Franklin County Appeals Court: Structure of Employment Agreement Implied Non-Compete Clause Into Founder’s Retirement Clause.

Last month, the Franklin County Court of Appeals affirmed summary judgment in favor of an east-side dental practice in a declaratory judgment action involving its obligation to make retirement, or deferred compensation, payments under an employment agreement to its founder who retired after a serious illness and then opened up a competing dental practice after his recovery. Drs. Kristal & Forche, D.D.S., Inc. v. Erkis, 2009-Ohio-5671. The dispute centered on the meaning of “retirement,” which was not defined in the agreement. The Court implied the non-competition obligation from the fact that the Professional Services Agreement signed by the defendant dentist contained a resignation clause which permitted him to leave the practice for any reason upon 90 days notice, but, unlike the retirement clause, did not obligate his remaining partners to provide him with deferred income during his retirement. Therefore, the Court concluded that “retirement” meant from the profession, not just the dental practice, or the resignation clause would be rendered superfluous.

According to the Court’s opinion, the defendant dentist formed the practice, which was ultimately joined by two additional dentists. They formed a professional corporation and each signed professional services agreements. The agreements provided that each dentist could resign upon 90 days notice. The agreement also provided that the defendant dentist could retire at any time and at any age and be entitled to over $1.1M in deferred compensation paid out in monthly installments of $40,000. Retirement was not defined in the agreement. The only other clauses where a dentist was entitled under the agreement to deferred compensation was when the dentist died or became disabled, which also involved leaving the profession, rather than just the practice.

In early 2003, the defendant dentist became seriously ill, accepted disability payments under the agreement and retired in May 2003. The practice purchased back his shares and paid him $306,000 in retirement compensation through May 2005. He then made a remarkable recovery and opened his own competing practice in October 2004, which involved soliciting some of his former employees and clients. The practice then filed a declaratory judgment action in August 2005 concerning its obligation to continue making retirement payments to the defendant dentist on the grounds that the defendant dentist had breached his agreement by competing against it and, by soliciting clients and referral sources, had decreased its revenue to the point that it could no longer afford to fund his “retirement.”

The practice argued that “retirement” meant from the profession, not just the practice. As a result, by the defendant-dentist’s competition against them, he breached the agreement by returning to the profession and relieved them of their obligation to make retirement payments to him. Thus, under the practice’s interpretation, the agreement’s retirement clause imposed an implied non-compete obligation upon the defendant dentist. In turn, the dentist argued that “retirement” meant any and all retirements and did not require him to remain unemployment or to leave the profession permanently.

The Court agreed with the practice’s argument because (1) the voluntary and involuntary termination provisions permitted the dentist to leave the practice without requiring the practice to provide deferred compensation and (2) deferred compensation was only required if the dentist left because of death, disability or retirement. Therefore, the Court could infer the parties’ intent from the structure of the agreement to define “retirement” as meaning from the profession, rather than just the practice.

Insomniacs can read the full opinion at http://www.sconet.state.oh.us/rod/docs/pdf/10/2009/2009-ohio-5671.pdf.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.