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GISMONDI, PAGLIA, SHERLING, M.D., P.C. v. FRANCO

June 22, 2000

GISMONDI, PAGLIA, SHERLING, M.D., P.C., PLAINTIFF,
V.
MICHAEL J. FRANCO, M.D., DEFENDANT.



The opinion of the court was delivered by: McMAHON, District Judge.

DECISION AFTER TRIAL

In this action, Plaintiff Gismondi, Paglia, Sherling, M.D., P.C., (hereinafter "GPS"), a professional medical corporation, sues its former employee, Dr. Michael J. Franco, to enforce the terms of a restrictive covenant contained in Franco's employment contract. The matter was brought on by order to show cause on May 11, 2000. Rather than bother with a preliminary injunction, the Court ordered the parties to proceed to a trial on the merits of Plaintiff's claims (which included a claim on a note as to which Defendant was allegedly in default). That trial took place on June 12 and 13, 2000. Defendant interposed a number of counterclaims, but discontinued them without prejudice pursuant to Fed. R.Civ.P. 41(c).

The following constitute the Court's findings of fact and conclusions of law.

FINDINGS OF FACT

(1) Defendant's Employment with GPS

GPS, a New York professional corporation that has conducted business since 1974, is a multi-office general medical practice. Its main office is in Mamaroneck, New York, and GPS has other offices throughout Westchester County. The doctors employed by GPS specialize in the areas of pulmonary medicine, critical care, internal medicine, family practice and sleep medicine. The principal (shareholders) of GPS include Dr. Dante Gismondi, Dr. Joseph Paglia, Dr. Bruce Sherling, and Dr. Bruno DiCosmo. At present, GPS employs seven doctors and approximately 28 staff members.

Michael J. Franco is a doctor licensed to practice in New York, Connecticut, New Hampshire and Vermont. He grew up in Greenwich, Connecticut, left to attend college and medical school, returned for his residency at Stamford Hospital, and then spent three years at Mary Hitchcock Hospital at Dartmouth College, Hanover, New Hampshire, as a fellow in pulmonary and critical care medicine. He is Board-certified in Internal and Pulmonary Medicine. He has several publications to his credit. (PX 8.) He also has training in sleep medicine and is eligible to sit for Board certification in that area, although he has not done so.

When Dr. Franco had a year to go on his fellowship, he began exploring career options in the Fairfield County area where he had grown up. (PX 31.) No evidence has been offered about when Dr. Franco first made contact with Plaintiff, or how. By March 24, 1997, however, he had signed a letter of intent (headed "Proposal") detailing salary, bonuses, and benefits from July 1997 to January 2001. (PX 3.)

Thereafter, Dr. Franco and Dr. Paglia, representing GPS, negotiated the formal employment contract that Dr. Franco was required to sign. Plaintiff and/or its counsel drafted the employment contract.

Apparently, only one contract term resulted in significant negotiations: the restrictive covenant at issue in this case.*fn1 It went through four iterations. In what has been represented as the first draft of the contract (PX 4), the covenant prevented Dr. Franco from "engaging in the practice of medicine within a ten (10) mile radius of the Town of Mamaroneck, New York, City of New Rochelle, New York, and Greenwich, Connecticut" for a period of three years following the termination of his employment. A draft dated on or about May 20, 1997 prohibited Dr. Franco from engaging in "the practice of medicine in the Town of Mamaroneck, New York, and the Village of Port Chester, New York, and within a ten-mile radius of the said Town of Mamaroneck, New York and the Village of Port Chester, New York." (PX 5.) The next draft changed the ten-mile radius to fifteen miles. (PX 6). Dr. Franco weighed in on May 22, with the suggestion that the covenant restrict him "in the Town of Mamaroneck, New York and the Village of Port Chester, New York, and within a fifteen mile radius from the outside borders of the Town of Mamaroneck, New York and the Village of Port Chester, New York, excluding the State of Connecticut." (PX 33.)

