Summary
holding that a covenant which prohibited a party from acting in forty-eight Texas counties was not unreasonable because the defendants marketed the relevant services within those counties
Summary of this case from Brink's Inc. v. PatrickOpinion
Civil No. 3:00-CV-2391-H
April 9, 2002
MEMORANDUM OPINION AND ORDER
Before the Court is Plaintiffs Motion for Partial Summary Judgment, filed October 26, 2001; Defendants' Response thereto, filed November 15, 2001; Plaintiffs Reply, filed November 30, 2001; Defendants' Surreply, filed December 11, 2001; and Plaintiffs Rejoinder, filed December 20, 2001. Also before the Court is Defendants' Motion for Partial Summary Judgment, filed December 17, 2001; Plaintiffs Response thereto, filed January 7, 2002; and Defendants' Reply filed January 22, 2002. The Court has jurisdiction pursuant to 28 U.S.C. § 1332. Upon review of the pleadings, briefs, and relevant authorities, the Court is of the opinion for the reasons stated below that Defendants' Motion for Partial Summary Judgment should be DENIED and Plaintiffs Motion for Partial Summary Judgment should be GRANTED.
I. BACKGROUND
Plaintiff, ProPath Services, Inc., formerly Medical Laboratory Service Dallas d/b/a Medical Laboratory Service Southwest ("MLSS"), is a partnership of physicians licensed to practice medicine in Texas who are either Board Certified or Board eligible and pursuing certification in pathology. (Pl. First Am. Compl. at 2). Defendants, Quest Diagnostics Clinical Laboratories, Inc. and Quest Diagnostics, Inc., formerly SmithKline Beecham Clinical Laboratories, Inc. ("SBCL"), own and operate or manage clinical laboratories, or provide laboratory services, management support and reference testing to laboratories that perform various tests for the purpose of providing information for the diagnosis, prevention, or treatment of disease or the assessment of medical conditions. (First Am. Compl. at 2).
In 1992, ProPath's predecessor and Defendants' predecessor, entered into an Agreement for Anatomic Pathology Support Services ("1992 Agreement" or "Agreement"), thereby formalizing an eleven year relationship. (First. Am. Compl. at 4). SBCL agreed to provide MLSS with technical and support services to assist in the provision of anatomic pathology testing services including marketing, specimen pick-up, supplies, slide preparation and screening, billing, and reporting.
Pathology is divided into:
(i) clinical pathology and (ii) anatomic pathology. Clinical pathology includes the study of chemical components of body fluids, cells, organisms or prions, and counting of various cells. Anatomic pathology includes all diagnostic services based on skilled observation, e.g., looking at organs or biopsies, directly (grossly) or by microscope, electron microscope, or special lighting, stains, or special procedures. Further, anatomic pathology generally is divided into two categories: (a) cytology, which addresses diseases of cells; and (b) histology, which addresses diseases of organs or tissues."
(First Am. Compl. at 3 n. 1).
On July 28, 2000, Defendants informed Plaintiff that they would terminate the Agreement. (First Am. Compl. at 8). Plaintiff alleges that it notified Defendants that it would require the transfer of cytology operations on September 14, 2000 and that Defendants in a subsequent letter refused the transfer. (First Am. Compl. at 8). On March 5, 2001, Plaintiff and Defendants entered into an agreement that resulted in QDCL withdrawing the initial withdrawal notice and Plaintiff withdrawing its demand for transfer of the cytology operations. (First Am. Compl. at 8).
Under Section 6.1, termination is to take place 180 days from the date of the notice.
On May 15, 2001, Defendants notified Plaintiff that they would terminate the agreement again. (First Am. Compl. at 8). On May 21, 2001, Plaintiff notified Defendants that it would require transfer of the cytology operations. (First Am. Compl. at 9). Plaintiff alleges that to date, Defendants have only offered to transfer part of the operations, such as primary equipment, but not the employees. (First Am. Compl. at 9).
