THE BOARD OF REGENTS, STATE OF IOWA and THE UNIVERSITY OF IOWA, Plaintiffs - Appellants, vs. DR. THOMAS WARREN, Defendant - Appellee.
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IN THE COURT OF APPEALS OF IOWA
No. 8-620 / 08-0017
Filed November 26, 2008
THE BOARD OF REGENTS, STATE OF IOWA
and THE UNIVERSITY OF IOWA,
Plaintiffs-Appellants,
vs.
DR. THOMAS WARREN,
Defendant-Appellee.
_______________________________________________________________
Appeal from the Iowa District Court for Johnson County, Kristin L. Hibbs,
Judge.
Plaintiffs appeal the district court’s denial of their request for injunctive
relief based on a covenant not to compete. AFFIRMED.
Thomas J. Miller, Attorney General, and George A. Carroll, Assistant
Attorney General, for appellants.
David J. Dutton and Erin P. Lyons of Dutton, Braun, Staack & Hellman,
P.L.C., Waterloo, for appellee.
Considered by Vogel, P.J., and Miller, J., and Zimmer, S.J.*
*Senior Judge assigned by order pursuant to Iowa Code section 602.9206
(2007).
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MILLER, J.
I.
Background Facts & Proceedings
In July 2001, Dr. Thomas Warren became employed as an assistant
professor with the College of Medicine at the University of Iowa in the
Department of Internal Medicine’s Division of Hematology/Oncology, for an initial
term of three years. Dr. Warren was interested in conducting cancer research,
and he was employed with the expectation that he would spend about eighty
percent of his time conducting research. Dr. Warren was given laboratory space
and allocated $40,000 each year for the first two years for his research. This
allowed him to hire a research assistant and purchase supplies. The University
expected that Dr. Warren would secure independent funding for his research
after the first two years.
Dr. Warren participated in the Faculty Practice Plan, which meant he was
required to provide medical care to patients as directed by the University. In
addition to his research time, Dr. Warren worked one day each week at Cancer
Care of Iowa City, and he also spent about two months each year covering for
other physicians at the University of Iowa Hospitals and Clinics. The University
received the revenue from the time Dr. Warren and other faculty members spent
treating patients, and then used those funds to pay faculty salaries and other
expenses.
Dr. Warren signed a non-compete agreement on July 17, 2001, which
provided:
Upon my voluntary termination of my appointment as a
member of the salaried faculty of the College of Medicine, or as an
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appointee as an Associate in the College of Medicine, I will refrain
for a two year period from engaging in the practice of (medicine,
psychology, etc.) in any community in which I have practiced
through any intramural or extramural College of MedicineSponsored Program. This restriction will not be enforceable if the
College of Medicine does not, directly or indirectly, arrange for
(physician, psychologist, etc.) services in the community within 180
days of my termination.
For purposes of this paragraph,
“community” means any municipality in which I practiced through a
College of Medicine-Sponsored Program and the surrounding
geographic area defined by a 50 mile radius from the practice
site(s).
Under extraordinary circumstances, as determined by the
Faculty Practice Plan Management Committee, the provisions of
this non-compete agreement may be waived, in whole or in part.
Dr. Warren’s position as an assistant professor was a tenure track
position. Assistant professors are generally given seven years to achieve tenure.
The ability to secure funding and to publish are important considerations in
achieving tenure. If a person does not achieve tenure they are terminated by the
University.
Dr. Warren’s performance was reviewed on November 7, 2003, by the
Department of Internal Medicine Council on Promotions. The minutes of the
meeting show Dr. Warren “experienced a slow start with scholarship and funding
applications.” Dr. Warren was given a one-year reappointment, which meant he
“must make important strides very soon or perhaps consider a change in track.”
Dr. Warren’s performance was reviewed again on November 4, 2004.
The committee had the same concerns as a year earlier--lack of funding and
scholarly output. A suggestion was made about moving Dr. Warren to a clinical
position, which would not involve research. Dr. Warren was reappointed for a
term of two years.
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After these reviews Dr. Warren came to realize he was not going to
achieve tenure. In March 2005 the University cut off his funding for research.
Dr. Warren could no longer hire a research assistant, or continue with his
research.
Without funding he could not do the research needed to seek
additional funding, and he could not publish. Dr. Warren testified that at that
point the University had made a decision it would not allow him to continue on
the tenure track doing research.
