Opinion
1 CA-CV 22-0271
02-28-2023
CLIFFORD B. JONES, Plaintiff/Appellant, v. THE CENTER FOR ORTHOPEDIC AND RESEARCH EXCELLENCE, INC., et al., Defendants/Appellees.
Dickinson Wright PLLC, Phoenix By David G. Bray, Bennett Evan Cooper, Paxton D. Endres Counsel for Plaintiff/Appellant Perkins Coie LLP, Phoenix By P. Derek Petersen, Benjamin C. Calleros, Margo R. Casselman Counsel for Defendants/Appellees
Not for Publication - Rule 111(c), Rules of the Arizona Supreme Court
Appeal from the Superior Court in Maricopa County No. CV2020-004096 The Honorable Daniel G. Martin, Judge.
COUNSEL
Dickinson Wright PLLC, Phoenix By David G. Bray, Bennett Evan Cooper, Paxton D. Endres Counsel for Plaintiff/Appellant
Perkins Coie LLP, Phoenix By P. Derek Petersen, Benjamin C. Calleros, Margo R. Casselman Counsel for Defendants/Appellees
Presiding Judge Jennifer M. Perkins delivered the decision of the Court, in which Judge James B. Morse Jr. and Judge Michael J. Brown joined.
MEMORANDUM DECISION
PERKINS, Judge:
¶1 Plaintiff Clifford B. Jones sought judgment declaring unenforceable a covenant in a business contract he entered with the Center for Orthopedic and Research Excellence, Inc. ("the Center"). The superior court granted summary judgment against Jones, concluding that he breached the business contract and must pay liquidated damages. Jones appeals and, for the following reasons, we affirm.
FACTS AND PROCEDURAL BACKGROUND
¶2Clifford B. Jones is an orthopedic trauma surgeon currently employed with Dignity Health. He was previously employed with the Center. While employed with the Center, he signed several agreements with the Center and its affiliates, including Healthcare Outcomes Performance Company ("HOPCo"). The only agreement subject to this appeal is the December 2018 purchase and sale agreement with HOPCo ("the Agreement"). Through the Agreement, HOPCo bought 33% of the Center and the Center's shareholders, including Jones, sold their interests in the Center to HOPCo. For his interest in the Center, Jones received a Shareholder Distribution Payment of $349,067.54.
¶3 Article VI, § 6.2 of the Agreement contains a "Restriction on Competition," which prevented shareholders, including Jones, from engaging or assisting in any "Competing Business" within the "Restricted Territory" before the end of a five-year term. But under § 6.5, if a selling shareholder stops working for HOPCo, the shareholder agrees to pay the "Shareholder Termination Payment" ("Termination Payment") and be released from the restrictive covenants. The termination payment amount starts at $300,000 and, using a multiplier, the payment decreases for each year the shareholder stays employed at HOPCo. After five years, there is no payment.
¶4 Jones resigned from the Center in October 2019, less than one year after entering the Agreement. The parties dispute the nature of his resignation. According to Jones, the Center and HOPCo's unethical practices "forced" him to resign. HOPCo says that Jones was not "forced to resign" but rather did so based on "[Jones'] own self-serving, conclusory allegations." After resigning, Jones began working at Dignity Health and HOPCo sought enforcement of the Agreement's Termination Payment.
¶5 Jones sued for a declaratory judgment that the restrictive covenant is unenforceable, and HOPCo counterclaimed that Jones breached the Agreement, thus entitling it to the Termination Payment. HOPCo did not ask the court to enforce the restrictive covenants by enjoining Jones from his work at Dignity Health, although it did ask the court to declare them enforceable. The parties filed cross-motions for summary judgment, and the superior court granted summary judgment to HOPCo. The court found that the Termination Payment is not an unenforceable penalty and is thus enforceable; Jones breached the Agreement; and HOPCo was entitled to a Termination Payment of $240,000. The court also awarded attorney fees to HOPCo. Jones appeals and we have jurisdiction. A.R.S. § 12-2101(A)(1).