Specifically, there are three sections of the Agreement that Plaintiff alleges the Defendants violated. First, and perhaps most significant, Plaintiff alleges that Section 3.2, "Winding Down," provides that after the termination of the Agreement the Defendants are required to transfer all cytology operations to Plaintiff upon 30 days notice of the termination of the agreement. Second, Plaintiff contends that Section 1.4, "Marketing," provides that QDCL must continue to market exclusively for ProPath after transfer of the cytology operations and until termination of the 1992 Agreement. Third, Plaintiff alleges that Section 1.5, the "Covenant Not to Compete," provides that the Defendants agreed not to compete with Plaintiff for a period of 6 months after the termination of the Agreement. In regard to these claims, Plaintiff seeks declaratory relief and specific performance. It is important to note, however, that this Opinion only addresses the arguments raised in the parties' Motions, i.e. what are the parties' obligations under each of the provisions and not whether a breach of these provisions has occurred.
Plaintiff provides that "cytology operations consist of three main components: (1) the equipment necessary to stain and prepare specimens; (2) the operations of employees, including cytotechnologists, required to review and evaluate such specimens; and (3) the revenue associated with cytology cases reviewed." (First Am. Compl. at 8).
Plaintiff also alleges that Defendants have confidential information acquired from ProPath that will benefit the Defendants and Plaintiffs competitors. (First Am. Compl. at 9). In relation to this claim, which is not the subject of the partial summary judgment motions, Plaintiff alleges Breach of Fiduciary Duty and/or Duty of Loyalty, Inducement of Breach of Fiduciary Duty and/or the Duty of Loyalty, Misappropriation of Confidential Information and Trade Secrets, Unfair Competition, Breach of Contract, and Tortious Interference with Business Relations. Defendants also allege in their First Amended Answer and Counterclaims, filed August 3, 2002, that the 1992 Agreement is not binding on Defendant Quest Diagnostics Incorporated. This issue was not raised in the Motions for Summary Judgment.
Defendants launch a multi-prong attack on Plaintiffs contentions. First, with regard to the entire 1992 Agreement, Defendants contend that their March 31, 2001 move to a new laboratory served to terminate the entire agreement. Second, and in the alternative, Defendants assert that a 1994 agreement removed histology and non-gynecologic cytology services from the 1992 Agreement, thereby denying ProPath relief in the areas of histology testing or operations, marketing (Section 1.4), and rendered the scope of the non-compete clause (Section 1.5) ambiguous. Third, Defendants argue that under § 3.2 of the Agreement (1) Plaintiff is not entitled to net revenues derived from relationships and agreements with Managed Care Organizations ("MCOs"); (2) Defendants are not required to terminate cytology employees; and (3) Plaintiff does not own the net revenues derived from cytology operations under the 1992 Agreement. Fourth, Defendants contend that they are not required to market cytology services to ProPath, under Section 1.4, following the transfer of operations. Fifth, Section 1.5, the covenant not to compete, is unenforceable for lack of consideration and is impermissibly broad.
Defendants also assert that a December 10, 1992 Addendum ("Addendum") to the 1992 Agreement served to replace a number of the provisions of the 1992 Agreement that affect the manner of compensation pursuant to Section 1.3 of the Agreement and the ownership of revenues. Plaintiff contends that the Addendum was never signed and therefore not valid. Defendants argue that Plaintiff made several judicial admissions in the pleadings that prevent Plaintiff from contesting the Addendum's validity.
Section 1.3 provides:
If requested by MLSS and in consideration for the compensation set forth in Section III below, SBCL shall be responsible for all billing and collection activities on behalf of and in the name of MLSS, with MLSS' provider number, consistent with all applicable third party payor requirements. MLSS shall own all right, title, and interest to the Net Revenues (as defined below) received by SBCL with respect to billings performed in the name of MLSS. SBCL shall not otherwise share in the net revenues.
II. SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate where the facts and law as represented in the pleadings, affidavits and other summary judgment evidence show that no reasonable trier of fact could find for the nonmoving party as to any material fact. FED.R.CIV.P. 56; Lujan v. National Wildife Federation, 497 U.S. 871, 888 (1990); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986); Innovative Database Systs. v. Morales, 990 F.2d 217 (5th Cir. 1993). "The moving party bears the initial burden of identifying those portions of the pleadings and discovery in the record that it believes demonstrate the absence of a genuine issue of material fact, but is not required to negate elements of the nonmoving party's case." Lynch Properties, Inc. v. Potomac Ins. Co. of Ill., 140 F.3d 622, 625 (5th Cir. 1998) (citing Celotex, 477 U.S. at 322-25). If the movant fails to meet its initial burden, the motion must be denied, regardless of the nonmovant's response. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994).