Dr. Warren’s supervisor, Dr. Raymond Hohl, suggested that Dr. Warren
take a full-time job at Cancer Care, and become a clinical faculty member. A
similar suggestion was made by the head of the Department of Internal Medicine.
Dr. Warren testified he could “be a much better doctor in the community than I
can clinically at the University.”
He stated the only reason he joined the
University faculty was because he wanted to pursue laboratory research. Dr.
Warren resigned his position with the University. He made arrangements for his
former patients at Cancer Care to see other doctors at that facility. Dr. Warren
did not petition the University to waive the provisions of the non-compete
agreement.
Dr. Warren signed an employment agreement with Iowa Blood and
Cancer Care, P.L.C. (IBCC) in Cedar Rapids on June 2, 2005. Cedar Rapids is
within fifty miles of Iowa City.
Dr. Chirantan Ghosh, who hired Dr. Warren,
testified that Dr. Warren brought no patients to IBCC.1 IBCC suffered a loss
hiring Dr. Warren for the first ten months while it paid him a salary and he was
Two of Dr. Warren’s patients from Cancer Care of Iowa City later sought him out at
IBCC. One patient worked in the same building where IBCC was located, and another
was unhappy with her diagnosis at Cancer Care.
1
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building up a patient base in Cedar Rapids. Dr. Warren has referred several of
his patients to the University for care they could not receive through IBCC.
On August 26, 2005, the Board of Regents and the University (together
University) filed an action against Dr. Warren seeking an injunction to prohibit
him from practicing medicine in violation of the non-compete agreement. The
University presented evidence that it competed against facilities in Linn County
for patients.
After Johnson County, the greatest number of patients for the
University Hospitals and Clinics come from Linn County. The University spent an
average of about $41,000 per year in 2004, 2005, and 2006 in advertising in Linn
County the services of its Holden Comprehensive Cancer Care Center.2
There is a shortage of oncologists in the State of Iowa.
The federal
government has determined that the Cedar Rapids area is underserved by
physicians.
Because of this, the number of visas for physicians from other
countries to come to the area had been increased. Dr. Ghosh, who established
IBCC, testified he did not believe IBCC was in competition with the University.
He stated he believed the two entities were compatible because IBCC referred
many patients to the University, and in fact IBCC had increased the number of
those referrals in recent years. Dr. Ghosh pointed out that cancer is a chronic
disease, and many of IBCC’s patients did not want to have a long drive to see
2
The evidence appears to indicate, but does not make clear, that the services of the
Holden Comprehensive Cancer Care Center include some or all of the clinical services
of the Department of Internal Medicine’s Hematology/Oncology Division. Assuming such
to be true, the evidence also does not show what proportion of the Center’s services
consist of the services of the Division, or what part, if any, of the $41,000 per year in
advertising expenses relate to the clinical services of the Division. It is thus impossible
to determine from the existing record what part, if any, of the advertising expenses relate
to the services of the Division.
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their physician. Furthermore, Dr. Ghosh testified Dr. Warren had not brought any
patients with him, and he had not taken any patients away from the University.
The district court issued a decision on May 11, 2007, denying the
University’s request for an injunction. The court found there was not sufficient
evidence that the non-compete agreement was reasonably necessary for the
protection of the University’s business. The court found there was no evidence
the University suffered a financial loss when Dr. Warren left.
The court
determined the agreement was unreasonably restrictive because it prohibited Dr.
Warren from practicing medicine within fifty miles, rather than limiting the
restriction to the specific type of medicine practiced by Dr. Warren. The court
also concluded the public interest weighed heavily on the side of sufficient health
care in Linn County and against enforcement of the non-compete agreement.
Based on these conclusions, the court determined the University failed to meet
its burden to show an injunction was clearly required in this case. The University
appeals.
II.
Standard of Review
A court has equitable jurisdiction to issue injunctions. PIC USA v. North
Carolina Farm P’ship, 672 N.W.2d 718, 722 (Iowa 2003). For this reason, our
review is de novo. Iowa R. App. P. 6.4; Max 100, L.C. v. Iowa Realty Co., Inc.,
621 N.W.2d 178, 180 (Iowa 2001). In equitable proceedings we give weight to
the factual findings of the district court, especially concerning the credibility of
witnesses, but are not bound by the court’s findings. Iowa R. App. P. 6.14(6)(g).