DISCUSSION
¶6 We review de novo the superior court's grant of summary judgment, Jackson v. Eagle KMC L.L.C., 245 Ariz. 544, 545, ¶ 7 (2019), construing the facts in the light most favorable to the non-moving party, Wells Fargo Bank, N.A. v. Allen, 231 Ariz. 209, 213, ¶ 14 (App. 2012). Summary judgment is appropriate only if "the moving party shows that there is no genuine dispute as to any material fact and [it] is entitled to judgment as a matter of law." Ariz. R. Civ. P. 56(a). We also interpret contracts de novo. Tenet Healthsystem TGH, Inc. v. Silver, 203 Ariz. 217, 219, ¶ 5 (App. 2002).
¶7 Jones contends that the restrictive covenant is unenforceable as a matter of law. But the superior court only ruled that the Termination Payment was an enforceable penalty; it made no ruling regarding the restrictive covenant. The parties agreed to the Termination Payment provision "[notwithstanding any other terms of [the Agreement] to the contrary." We need not evaluate enforceability of the restrictive covenant.
¶8 Jones contends the Termination Payment provision is unenforceable. A liquidated damages provision is enforceable if it is intended "to compensate the non-breaching party rather than penalize the breaching party." Dobson Bay Club II DD, LLC v. La Sonrisa de Siena LLC, 242 Ariz. 108, ¶ 1 (2017). A liquidated damages provision is a penalty and unenforceable when the damages amount is an "unreasonably large sum." Mining Inv. Grp., LLC v. Roberts, 217 Ariz. 635, 640, ¶ 20 (App. 2008).
¶9 When determining whether a liquidated damages provision is reasonable, the reviewing court should "consider (1) the anticipated or actual loss caused by the breach and (2) the difficulty of proof of loss." Dobson Bay, 242 Ariz. at 111, ¶ 12. Liquidated damages provisions in contracts are afforded more latitude when the difficulty of proof of damages is great, less latitude when the difficulty of proof is low, and are unenforceable when it is clear the party suffered no damages. Id. (adopting Restatement (Second) of Contracts § 356 (Am. Law. Inst. 1981)). The party seeking to avoid enforcement of a liquidated damages provision has the burden of persuading the court that it is an unenforceable penalty. Id. at 112, ¶ 17. "Whether a contract provides for liquidated damages, or a penalty is also an issue of law we review de novo." Id. at ¶ 18.
¶ 10 HOPCo's damages from a future breach are, at least in part, difficult to calculate. HOPCo's purchase price resulted in the Shareholder Distribution Payment Jones received of nearly $350,000. At § 6.1 of the Agreement, the parties acknowledge this "immediate, direct and substantial benefit to each Shareholder" provided consideration for HOPCo to receive "the benefit of the goodwill, going concern value and business opportunities" through its purchase. Jones' continued medical practice after leaving the Center would deprive HOPCo of that goodwill and some business opportunities, but such a deprivation is not easily reduced to money damages. The Agreement's liquidated damages provision should, therefore, receive "considerable latitude." See id. at 111, ¶ 12 (citing Restatement (Second) of Contracts § 356 cmt. b).
¶ 11 The Termination Payment amount accounted for the time Jones stayed employed with the Center after the sale of his interest. In other words, the longer Jones remained employed at the Center, the less he would owe in liquidated damages. And the ultimate damages calculation was $240,000, less than the nearly $350,000 Jones received by selling his interest in the Center. The facts surrounding HOPCo's projected damages due to Jones' breach are not developed, but Jones bore the burden to establish that the Agreement's provision was unreasonable. Instead, Jones argued HOPCo did not suffer any damages and had to prove the existence and amount of actual damages to recover. But when parties agree to a liquidated damages provision they need not prove actual damages. See id. at 110, ¶ 8 ("Such 'liquidated damages' provisions serve valuable purposes. They provide certainty when actual damages would be difficult to calculate, and they alleviate the need for potentially expensive litigation.").
¶12 The Termination Payment provision targeted HOPCo's damages in the event of a breach. The damages amount decreased for every year Jones remained employed with the Center, and the amount could not exceed Jones' benefit from the contract. Viewing this provision with considerable latitude, we agree with the superior court that it was reasonable and enforceable. The superior court did not err in granting summary judgment to HOPCo.
CONCLUSION
¶ 13 We affirm. In our discretion, we grant HOPCo's request for its reasonable attorney fees incurred on appeal under A.R.S. § 12-341.01, plus taxable costs, subject to compliance with ARCAP 21.