The last proposal was unacceptable to GPS. Like many medical groups in this era of managed care, GPS envisioned growing its revenues by growing its patient base. It had recently purchased a practice in Rye, New York, to complement its offices in the adjacent municipalities of Mamaroneck and Port Chester (where the practice was affiliated with United Hospital). Dr. DiCosmo testified, credibly, that GPS found Dr. Franco an interesting prospect because he had family ties at Greenwich Hospital ("GH") through a Dr. Michael Marino, a nephew of a friend of Franco's father, and because Franco anticipated obtaining a teaching position and admitting privileges there. GPS hoped to develop its practice in lower Fairfield County, and Dr. Franco was part of that strategy. Therefore, GPS was not willing to employ Dr. Franco if he would not agree to some restrictions on his post-employment ability to practice within Connecticut.

Dr. Franco and Dr. Paglia negotiated over this particular term between May 22 and May 28, 1997. Dr. Franco protested that he could not take the risk that he would have to move his wife and children out of Fairfield County if his relationship with GPS did not work out. Eventually, Dr. Paglia suggested that they carve out the City of Stamford, Connecticut from the scope of the restrictive covenant, and Dr. Franco agreed. The contract that was finally signed (PX 1) contained the following language:

As a material inducement to the CORPORATION to enter into this Agreement, EMPLOYEE agrees that, in the event of termination of his employment hereunder, for a period of three (3) years following the termination date, he shall not, directly or indirectly, whether as a sole practitioner, or as an employee, shareholder, director, officer, partner, agent or independent contractor of any person, persons or entity, or in any other capacity:
(i) Engage in the practice of medicine in the Town of Mamaroneck, New York and the Village of Port Chester, New York, and within a fifteen-mile radius from the outside borders of the Town of Mamaroneck, New York and the Village of Port Chester, New York, except that EMPLOYEE shall not be restricted from practicing medicine in the City of Stamford, Connecticut.

Dr. Franco's contract also contained a liquidated damages clause, which stated that any injury resulting from Dr. Franco's breach of the restrictive covenant was likely to cause GPS irreparable damage, and provided that he would pay GPS a year's salary ($130,000) as liquidated damages in the event of a breach by Franco. (PX 1.)

The contract also contained the following pertinent provisions:

(1) Franco would work full time for the corporation, and would turn over to GPS any money he earned from any business or professional services rendered by him. (PX 1, Section 4.)
(2) Franco was eligible for a bonus in the years 1999 and 2000, calculated as a percentage of any revenues he brought into GPS in excess of $350,000 for those calendar years. The practice's accountant was to determine Franco's eligibility for a bonus and his determination was to be final and binding on the parties. (PX 1, Section 5.)
(3) Franco certified that he was licensed to practice medicine in New York and would remain so licensed. (PX 1, Section 2.)
(4) Franco would not solicit any patients of the practice for three years following his departure from the practice, disclose the names and addresses of GPS's patients, or solicit any GPS employee to come work for him. (PX 1, Section 10(a).)
(5) The contract was to expire at year-end 1997, and would continue from year to year thereafter unless terminated by either party on 60 days' written notice. (PX 1, Section 1.)
(6) The contract could be terminated for cause under the following conditions: "A determination by the CORPORATION that EMPLOYEE has engaged in misconduct or has breached this Agreement in such a material manner as to render continuance as an EMPLOYEE detrimental to the CORPORATION." (PX 1, Section 9(g).)

The contract did not contain any provision requiring Franco to become licensed to practice medicine in Connecticut or to obtain and retain privileges at Greenwich Hospital. It contained no representations of any sort about the future of GPS's practice or its business plans. It said nothing about sleep medicine or Defendant's expertise in that area.

The contract contained a standard merger clause, which precluded reliance on any representations not contained therein and merged and superseded all prior discussions between the parties. (PX 1, Section 12(b).)

At the same time, Dr. Franco borrowed $15,000 from GPS to help finance his move back to Connecticut. He signed a promissory note in that amount on May 20, 1997. (PX 2.) The note provides, in pertinent part, "Upon default in payment of any installment of principal or interest when due, the whole of the principal sum then remaining unpaid and all interest accrued thereon shall, at the option of the Payee, become immediately due and payable, without demand or notice."

Dr. Franco, who had let his Connecticut medical license lapse when he moved to New Hampshire, reobtained the license in 1997. He also applied for privileges at GH on June 9, 1997. (PX 54.) Franco admitted at trial that he obtained his privileges after signing the letter of intent with GPS, and that he used those privileges to further his employment with GPS. Dr. Franco ...


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