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A request for an injunction should be granted with caution and only when clearly
required. Presto-X Co. v. Ewing, 422 N.W.2d 85, 89 (Iowa 1989).
III.
Merits
Restrictive covenants regarding physicians have been recognized as valid
and enforceable in Iowa.
N.W.2d 678, 681 (1962).
Cogley Clinic v. Martini, 253 Iowa 541, 546, 112
Non-compete agreements, otherwise known as
covenants not to compete, are not generally favored, however, because they “are
viewed as restraints of trade which limit an employee’s freedom of movement
among employment opportunities . . . .” Revere Transducers, Inc. v. Deere &
Co., 595 N.W.2d 751, 761 (Iowa 1999).
A restrictive covenant is strictly
construed against the party seeking injunctive relief. Cogley Clinic, 253 Iowa at
546, 112 N.W.2d at 681 (noting restrictive covenants are in partial restraint of
trade and are approved with some reluctance).
To determine whether a restrictive covenant is enforceable, we consider:
(1) whether the restriction is reasonably necessary for the protection of the
employer’s business; (2) whether it is unreasonably restrictive of the employee’s
rights; and (3) whether it is prejudicial to the public interest. Revere Transducers,
595 N.W.2d at 761. The restriction must be no greater than that necessary to
protect the employer.
Mutual Loan Co. v. Pierce, 245 Iowa 1051, 1055, 65
N.W.2d 405, 407 (1954).
“Essentially, these rules require us to apply a reasonableness standard in
maintaining a proper balance between the interests of the employer and the
employee.”
Iowa Glass Depot, Inc. v. Jindrich, 338 N.W.2d 376, 381 (Iowa
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1983). The facts and circumstances of each individual case must be carefully
considered to determine whether a restrictive covenant is reasonable. Id. at 382.
“The validity of the contract in each case must be determined on its own facts
and a reasonable balance must be maintained between the interests of the
employer and employee.” Baker v. Starkey, 259 Iowa 480, 495, 144 N.W.2d
889, 897-98 (1966).3
A.
“The employer has the initial burden to show that enforcement of
the covenant is reasonably necessary to protect its business.” Dental East, P.C.
v. Westercamp, 423 N.W.2d 553, 555 (Iowa Ct. App. 1988); see also Ma & Pa,
Inc. v. Kelly, 342 N.W.2d 500, 502 (Iowa 1984) (“The burden of proving
reasonableness is upon the employer who seeks to enforce such a covenant.”
(citation omitted)).
In considering whether a restrictive covenant is reasonably necessary for
the protection of the employer’s business, we consider whether the employee
had close proximity to customers. Revere Transducers, 595 N.W.2d at 761. An
important consideration is whether the employee has personal contact with the
employer’s customers. Orkin Exterminating Co. v. Burnett, 259 Iowa 1218, 1222,
146 N.W.2d 320, 324 (1966). “Where there is little customer contact, we have
refused to enforce the covenant on the basis that the restriction was
unreasonable.” Iowa Glass, 338 N.W.2d at 382. A restrictive covenant is more
likely to be upheld “when the employee is placed in a position of close customer
3
Although Iowa Glass Deport and Baker speak of balancing the interests of the
employer and employee, the later Revere Transducers makes clear that the public
interest also must be considered. See Revere Transducers, 595 N.W.2d at 761.
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relationship and has an opportunity to pirate customers from the employer at the
termination of his employment.” Id. at 381.
As noted above, Dr. Warren spent eighty percent of his time conducting
research, and during this time he had no contact with patients. Dr. Warren spent
some time covering for other physicians at the University Hospitals and Clinics,
and all parties agreed the patients he saw there were not his patients. There
was no evidence he developed a close customer relationship with these patients.
Dr. Warren additionally spent one day each week at Cancer Care. While
he had a physician-patient relationship with these patients, the record is also
clear that he arranged for all of these patients to remain in the care of other
physicians at Cancer Care. Dr. Warren later saw two of these patients at IBCC.
One patient worked in the same building as IBCC, and Dr. Warren testified he
saw this patient in conjunction with a physician at the University. Another patient
called Dr. Warren after she became unhappy with the recommendation of a
physician at Cancer Care. Dr. Warren referred this patient for radiation therapy
at the University. We conclude Dr. Warren did not attempt to solicit or “pirate”
the patients of Cancer Care after he left his employment there.