If the movant does meet its burden, the nonmovant must go beyond the pleadings and designate specific facts showing that a genuine issue of material fact exists for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Edwards v. Your Credit, Inc., 148 F.3d 427, 431 (5th Cir. 1998). A party opposing summary judgment may not rest on mere conclusory allegations or denials in its pleadings unsupported by specific facts presented in affidavits opposing the motion for summary judgment. FED. R. CIV. P. 56(e); Lujan, 497 U.S. at 888; Hightower v. Texas Hosp. Assn., 65 F.3d 443, 447 (5th Cir. 1995).
In determining whether genuine issues of fact exist, "[f]actual controversies are construed in the light most favorable to the nonmovant, but only if both parties have introduced evidence showing that a controversy exists." Lynch, 140 F.3d at 625; see also Eastman Kodak v. Image Technical Services, 504 U.S. 451 (1992). However, in the absence of any proof, the Court will not assume that the nonmoving party could or would prove the necessary facts. Lynch, 140 F.3d at 625. A party must do more than simply show some "metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586. "If the record, taken as a whole, could not lead a rational trier of fact to find for the non-moving parry, there is no genuine issue for trial." Friou v. Phillips Petroleum Co., 948 F.2d 972, 974 (5th Cir. 1991).
III. ANALYSIS
A. Whether the entire 1992 Agreement was terminated as a result of the Defendants' Laboratory Change of Location
As an initial matter, Defendants assert that all of Plaintiffs claims made in its Motion are moot because the 1992 Agreement, on which the claims are based, was terminated when Defendants relocated their laboratory operations located at 8000 Sovereign Row Dallas, Texas and relocated to Irving, Texas on March 31, 2001. Plaintiff disputes Defendants' interpretation of the termination provision of the Agreement, and argues that a mere relocation of laboratory operations did not terminate the Agreement.
The termination provision at issue here, Section 6.2, states "This Agreement will immediately and automatically terminate on and as of the date any of the following occur: . . . 6.2-2 Discontinuance of Operations. Permanent discontinuance of substantially all the operations of the Laboratory by SBCL." Although there is no specific definition section to the Agreement, the third "WHEREAS" clause of the Agreement provides that "SBLC owns a clinical laboratory facility located at 8000 Sovereign Row, Dallas, Texas 75247 ("Laboratory")." Defendants claim that because "Laboratory" is only identified as the Sovereign Row facility, any relocation of operations would terminate the Agreement. Plaintiff contends that the mere relocation of the operations from the Sovereign Row facility to another site does not terminate the Agreement, but rather the complete cessation of the operations associated with the Sovereign Row laboratory would have to cease for termination to occur. (Pl. Reply at 3). Plaintiff states, and Defendants do not contest, that the operations that previously occurred in the Sovereign Row facility continued after the move to Irving.
Plaintiff is correct; the contract is unambiguous. Interpreting an unambiguous contract is a question of law, not fact, and therefore appropriate for summary judgment decision. See Friou v. Phillips Petroleum Co., 948 F.2d 972, 974 (5th Cir. 1991). The Court must give the words of an unambiguous contract their "plain, ordinary, and generally accepted meaning." Cross Timbers Oil Co. v. Exxon Corp., 22 S.W.3d 24, 26 (Tex.App. — Amarillo 2000, no pet.). The subject of Section 6.2-2 is "operations," as is the focus of the entire agreement. See EEOC v. R.J. Gallagher Co., 181 F.3d 645, 651 (5th Cir. 1999) ("[W]e must interpret a contractual agreement so as to give effect to each and every provision of the contract."). To say, as Defendants contend, that the entire agreement would terminate because of relocation would be to ignore the plain language of the termination provision and the fact that the parties entered into the Agreement for the provision of technical and support services for anatomic pathology testing, regardless of location.
