Pub. Hosp. Dist. No. 1 of King County v. Schoos (Full Text)
DO NOT CITE. SEE RAP 10.4(h).
Court of Appeals Division I
State of Washington
Opinion Information Sheet
Docket Number: 46916-9-I
Title of Case: Valley Medical Ctr, Respondent
v.
Gil & Alice Schoos, Appellant
File Date: 12/03/2001
SOURCE OF APPEAL
----------------
Appeal from Superior Court of King County
Docket No: 98-2-15586-8
Judgment or order under review
Date filed: 06/21/2000
Judge signing: Hon. Stephen G. Scott
JUDGES
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Authored by C. Kenneth Grosse
Concurring: Ronald E. Cox
Marlin J Appelwick
COUNSEL OF RECORD
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Counsel for Appellant(s)
Jay H. Zulauf
Mundt MacGregor Llp
999 3rd Ave Ste 4200
Seattle, WA 98104-4001
Christopher S. McNulty
Mundt MacGregor Llp
Ste 4200
999 3rd Ave
Seattle, WA 98104-4082
Jay H. Zulauf
Mundt MacGregor Llp
999 3rd Ave Ste 4200
Seattle, WA 98104-4001
Christopher S. McNulty
Mundt MacGregor Llp
Ste 4200
999 3rd Ave
Seattle, WA 98104-4082
Counsel for Respondent(s)
Geoffrey J. Bridgman
1601 5th Ave Ste 2100
Seattle, WA 98101
Phillip C. Raymond
Ogden Murphy Wallace
2100 Westlake Ctr Tower
1601 5th Avenue
Seattle, WA 98101
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
PUBLIC HOSPITAL DISTRICT NO. 1 )
OF KING COUNTY, d/b/a VALLEY )
MEDICAL CENTER, ) No. 46916-9-I
)
Respondent, ) DIVISION ONE
)
v. )
)
GIL SCHOOS and ALICE ('ALI') )
SCHOOS, and the marital community ) UNPUBLISHED OPINION
composed thereof, and GIL SCHOOS, )
RPT, INC., ) FILED:
)
Appellant. )
)
GROSSE, J. -- A contract for the sale of a business that allocates
one-half of the purchase price to goodwill, contains a non-compete clause,
and provides for liquidated damages consisting largely of forfeiture of the
annual payments for the goodwill that remain due at breach, is enforceable.
Liquidated damages will be upheld if the amount is a reasonable forecast of
just compensation for the harm caused by the breach, and that harm
difficult to determine. Here, the covenant not to compete was reasonable
and it was breached. At the time of that breach, Schoos was owed $180,000
on the contract for the sale of his physical therapy business to the Public
Hospital District No. 1 of King
County, d/b/a Valley Medical Center (hereinafter referred to as Valley
Medical Center). The trial court's judgment forfeiting that amount as
liquidated damages under the terms and conditions of the contract between
the parties was not error.
FACTS
Gil Schoos is a licensed physical therapist. From 1979 to 1993, he
owned and operated Renton Physical Therapy, Inc., an outpatient physical
therapy clinic located less than a mile from Valley Medical Center.
Additionally, Schoos had interests in other clinics in South King County
and in Bellevue.
In 1993, Valley Medical Center purchased Renton Physical Therapy, Inc.,
including assets and goodwill, for $600,000, attributing $300,000 each to
the assets and to the goodwill. In addition, Valley Medical Center agreed
to employ Schoos as manager of its outpatient physical therapy clinic. The
agreement included a non-compete clause with a geographical boundary of a
15-mile radius from the clinic. In addition, the agreement included a
liquidated damages clause requiring Schoos to pay Valley Medical Center an
amount equal to all compensation received by him resulting from any
activity in violation of the covenant, and to repay the $300,000 attributed
to the goodwill.
For a period after the sale, Schoos managed Valley Medical Center's clinic.
In November 1994, Schoos sold his interest in other South King County
clinics to Physiotherapy Associates, a national chain of physical therapy
clinics. Physiotherapy Associates offered Schoos a consulting position,
but Schoos declined and continued employment with Valley Medical Center.
About this time Valley Medical Center believed Schoos was violating the
terms of the non-compete agreement. Valley Medical Center complained to
Schoos and indicated it was considering invoking the liquidated damages
clause of the 1993 agreement. Negotiations ensued to resolve the dispute.