In considering whether a restriction is reasonably necessary for an
employer’s business, we also look to whether the employee has obtained
confidential knowledge and the nature of the business and the occupation.
Revere Transducers, 595 N.W.2d at 761; Orkin Exterminating, 259 Iowa at 1223,
146 N.W.2d at 324. Dr. Warren received his training as a physician prior to his
employment as a faculty member of the University. There was no evidence that
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while employed as a faculty member he received “special training or peculiar
knowledge that would allow him to unjustly enrich himself at the expense of his
former employer.” See Iowa Glass, 338 N.W.2d at 382. Dr. Warren testified that
in treating patients he used information generally known to those practicing
hematology and oncology.
In Cogley Clinic, 253 Iowa at 548, 112 N.W.2d at 682, a case involving a
restrictive covenant signed by a physician employed by a clinic, the court noted
the clinic had invested in the promotion of the physician in the community. The
physician had been introduced, sponsored, and recommended in the community
by the clinic for several years. Cogley Clinic, 253 Iowa at 549, 112 N.W.2d at
682. In the present case, however, there was no evidence the University had
promoted Dr. Warren within the community as a physician. The University did
not expend any money to obtain patients for Dr. Warren or to establish a clinical
practice for him.
Looking at all of the facts and circumstances of this case, we determine
the University has not met its burden to show the restriction was reasonably
necessary for the protection of the University’s business. The University has not
shown that it suffered or will suffer a loss of business due to the practice of
medicine in Cedar Rapids by Dr. Warren.
B.
The second element to consider is whether the restrictive covenant
is unreasonably restrictive of the employee’s rights. Revere Transducers, 595
N.W.2d at 761.
A covenant will not be upheld if it is oppressive or creates
hardships for the employee that are out of proportion to the benefit to the
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employer.
Dental East, 423 N.W.2d at 555.
Restrictive covenants must be
tightly limited as to both time and area. Lemmon v. Hendrickson, 559 N.W.2d
278, 282 (Iowa 1997). A restrictive covenant “must be no greater than necessary
to protect the interests of the employer.” Mutual Loan Co., 245 Iowa at 1055, 65
N.W.2d at 407.
The non-compete agreement signed by Dr. Warren does not appear to be
unduly restrictive as to time (two years) or area (fifty miles). However, because
we find, as the district court did, that the first and third elements identified in
Revere Transducers must be resolved against the University, we conclude we
need not decide whether this second element also militates against enforcement
of the non-compete agreement.
C.
The third element is whether the restrictive covenant is prejudicial
to the public interest. Revere Transducers, 595 N.W.2d at 761. “Where the
basic contract is fair and equitable, such covenants do not violate public policy.”
Orkin Exterminating, 259 Iowa at 1223, 146 N.W.2d at 324. The party asserting
a restrictive covenant is contrary to public policy has the burden of proof on the
issue. Cogley Clinic, 253 Iowa at 550, 112 N.W.2d at 682.
In Cogley Clinic, a physician was restricted from practicing within twentyfive miles of Council Bluffs for three years. Id. The court considered the great
number of doctors practicing in Council Bluffs and Omaha, and concluded, “[t]he
public welfare is not seriously involved in this case.” Id. In the present case,
however, Dr. Warren presented testimony that the federal government had
designated Cedar Rapids as underserved by physicians, and the visa quota for
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the area had been increased. Based on this shortage of physicians, the Cedar
Rapids community would be negatively impacted if Dr. Warren were not
permitted to treat cancer patients there.
We concur in the district court’s conclusion:
The evidence establishing the current atmosphere in Linn
County with regard to the treatment of cancer patients weighs
heavily on the side of that public interest for appropriate and
sufficient health care and in favor of non-enforcement of the noncompete clause. On balance, the Court finds the public interest in
health care must prevail.
After carefully considering and weighing the interests of the parties, we
conclude that enforcement of the non-compete agreement would not be
reasonable under the facts of this case. See Iowa Glass, 338 N.W.2d at 381
(noting we must “apply a reasonableness standard in maintaining a proper
balance between the interests of the employer and the employee”). There was a
lack of evidence to show enforcement of the agreement was reasonably
necessary to protect the employer. Balancing against this, there was evidence to
show the non-compete agreement was unreasonably restrictive to Dr. Warren
and was prejudicial to the public interest.
We affirm the decision of the district court denying the University’s request
for an injunction against Dr. Warren.
AFFIRMED.
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