The Court finds that the Agreement was not terminated on March 31, 2001 when the Defendant relocated from the Sovereign Row facility. Defendants' Motion on this ground is DENIED and the Court will proceed with an analysis of the remainder of Defendants' and Plaintiffs contentions.
B. Whether the 1994 transfer of histology services "carved out" all aspects of the 1992 Agreement related to histology and non-gynecologic cytology
Defendants contend that a February 1994 agreement, which allegedly provided that ProPath would take over laboratory services related to histology and non-gynecologic cytology that were previously QDCL's function, denies the Plaintiff all relief under the 1992 Agreement with regard to histology and non-gynecologic operations, specifically under the marketing provision and the covenant not to compete. The parties agree that this transfer took place. (Def. Mot. at 2; Pl. Resp. at 3). Plaintiff asserts, however, that there was no mention of changing the parties' marketing obligations or the rights under the covenant not to compete as part of the 1994 agreement, and that Defendants continued to market histology services exclusively to ProPath after the transfer.
Although Defendants allege that the 1994 agreement amended the parties' rights and obligations under the 1992 Agreement (Defs. Mot. at 2), Defendants do not provide a copy of the 1994 agreement, nor explain its absence. Defendants argue instead that language within a January 14, 1997 letter confirms the effect of the 1994 transfer on the 1992 Agreement. Nevertheless, "Texas law requires that we read a contract and its subsequent modification as a whole, giving effect to new provisions and discarding old provisions which are inconsistent with the new terms." EEOC, 181 F.3d at 651. Without a copy of the 1994 agreement, the Court cannot construe its effect, if any, on the 1992 Agreement. Therefore, Defendants have not met their burden to show that the 1994 transfer terminated Defendants obligations regarding histology and non-gynecologic cytology under the 1992 Agreement and their Motion on this ground is DENIED. Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) ("If the moving party fails to meet this initial burden, the motion must be denied, regardless of the nonmovant's response.").
Appendix N to Plaintiffs Motion for Summary Judgment contains a series of Memoranda referring to "on-going plans and discussions" regarding the transition of histology operations; however, the parties do not refer to these Memoranda in support of their argument nor is the Court inclined to construe these as contracts.
C. The Parties' Rights under Section 3.2
Section 3.2, the "winding-down" provision provides in relevant part that:
MLSS shall have the right to require SBCL to cease providing cytology technical services under this Agreement or to transfer such operations to MLSS at any time by providing SBCL with at least thirty (30) days prior written notice to that effect, such notice to specify any employees of SBCL that MLSS wishes to employ should MLSS continue such operations. SBCL shall cooperate fully with MLSS in transferring or winding down such operations and shall use its reasonable good faith efforts to mitigate all costs payable to MLSS under this Section 3.2 through continued employment by SBCL of employees involved in such operations or otherwise, to the extent SBCL deems practicable . . . .
Plaintiff moves the Court to declare that Defendants must transfer to it all cytology operations, including employees now working for the Defendants and identified by Plaintiff. Defendant asserts 1) Plaintiff is not entitled to business generated from Defendants' relationships and agreements with Managed Care Organizations; 2) Defendants are not obligated to terminate their cytology employees for employment with Plaintiff; and 3) Plaintiff does not own the Net Revenues generated from Cytology Operations under the 1992 Agreement. Each argument will be addressed below.
1. Whether Plaintiff is entitled to business generated from Defendants' relationships with Managed Care Organizations ("MCO")
Defendants allege that they have arrangements with a number of MCOs to provide laboratory services. With regard to these arrangements, Defendants allege that QDCL would contract with ProPath for professional review of cytology specimens and histology specimens and QDCL would pay ProPath a fee for this work. Based upon this arrangement, Defendants allege that Plaintiff was their "subcontractor" and that Defendants own the managed care work, thereby restricting the "transfer" provision in Section 3.2 to non-managed care work. Plaintiff opposes Defendants' contention, arguing that the managed care work is subject to transfer because Plaintiff owns it and, in the alternative, Section 3.2 does not require ownership.
Plaintiff contends that this payment was a portion of the capitation fee and not a fee for services.
