March 9, 2018
In a landmark decision, the Colorado Court of Appeals has overhauled and potentially deemed most, if not all, liquidated damages provisions in physician non-compete agreements unenforceable. In Crocker v. Great Colorado, the Colorado Court of Appeals held that a liquidated damages provision in a physician non-compete agreement is enforceable only if the amount is reasonably related to an injury determined upon termination of employment, not related to any prospective injury. This decision will have a dramatic impact on the enforceability of current liquidate damages provisions and on a practice group’s ability to draft enforceable liquidated damage provisions moving forward.
In Colorado, non-compete agreements between physicians, which restrict the right of a physician to practice medicine, are statutorily void under C.R.S. 8-2-113(3). However, the statute specifically allows for the enforcement of liquidate damage provisions for the payment of damages “in an amount that is reasonably related to the injury suffered by reason of termination of the agreement.” Id. This statutory language drives the court’s landmark decision in Crocker v. Great Colorado.
In Crocker, an anesthesiologist signed an employment agreement which contained a provision for liquidated damages to be paid in the event that the employee violated a “Damages Upon Competition” provision. That provision states that if the employee competes with the employer by participating in the practice of anesthesia within fifteen miles of a hospital served by the employer in the two years following termination, he must pay liquidated damages as calculated by a formula in the agreement. After the anesthesiologist left the employer, he signed an employment agreement with a different anesthesia practice and began practicing at hospitals within the noncompete area. His previous employer brought suit, claiming over $200,000 in damages calculated by the formula within the liquidated damages provision. After the trial court found no such injury, the employer appealed.
On appeal, the Court held that the statutory language “directs that a damages term in a noncompete provision such as here is enforceable only if the amount (whether a fixed sum or calculated pursuant to a formula) is reasonably related to ‘the injury suffered,’ in the past tense.” (Emphasis added). Therefore, under the plain language of the statute, the reasonableness of the relationship between the two amounts must be actually demonstrated, and “it cannot be analyzed prospectively; by definition it can only be determined upon termination of employment.” (Emphasis added). Based on this language, the court held that there was no reasonable relationship between the actual injury suffered and the $207,755 calculated pursuant to the employer’s prospective liquidated damages formula.
This holding will have a major impact on how courts enforce similar liquidated-damages provisions. Courts must determine that the provision is reasonably related to the injury actually suffered at the time of termination. Under such analysis, courts can now hold that liquidated damages provisions, which include complex prospective damage formulas such as the one in Crocker, are statutorily unenforceable. Lawyers and physicians alike will have to redraft current and future noncompete provisions to take into account the court’s decision in Crocker.
This article is intended to provide general information and, therefore, should not be treated as legal advice. If you have questions about a specific legal issue, you should seek the advice of a qualified attorney.