Schoos and Valley Medical Center reached a new agreement. This agreement
included Schoos's resignation and a release of claims dated June 1, 1995
reiterating the non-compete clause with the same 15-mile radius
restriction, and included a duration period of 35 months, coinciding with
the original end-date of the initial agreement. The new agreement
contained a liquidated damages clause substantially similar to the 1993
agreement, but also contained a clause requiring Schoos to forfeit all
remaining payments in the event he defaulted on his obligations. In
pertinent part, the contract provides:
B. Restatement of Covenant Not to Compete, Non-Solicitation,
Nondisclosure. Employee acknowledges . . . . Therefore, Employee agrees as
follows:
1. Non-Competition.
a. As a significant inducement to {Valley Medical Center} to enter into
and to perform its obligations under this Agreement, Employee agrees that
until May 3, 1998, he shall not, within a Fifteen (15) mile radius of
{Valley Medical Center} in Renton, Washington (hereinafter the 'Radius'),
directly or indirectly, either for himself of any other person or entity
engage in, permit his name to be used by, render services for or otherwise
assist in or participate in any manner or capacity with any entity that
engages in any business similar to or in competition with the Facility as
now conducted or as presently proposed to be conducted.
. . . .
d. . . . Further, Paragraph B1(a), above, shall not prevent Employee
from working for any entity in the business of physical therapy which
operates within the Radius, so long as such entity also has an office or
clinic outside of the Radius and Employee performs his duties and
responsibilities entirely outside the Radius for such office or clinic, and
(i) Employee does not have management responsibilities related to any
business operations of the entity within the Radius, or (ii) Employee does
not solicit business opportunities (not including patients or physicians'
referrals) for any entity that operates within the Radius so as to increase
the competitiveness of the entity within the Radius, without the prior
written consent of {Valley Medical Center}, which consent shall not be
unreasonably withheld.
2. Non-Solicitation. Until May 3, 1998, Employee will refrain from:
a. Contacting organizations that utilize {Valley Medical Center's}
services or physicians who refer patients to {Valley Medical Center}, for
the purpose of soliciting business or establishing relationships for any
business entity within the Radius that directly or indirectly competes with
{Valley Medical Center}; and
b. Contacting patients of {Valley Medical Center} for the purpose of
soliciting business or establishing a relationship for any business entity
that directly or indirectly competes with {Valley Medical Center} within
the Radius.
. . . .
5. Remedies. With respect to each breach or threatened breach by
Employee of any of the terms and covenants contained in this Agreement,
{Valley Medical Center}, in addition to all other remedies available at law
or in equity, will be entitled to enjoin the commencement or continuance of
any such violation and may apply for entry of an immediate restraining
order or injunction.
In addition, Employee agrees, upon demand, to immediately account for and
pay over to {Valley Medical Center} an amount equal to all compensation, of
any kind directly or indirectly received by, or for the use or benefit of
Employee, resulting from any activity in violation of the foregoing
covenants, including but not limited to all funds received from {Valley
Medical Center} pursuant to Paragraph B6, below.
6. Payment of Compensation for Non-Compete. The parties agree that
this paragraph shall supersede any and all further financial obligations of
{Valley Medical Center} under the Purchase and Sale Agreement. Upon
execution of this Agreement, Employee shall return to {Valley Medical
Center} the original Promissory Note dated May 3, 1993, attached to the
Purchase and Sale Agreement as Exhibit C. Provided that Employee is not in
default of his obligations hereunder, {Valley Medical Center} shall make
the following payments to Employee:
$60,000.00 upon receipt of the Promissory Note
$30,000.00 on or before May 3, 1996
$30,000.00 on or before May 3, 1997
$30,000.00 on or before May 3, 1998
In addition, {Valley Medical Center} shall make the following payments to
the trust account of Employee's attorneys, Jameson Babbitt Stites &
Lombard, PLLC, Attorneys at Law (hereinafter the 'Attorneys'), for the
benefit of Employee to be held with interest thereon until May 3, 1998, as
security for Employee's performance of this Agreement:
$30,000.00 on or before May 3, 1996
$30,000.00 on or before May 3, 1997
$30,000.00 on or before May 3, 1998
After his negotiated resignation from Valley Medical Center, Schoos became
Physiotherapy Associates' Regional Development Coordinator for the Western
United States. He worked for Physiotherapy Associates from January 1996
through the spring of 1998, mainly developing physical therapy clinics
outside of the state. However, Valley Medical Center believed Schoos did
not refrain from professional activities prohibited by the non-compete
agreement. It concluded that Schoos had financial interests in a clinic
within the prohibited radius and inferred that he had been treating Valley
Medical Center patients there, as well as doing other work not permitted
under the agreement. Valley Medical Center also believed that Schoos was
involved in Physiotherapy Associates' acquisition of clinics within the non-
compete geographical zone. Most importantly, Valley Medical Center claimed
that Schoos played a significant role in opening a new Renton clinic in the
same building that housed Schoos's original physical therapy clinic. By
this time, Valley Medical Center had moved its clinic to the Valley Medical
Center campus.