Exhibit B-1, Section IV of the Agreement provides that "MLSS will charge SBCL a capitation fee for MLSS' professional component of cytology and surgical pathology services furnished with regard to Sanus HMO and Cigna HMO members . . . ." Both parties agree as to the validity of this provision and that it provides an exception to the Compensation provision in Section 3.1-1 where Plaintiff would pay Defendants for services performed. Turning to Plaintiffs strongest argument — that the ownership of the managed care work is irrelevant to the transfer provisions under Section 3.2 — the Court finds Plaintiffs interpretation is correct. The plain language of Section 3.2 governs: "MLSS shall have the right to require SBCL to cease providing cytology technical services under this Agreement or to transfer such operations to MLSS at any time . . . ." The provision of services and payment therefor with regard to the MCO agreements is clearly "under" the 1992 Agreement and the provision does not provide any requirement for ownership. Without reaching the merits of Defendants' argument that Plaintiff does not own the business related to MCO agreements, the Court hereby DENIES Defendants' Motion on the basis of the plain language of Section 3.2 and finds that the cytology managed care business is subject to the "transfer" under Section 3.2. See Cross Timbers Oil Co. v. Exxon Corp., 22 S.W.3d 24, 26 (Tex.App.-Amarillo 2000, no pet.).
The parties also agree that Exhibit B-1 of the 1992 Agreement was amended a number of times when additional agreements with MCOs were reached.
2. Whether Section 3.2 requires the Defendants to transfer their cytology employees to the Plaintiff
Plaintiff demands that as part of the "transfer of operations" it is entitled to its choice of Defendants' employees of the cytology operations. Specifically, Plaintiff contends that the phrases "transfer such operations" and "cooperate fully," within Section 3.2, require Defendants Co terminate their cytology employees and permit Plaintiff to re-hire them. (Pl. Mot. at 16). Further, Plaintiff notes that the Defendants are only permitted to retain employment of the cytology employees where it would mitigate Plaintiffs costs. (Pl. Mot. at 16). Plaintiff also asserts that the parties engaged in a transfer of employees as part of the 1994 transfer of histology operations and this transfer is intended to be the same. (Pl. Mot. at 18). Defendants contend that they are not required to terminate their cytology employees or close their positions.
Defendants refer to the same language identified by Plaintiffs and assert that Section 3.2 actually provides for the "continued employment by SBCL of employees involved in such operations." (Defs. Mot. at 13). Defendants also assert that, at the very least, Section 3.2 raises a fact question in that "cytology technical services" is not defined and it is not clear as to whether that phrase refers to "technology and support services," which it claims would include the employees, or simply "technology services." (Defs. Resp. at 12).
Texas law provides that "A court is not at liberty to revise an agreement while professing to construe it." General American Indemnity Co. v. Pepper, 161 Tex. 263, 265 (1960). In addition, "we must honor the presumption that parties to a contract intend every clause to have some effect, and attempt to reconcile ambiguous provisions unless they are `irreconcilable' or `necessarily repugnant'." Chapman v. Orang Rice Milling Co., 747 F.2d 981, 983 (5th Cir. 1984). Here, however, we do not have ambiguous provisions. Section 3.2 clearly provides that Plaintiff may specify cytology employees it wishes to employ during and after the winding down process. The provision also provides that the Defendants would continue to employ cytology employees only to the extent that it would mitigate Plaintiffs costs. Therefore, Defendants are not permitted to employ cytology employees if Plaintiff does not need to mitigate its costs. See Blankenship, et al. v. Highland Insurance Co., 594 S.W.2d 147, 150 (Tex.App.-Dallas 1980, writ ref'd n.r.e.) ("[T]he rule of expressio unius est exclusio alterius . . . is the product of logic and common sense . . . ."). The contract does not need to expressly state that Defendants must terminate the employees for the language, as it is written, to mean as much. Section 3.2 provides that Defendants must transfer their cytology employees, except to the extent that Plaintiff needs to mitigate its costs. Plaintiffs Motion on this ground is GRANTED and Defendants' Motion is DENIED.
