, the Court had much more to say on the matter.
First, it held that its expansive definition of the restrictive covenant did not answer the question of whether Ingrim breached it. Instead, the Court held that it was a question of fact for the trial court to decide. Though the Court noted that in most sale of business cases, a court need not inquire into the degree of competition between buyer and seller, this case "presents a rare instance where a party is attempting to enforce a covenant not to compete against a person employed by a federally-funded non-profit organization that provides free or low-cost health services."
Second, the Court adopted other states' formulation for deciding how sale-of-business covenants were to be analyzed. It held that the court must consider whether the covenant was greater than necessary to protect the buyer's investment in goodwill and whether the buyer's need to protect its goodwill outweighed both the hardship to the seller and the public interest.
This case presented the rare opportunity for a court to actually give the "public interest" factor much consideration at all. Normally, it's not an issue. But given the unique nature of what Ingrim was doing following his move back to Alaska, it wasn't much of a stretch for the Court to go out of its way and emphasize that the interest of the public had to be considered in determining whether the non-compete was enforceable against Ingrim under the facts.
Finally, the Court was decidedly unimpressed with the liquidated damages clause, reasoning that it made no attempt to forecast actual damages. The real problem with the clause was that it was static; it applied uniformly to any breach and did not decrease over time. Presumably, to have any relation to the buyer's investment in goodwill, the clause should have been drafted to calculate damages in a declining amount over time. A breach on the first day, however, was equal to that on the last. That formulation is suggestive of a penalty, rather than an attempt to pre-determine actual damages.
On remand, Wenzell faces a herculean task. The Court's opinion, though extremely well-reasoned, left little doubt that the trial court ought to be skeptical of Wenzell's claim in light of the fact that Ingrim really wasn't competing for private patients or soliciting anyone.
Court: Supreme Court of Alaska
Opinion Date: 4/9/10
Cite: Wenzell v. Ingrim, 2010 Alas. LEXIS 39 (Alas. Apr. 9, 2010)
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Kenneth: Great post and a interesting case. I acknowledge my bias (we only represent employees in fighting non-competes) but it is my position that the "public policy" exception should always apply when the employee goes to work for the state or local government or a non-profit. This decision in this case will be interesting. Dan FrithReplyDelete
I was told about this case by the plaintiff in a dental discussion group. I have since changed my Seller oriented non-competition agreements to bar "actual and potential competition" through any "public or private facility." I like this blog, I'm glad to have found it.ReplyDelete