Valley Medical Center filed its complaint against Schoos alleging breach of
the non-compete agreement and seeking enforcement of the liquidated damages
clause. Schoos filed a counterclaim seeking the remaining goodwill payment
of $60,000 he argued Valley Medical Center owed to him under the 1995
agreement.
Valley Medical Center sought summary judgment to determine as a matter of
law that Schoos breached the non-compete agreement and that the liquidated
damages clause was enforceable. The trial court granted the motion in
part, determining that the 1995 non-compete agreement was reasonable as a
matter of law, and that it prohibited Schoos from physically working within
15 miles of Valley Medical Center on matters for Physiotherapy Associates
which was competing with Valley Medical Center. The trial court found on
the undisputed facts that there was a breach of the agreement. The trial
court indicated that although it found a breach, whether the breach was
material or whether there was resulting damage were issues for a jury to
determine.
At trial, the parties stipulated that the trial judge would decide the
issues related to the enforceability of the liquidated damages clause and
determine any amount to be awarded thereunder. The trial court reserved
ruling on those issues and instructed the jury. The jury deliberations
included the issue of Valley Medical Center's actual damages and Schoos's
counterclaim. It awarded $60,000 in actual damages to Valley Medical
Center and denied the counterclaim.
After supplemental briefing, the trial court issued a letter ruling
upholding the enforceability of the liquidated damages provision. The
trial court held that $180,000 in payments made by Valley Medical Center to
Schoos under the 1995 agreement be returned along with the $8,000 Schoos
received as a bonus for the startup of Physiotherapy Associates' Renton
clinic. The court determined that the actual damages of $60,000 found by
the jury at trial was not disproportionate to the liquidated damages of
$188,000 and entered judgment for the amount of liquidated damages. The
court awarded prejudgment interest in the amount of $81,900 and granted
Valley Medical Center's request for attorney fees and costs in the amount
of $219,796.40. Schoos appeals.
DISCUSSION
Schoos claims the trial court erred in granting partial summary
judgment regarding the enforceability, interpretation and violation of the
non-compete clause.1
There is a three-part test for the reasonableness of a covenant not to
compete. Originally established in Racine v. Bender,2 and stated in
Knight, Vale & Gregory v. McDaniel,3 and restated in Perry v. Moran:4
Whether a covenant is reasonable involves a consideration of three factors:
(1) whether restraint is necessary for the protection of the business or
goodwill of the employer, (2) whether it imposes upon the employee any
greater restraint than is reasonably necessary to secure the employer's
business or goodwill, and (3) whether the degree of injury to the public is
such loss of the service and skill of the employee as to warrant
nonenforcement of the covenant.
The court in Knight applied the test to a covenant not to compete signed by
an employee of an accounting firm agreeing to refrain from performing work
for the employer's former clients for a period of three years. The Knight
court upheld the granting of summary judgment to the employer stating:
Absent disputed facts, the construction or legal effect of a contract,
including the 'reasonableness' of a covenant not to compete, is determined
by the court as a matter of law. Marquez v. UW, 32 Wn. App. 302, 648 P.2d
94 (1982); Alexander & Alexander, Inc. v. Wohlman, 19 Wn. App. 670, 684,
578 P.2d 530 (1978). The primary dispute between the parties
concerns . . . the reasonableness of its covenant not to compete. The
facts surrounding entering into the agreement and the acts constituting
violation of the covenant are undisputed. Therefore, resolution of the
issue by summary judgment was appropriate. Yeats v. Estate of Yeats, 90
Wn.2d 201, 204, 580 P.2d 617 (1978).{5}
Schoos alleges that unlike the facts in Knight, here there were
disputed facts regarding whether he actually violated the non-compete
clause and therefore the trial court should not have granted summary
judgment. We disagree. Under the evidence presented, the trial court
properly determined the non-compete clause was reasonable and that Schoos
violated it.