3. Whether the December 10, 1992 Addendum is valid
The parties' remaining arguments regarding their rights under Sections 3.2 and 1.4 involve the validity of an unsigned Addendum dated December 10, 1992. Defendant asserts that the Addendum amended the 1992 Agreement, specifically superseding Sections 1.3 and 3.1 limiting the scope of compensation from histology and cytology to histology services alone. (Defs. Mot. at 19, 20). Thus, Defendants assert that Plaintiff does not own the net revenues from cytology operations and cannot obligate Defendants to market cytology operations following the winding down process because of a lack of consideration. Plaintiff contends that the Addendum is not valid, and therefore Plaintiffs rights should be interpreted based upon the 1992 Agreement alone. Defendants assert that Plaintiff made statements as to the validity of the Addendum that constitute judicial admissions, and therefore Plaintiff is barred from contesting the validity of the agreement. Specifically, Defendants identify three alleged judicial admissions. First, Plaintiff states in paragraph 18 of Plaintiffs First Amended Complaint, filed August 24, 2001, "This payment and reimbursement method proved cumbersome, so by amendment dated December 10, 1992, the payment procedure was changed, . . ." Second, Plaintiff provides in paragraph 12 of its Reply to First Amended Counterclaims, "ProPath admits that, at some point, the parties simplified the payment arrangements, so that instead of QDCL turning over all revenues to ProPath and ProPath then paying QDCL for its support services, the parties determined an amount per case that reflected the average net amount retained by ProPath." Third, in Footnote 14 of its Brief in Support of Preliminary Injunction, filed January 18, 2001, Plaintiff states "In late 1992, the billing process changed by agreement of ProPath and Quest to make it more convenient for Quest."
Section 1.4 provides in relevant part: "In consideration for the compensation set forth in Section III below, SBCL shall market anatomic pathology testing services exclusively for MLSS in conjunction with SBCL's own marketing efforts within the 48-county area . . . ."
"The question of whether an agreement was reached is generally a fact question where, as here, the existence of the agreement is disputed." Crest Ridge Construction Group, Inc. v. Newcourt Inc., 78 F.3d 146, 153 (5th Cir. 1996). Where Plaintiff makes a judicial admission as to the execution of the Addendum, such admission would render moot Plaintiffs arguments disputing the validity of the Addendum. See Mendoza v. Fidelity and Guaranty Insurance Underwriters, 606 S.W.2d 692, 694 (Tex. 1980) ("A judicial admission is conclusive upon the party making it, and it relieves the opposing party's burden of proving the admitted fact, and bars the admitting party from disputing it."); see also Gevinson v. Manhattan Construction Co., 449 S.W.2d 458, 465 ("A true judicial admission is a formal waiver of proof and is usually found in the pleadings or in a stipulation of the parties."). For a statement to constitute a judicial admission it must 1) be made in a judicial proceeding; 2) be contrary to a fact essential to the theory of recovery; 3) be deliberate, clear, and unequivocal; 4) such that giving it conclusive effect meets with public policy; and 5) about a fact on which judgment for the opposing party can be based. See Heritage Bank v. Redcom Laboratories, Inc., 250 F.3d 319, 329 (5th Cir. 2001). The Court finds that although Plaintiffs statement in its First Amended Complaint was careless, especially in light of the arguments presented in its Motion for Summary Judgment and its Response to Defendants' Motion, it does not constitute a judicial admission because prong five of the Heritage Bank test is not satisfied.
Plaintiffs other statements raised by Defendants do not constitute judicial admissions because they are not "deliberate, clear, and unequivocal." See Heritage Bank, 250 F.3d at 329. The statement made in the Reply to First Amended Counterclaims does not provide a time period for the simplification of payment arrangements, and therefore, does not conclusively confirm the existence of the agreement on December 10, 1992. Although more specific as to timing, the third statement, made within Footnote 14 of Plaintiffs Brief in Support of Preliminary Injunction, also does not specifically refer to the December 10, 1992 agreement.
Judgment regarding the transfer of operations under Section 3.2 does not turn on the validity of the Addendum. First, the Addendum does not modify Section 3.2. Second, even if the Addendum were valid and altered the ownership of the net revenues, as stated previously in Section C, Part 1, supra, the ownership of business under Section 3.2 is irrelevant and not required for transfer under the plain language of this Section. So, even if the Addendum were valid and this Court interpreted it in accordance with Defendants' arguments, the Court would not render judgment based upon the Addendum.
