Mid-Atlantic Health Law TOPICS

A recent ruling from the Court of Appeals of Indiana reminds employers of the importance of precise drafting of noncompetition covenants, because courts will strictly construe the covenants against employers.

The court interpreted a noncompetition covenant to allow a physician to compete with his ex-employer in another city because the ex-employer did not have an office in that city on the date the physician tendered his resignation, even though the employer opened an office in that city before the physician's last day of employment.

A. The Timeline

On June 8, 2007, Daniel H. Nolan, M.D., an anesthesiologist, entered into an employment agreement with Spine, Sports, and Pain Medicine, P.C. (Spine) containing a noncompetition covenant that stated, in pertinent part, as follows:

"Employee shall not during the period of his employment and for a period of two (2) years immediately following his termination for any reason . . . provide products or services competitive with those of Spine within a twenty-five mile radius of any office of Spine or healthcare facility at which professional employees of Spine provide medical or educational services, previously or currently for a period of two years." (emphasis added)

In June 2007, when Dr. Nolan began his employment with Spine, Spine had Indiana offices in Fort Wayne, Auburn, Bluffton, and Huntington. After a year and a half of working for Spine, on January 12, 2009, Dr. Nolan tendered his letter of resignation to Spine. The letter stated that his last day of employment would be March 23, 2009, thus, providing sixty days notice in accordance with the employment agreement. That same day, Dr. Nolan formed a limited liability company for the purpose of practicing medicine in Warsaw.

On February 1, 2009, Spine signed a lease to open a new office in Warsaw. On February 9, 2009, Spine sent a letter to Dr. Nolan accepting his resignation letter. The next day, February 10, 2009, Dr. Nolan's counsel informed Spine that Dr. Nolan intended to work in Warsaw. On February 16, 2009, over a month after Dr. Nolan tendered his resignation, and several days after accepting his resignation letter, Spine opened an office in Warsaw, and began treating patients there. On February 24, 2009, Spine terminated Dr. Nolan's employment agreement, and reminded him of his obligations under the noncompetition covenant.

On March 2, 2009, Dr. Nolan filed a complaint for declaratory relief against Spine claiming that the terms of the noncompetition covenant did not prohibit him from practicing in Warsaw. In response, Spine filed a counterclaim for a preliminary and permanent injunction, seeking to prevent Dr. Nolan from practicing in Warsaw.

B. The Law

The trial court denied the injunction because Spine was not claiming that Dr. Nolan was working within 25 miles of Spine's existing offices as of June 8, 2007, the date of the employment agreement. Thus, the trial court believed that the focus of the noncompetition covenant was the date the employment agreement was executed.

Spine appealed and argued that the noncompetition covenant should be interpreted to prohibit Dr. Nolan from working within 25 miles of a Spine office or any health care facility in which Spine provided services "previously or currently" during Dr. Nolan's employment. Spine further reasoned that, although Dr. Nolan tendered his resignation on January 12, 2009, his employment did not terminate until February 24, 2009, and Spine's Warsaw office opened on February 16, 2009.

On January 20, 2010, the Court of Appeals of Indiana (the second highest State court in Indiana) ruled that the focal point of the noncompetition covenant was the date that Dr. Nolan tendered his resignation letter, and not the date of the agreement or the final date of employment. The court stressed that noncompetition covenants in employment contracts are a restraint of trade, and disfavored by the law, that a noncompetition covenant will be strictly construed against the employer, and noncompetition covenants will never be extended beyond the express terms of the covenant.

More specifically, the court ruled that "previously or currently" in the employment agreement refers to January 12, 2009, the date Dr. Nolan tendered his resignation letter. Accordingly, the court held that Dr. Nolan was not prohibited from working in Warsaw, because Spine did not have an office in Warsaw on the date Dr. Nolan tendered his resignation letter.

On April 26, 2010, in an opinion in response to Spine's motion for rehearing, the Court of Appeals of Indiana affirmed its previous ruling, and clarified its reasoning for choosing the date the retirement letter was tendered, and not the last date of employment. The court stated that its previous ruling was based on Spine's inability to explain how Dr. Nolan could have anticipated that Spine would open an office in Warsaw between the time he tendered his resignation and the final date of his employment.

The court explained that a "roving" non-compete covenant that would encompass a geographical area incapable of identification would subject Dr. Nolan to indefinite obligations following his resignation, and should not be enforceable, because a covenant not to compete must give the employee a clear understanding of what conduct is prohibited.

C. Conclusion

Although the decision of the Court of Appeals of Indiana in Spine, Sports and Pain Medicine, P.C. v Nolan is not binding in Maryland, it should remind all employers that a noncompetition covenant in an employment agreement must be precisely drafted because courts are likely to construe noncompetition covenants both strictly and against employers.