A review of the record indicates there is no substantial dispute about
the reasonableness of the covenant not to compete. Schoos's claim that the
trial court erred because there is a question of fact as to whether he
materially violated the non-compete agreement is not supported because that
was not the determination made by the trial court on summary judgment.
Based on the undisputed facts before it, the trial court correctly
determined, as do we, that at a minimum Schoos violated the non-compete
provision as a matter of law. But the court left the determination as to
whether the violation was material or constituted substantial interference
with Valley Medical Center's business to the jury and the record contains
sufficient evidence to sustain the jury's verdict in that regard.6
Schoos argues that as the contract allows him to be employed by a
competitor, no violation occurred. Although it is true that the agreement
contemplated that Schoos might be employed by a competitor, that employment
was limited by the very provisions of the covenant not to compete.
Washington courts recognize that in the context of covenants not to
compete, where an employee has reserved the right to be employed by a
competitor, a particular activity will only be considered a violation if it
results in a substantial interference with the business that is sought to
be protected by the covenant.7 Here, the question of whether there was
substantial interference resulting in damages properly remained before the
jury. The summary judgment merely determined that the covenant not to
compete was reasonable and that there had been at least a minimal breach.
Our review of the record indicates that the trial court's determination on
summary judgment that the covenant not to compete was valid, and that
Schoos violated the non-compete agreement was correct.8
Next, Schoos claims the trial court erred in upholding the provision
for liquidated damages contained within the broader non-compete provision.
Specifically, Schoos challenges the court's finding that three years' worth
of payments for goodwill equaling $180,000 plus the $8,000 Schoos received
for helping to startup Physiotherapy Associates' Renton clinic was
forfeited as liquidated damages.
The Washington Supreme Court has considered the subject of liquidated
damages in two oft-cited cases, Watson v. Ingram9 and Wallace Real Estate
Investment, Inc. v. Groves.10 Liquidated damages clauses are favored in
Washington, and courts will uphold them if the amounts involved do not
constitute a penalty.11 As noted in Watson, Washington courts have applied
a two-part test from the Restatement of Contracts sec. 339, at 532 (1932).12
Liquidated damages clauses are upheld if (1) the amount fixed is a
reasonable forecast of just compensation for harm caused by breach, and (2)
the harm is difficult to ascertain.13 The test is applied as of the time of
the formation of the contract, not at the time of trial.14 Actual damages
are irrelevant except as evidence of the reasonableness of the liquidated
damages estimated at the time of the contract formation.15 Actual damages
may also be considered where they are so disproportionate to the estimate
that to enforce the estimate would be unconscionable.16
In Walter Implement, Inc. v. Focht,17 the Supreme Court stated: ''A
provision in a contract which bears no reasonable relation to actual
damages will be construed as a penalty.'' The distinction between
liquidated damages and a penalty was set forth in Management, Inc. v.
Schassberger:
'As distinguished from liquidated damages, a penalty is a sum inserted
in a contract, not as the measure of compensation for its breach, but
rather as a punishment for default, or by way of security for actual
damages which may be sustained by reason of nonperformance, and it involves
the idea of punishment. It is the payment of a stipulated sum on breach of
contract, irrespective of the damage sustained. Its essence is a payment
of money stipulated as in terrorem of the offending party, while the
essence of liquidated damages is a genuine covenanted pre-estimate of
damages.'{18}
In the case before us, we can infer from the jury's verdict that it
found a material breach of the agreement by its award of $60,000 in actual
damages. In turn, the trial court awarded $188,000 to Valley Medical
Center as liquidated damages. As indicated in Wallace, the amount of
actual damages may be considered 'where they are so disproportionate to the
estimate that to enforce the estimate would be unconscionable.'19 With the
exception of the $8,000 bonus, which we find to be a penalty and not part
of any reasonable pre-estimate, we agree with the trial court that the
liquidated damages in the amount of $180,000, representing three years of
goodwill, was a reasonable pre-estimate made at the time of the contract
and not unconscionable.