Judgment regarding Section 1.4, the marketing provision, also does not turn on the validity of the Addendum. Plaintiff asserts that because there is no termination provision included in Section 1.4, Section 1.4 must be governed by the general termination provision in Section 6.1 which provides that if either party should give notice to terminate the Agreement "the Agreement shall terminate on the future date specified in such notice." Plaintiff contends, therefore, that Defendants must market anatomic pathology testing services from the date of transfer of operations to termination. (Pl. Mot. at 16). Defendants contend that because the Addendum amended the compensation scheme under the 1992 Agreement to only provide compensation for histology services, there is no compensation for marketing cytology services and thus, no consideration to support Section 1.4. Defendants conclude that this alleged lack of consideration relieves them of the requirement to market cytology operations. (Defs. Mot. at 20). Defendants also assert as a related argument, that once the winding down process in concluded, QDCL will not receive collections from cytology services and Section 1.4 again fails for want of consideration. (Defs. Mot. at 19). Both of these arguments fail.
Under Texas Law, the Court must presume that sufficient consideration exists within a written contract. See Tag Resources, Inc. v. Petroleum Well Services, Inc., 791 S.W.2d 600, 605 (Tex.App.-Beaumont 1990, no writ). In order for this Court to find insufficient consideration, the consideration must be so "grossly inadequate as to shock the conscience, being tantamount to fraud." Birdwell v. Birdwell, 819 S.W.2d 223, 227-28 (Tex.App.-Fort Worth 1991, writ denied). Such is not the case here. "A single consideration is sufficient to support multiple promises bargained for in an agreement." See id. Whether compensation for cytology operations was removed from the Agreement or not, is irrelevant. The Addendum does not alter the marketing provision, except that it replaces the last two sentences, neither of which have any bearing on the parties arguments in these Motions. Because Section 1.4 provides that the Defendants must market anatomic pathology services, not simply cytology services, the consideration governing the marketing of histology services constitutes sufficient consideration, were the Addendum to be valid. In addition, the consideration supporting the marketing provision prior to the transfer of operations is sufficient to support marketing after the transfer of operations until termination.
Summarizing, the Court does not need to decide whether the 1992 Addendum is valid. The Court finds that because judgment with regard to whether Plaintiff owns the net revenues and whether there is sufficient consideration to support Section 1.4 is not based on the Addendum's validity, Plaintiffs statements do not constitute judicial admissions. Furthermore, Defendants are obligated to market anatomic-pathology services exclusively for Plaintiff after transfer of cytology operations and until termination of the Agreement. Defendants' Motion on the grounds that Plaintiff does not own the net revenues generated from cytology operations and that Section 1.4 does not obligate QDCL to market cytology services for ProPath after the transfer of operations is DENIED. Plaintiffs Motion on the ground that QDCL must market anatomic pathology services exclusively for ProPath after transfer of operation is GRANTED.
D. Whether Section 1.5 is unenforceable as a matter of law
Section 1.5 provides in relevant part that:
SBCL recognizes that MLSS' entering into this Agreement is induced primarily because of the covenants and assurances made by SBCL herein, that SBCL's covenant not to compete is necessary to insure the continuation of MLSS' business. . . . Therefore, SBCL agrees that during the term of this Agreement and any renewals thereof and continuing for a period of six (6) months following termination of this Agreement for any reason, SBCL, its affiliates, and agents will not actively solicit, directly or indirectly, any of the MLSS anatomic pathology business in the 48 Texas counties . . . .
Plaintiff correctly states that enforceability of a covenant not to compete is a question of law. See American Express Financial Advisors, Inc. v. Scott, 955 F. Supp. 688, 691 (N.D. Tex. 1996). Plaintiff asserts that the covenant covers the term of the agreement and six months thereafter, covers anatomic pathology testing services (not clinical services), and covers only the areas where Defendants have worked on Plaintiffs behalf. (Pl. Mot. at 20). Defendants assert that the covenant is unenforceable because it is not narrowly tailored nor a reasonable restriction on Defendants. (Defs. Resp. at 21, 22).
In determining the covenant's enforceability, the Court must determine 1) whether there is an otherwise enforceable agreement and 2) whether the covenant restricting competition is ancillary. See Scott, 955 F. Supp. at 691. The Court has already determined in most respects that the Agreement is enforceable. Therefore, the Court must turn to the second question of whether the covenant is ancillary. Texas law provides that a covenant is ancillary to an agreement if 1) the consideration given by Plaintiff in the otherwise enforceable agreement must give rise to the Plaintiffs interest in restraining the Defendants from competing; and 2) the covenant must be designed to enforce the Plaintiffs consideration or return promise in the otherwise enforceable agreement. See Light v. Centel Cellular Co., 883 S.W.2d 642, 627 (Tex. 1994). Plaintiff provides extensive analysis of its interest in the covenant and return promises supporting the covenant. (Pl. Mot. at 19). The consideration here was clearly the provision of confidential information. Plaintiff states that it had three interests in the covenant: 1) that Defendants not use confidential information to Plaintiffs detriment; 2) in preserving Plaintiffs anatomic pathology business; and 3) that the transfer of the cytology operations would be protected by a contemporaneous non-compete provision. Plaintiff also contends that the return promise was that the Defendants would not disclose Plaintiffs proprietary information and that they would retransfer all cytology operations to Plaintiff upon request. Defendants do not refute any of Plaintiffs analysis, and the Court finds Plaintiffs analysis to be correct. See Scott, 955 F. Supp. at 692 ("[C]onfidential information and trade secrets given by Plaintiff to Defendant gave rise to Plaintiffs interest in restraining Defendant from competing. The non-compete covenant, in turn, enforces Defendant's return promise not to use or disclose the confidential information and trade secrets in the context of the otherwise enforceable contract.").
Defendants argue that the term "anatomic pathology services" is impermissibly broad. In support of this contention, Defendants raise again the 1994 transfer of histology services and assert that because this transfer removed histology operations from the 1992 Agreement, the meaning of "anatomic pathology services" is unclear. Because a copy of the 1994 agreement was not provided as summary judgment evidence, the Court, earlier in this Opinion, see supra Section B, denied Defendants' Motion that the 1994 transfer "carved out" histology operations from the 1992 Agreement. Accordingly, there is no support for Defendants' argument that it would be unreasonable for Section 1.5 to apply to histology services.
In addition, as Defendants contend, a covenant not to compete is only enforceable where it contains "reasonable limitations as to time, geographical area, and scope of activity to be restrained, a six month restriction on competition, in light of the complexity of the transactions at issue, is not unreasonable." See Zep Manufacturing Co. v. Harthcock, 824 S.W.2d 654, 660 (Tex.App.-Dallas 1992, no writ). Here the time restriction is six months following termination and restrictions of longer duration have been upheld in this Circuit. See, e.g., Meineke Discount Muffler v, Jaynes, 999 F.2d 120, 123 (5th Cir. 1993) (upholding one-year restriction) An reasonable geographic restraint is often thought to be a restraint of the area in which the contesting party worked while under contract. See Harthcock, 824 S.W.2d at 660. The geographic restriction to the 48 Texas counties is not unreasonable given that the 48 Texas counties were the geographic region for Defendants' marketing of anatomic pathology services. See 1992 Agreement, Section 1.4. Therefore, the Court finds that the covenant is enforceable and not an unreasonable restriction. Defendants' Motion on this basis is DENIED and Plaintiffs Motion is GRANTED.
IV. CONCLUSION
For the reasons stated above, Defendants' Partial Motion for Summary Judgment is DENIED and Plaintiffs Partial Motion for Summary Judgment isGRANTED. Specifically, this Court finds that the 1992 Agreement was not terminated by Defendants' relocation of its laboratory to Irving; there is insufficient evidence to support a finding that the 1994 agreement amended the 1992 Agreement; cytology managed care business is subject to the "transfer" under Section 3.2; Defendants are required to transfer cytology employees to Plaintiff; Defendants are required to market anatomic pathology services exclusively for Plaintiff after transfer of operations; and the covenant not to compete is enforceable.
The Parties are DIRECTED to file a Joint Status Report providing a list of the remaining issues in this matter no later than noon, April 15, 2002 .
The Clerk is Directed to Fax this Order Immediately to Counsel for the Parties.