Schoos argues that the trial court erred in determining that
prejudgment interest is available on the liquidated damages amount, and
that attorney fees are available. 'Prejudgment interest is granted to
compensate a party for the loss of use of money to which he was entitled.'20
An award of prejudgment interest is proper when the nature of the
underlying claim is liquidated.21 A claim is liquidated where the evidence
furnishes the data and, if believed, makes it possible to compute the
amount with exactness, without reliance on opinion or discretion.22 A claim
is unliquidated if the actual principal amount must be arrived at by a
determination of reasonableness.23 Here, a determination of the amount of
liquidated damages did not require the trial court to exercise its
discretion. The amount determined here was liquidated and the award of
prejudgment interest was proper.24
Schoos appeals the grant of attorney fees below to Valley Medical
Center. Schoos argues that the fees should not have been awarded, but does
not attack the amount of the award as unreasonable. Both parties request
attorney fees on appeal.
The 1995 agreement provides for attorney fees and costs to the prevailing
party. We have determined that the partial summary judgment was
appropriate, that the jury verdict was proper but subsumed in the
liquidated damages provision, which we have also found is enforceable.
Fees and costs for Valley Medical Center were appropriate. Fees and costs
are awarded to Valley Medical Center on appeal.
WE CONCUR:
1The usual standard of review on summary judgments applies. Wilson v.
Steinbach, 98 Wn.2d 434, 437, 656 P.2d 1030 (1982).
2Racine v. Bender, 141 Wash. 606, 611-12, 252 P. 115 (1927).
3Knight, Vale & Gregory v. McDaniel, 37 Wn. App. 366, 369, 680 P.2d 448
(1984).
4Perry v. Moran, 109 Wn.2d 691, 698, 748 P.2d 224 (1987), modified, 111
Wn.2d 885, 766 P.2d 1096 (1989).
5Knight, 37 Wn. App. at 368.
6See court's instructions to the jury nos. 7, 8, 12, 13, 14, and 16.
Schoos makes no claim on appeal that he excepted to the instructions given
by the court, or that any of his proposed instructions that were not given
prevented him from arguing his case.
7Management, Inc. v. Schassberger, 39 Wn.2d 321, 329, 235 P.2d 293 (1951).
8Further, Schoos's argument that the agreement was terminated once Valley
Medical Center moved the clinic to its campus has no merit. Nothing in the
agreement can be read to so vitiate the agreement.
9Watson v. Ingram, 124 Wn.2d 845, 881 P.2d 247 (1994).
10Wallace Real Estate Inv., Inc. v. Groves, 124 Wn.2d 881, 881 P.2d 1010
(1994).
11Wallace, 124 Wn.2d at 886 (citing Walter Implement, Inc. v. Focht, 107
Wn.2d 553, 558, 730 P.2d 1340 (1987)).
12Watson, 124 Wn.2d at 850.
13Management, Inc., 39 Wn.2d at 327-28; Watson, 124 Wn.2d at 850.
14Watson, 124 Wn.2d at 851.
15Watson, 124 Wn.2d at 851.
16Wallace, 124 Wn.2d at 894.
17Walter Implement, Inc. v. Focht, 107 Wn.2d 553, 559, 730 P.2d 1340 (1987)
(quoting Northwest Collectors, Inc. v. Enders, 74 Wn.2d 585, 594, 446 P.2d
200 (1968)).
18Management Inc., 39 Wn.2d at 326 (quoting 15 Am. Jur. Damages sec. 241, at
672).
19Wallace, 124 Wn.2d at 893-94 (stating that a provision in a contract that
bears no reasonable relation to actual damages will be construed as a
penalty and that knowledge of the amount of actual damages suffered may
have a role when liquidated damages greatly exceed the injury suffered);
James A. Weisfield, Note, 'Keep the Change!': A Critique of the No Actual
Injury Defense to Liquidated Damages--Lind Building Corp. v. Pacific
Bellevue Developments, 66 Wash. App. 70, 776 P.2d 977 (Div. 1), review
denied, 113 Wash. 2d 1021, 781 P2d 1322 (1989), 65 Wash. L. Rev. 977, 982
(1990) (to be reasonable, a liquidated damages clause must not fix damages
at an amount disproportionate to the probable actual damages).
20Jones v. Best, 134 Wn.2d 232, 242, 950 P.2d 1 (1998) (citation omitted).
21Pub. Util. Dist. 1 of Klickitat County v. Int'l Ins. Co., 124 Wn.2d 789,
810, 881 P.2d 1020 (1994).
22King County v. Puget Sound Power & Light Co., 70 Wn. App. 58, 61, 852 P.2d
313 (1993).
23Kiewit-Grice v. State, 77 Wn. App. 867, 872, 895 P.2d 6 (1995).
24King Aircraft Sales, Inc. v. Lane, 68 Wn. App. 706, 720, 846 P.2d 550
(1993).
