In a recent California court case, Monarch Healthcare and physician Margo Jaffe Orr, MD squared off regarding a non-compete issue. Dr. Jaffe sold her medical practice to Monarch for $34,700 in a deal which purportedly included all tangible and intangible assets. However, the purchase price allocation afforded all of the purchase consideration to furniture, fixtures, equipment and supplies. No amount of the purchase price was allocated to goodwill, even though the contract terms claimed to include it. The transaction was accompanied by an employment agreement which included non-compete and non-solicitation provisions.
Non Compete and Goodwill
Dr. Jaffe later went on to open a new practice presumably at the end of her employment with Monarch. The group responded by claiming that the non-compete and non-solicitation clauses in her employment agreement had been violated. An injunction was granted by the court which prevented Dr. Jaffe from soliciting previous patients of the practice she sold to Monarch. However, it did not prevent her from opening the new office.
Purchase Price Allocation
Dr. Jaffe challenged the injunction and it was overturned. The California’s Business and Professions Code states that non-compete and non-solicitation clauses are generally not enforceable, except in the sale of a business where consideration has been paid for goodwill. The court determined that Monarch did not purchase Dr. Jaffe’s goodwill, as the purchase price allocation was for 100% of hard assets and did not specify an amount for goodwill. Additionally, the employment contract did not stipulate payment for goodwill. Thus the non-compete and non-solicitation provisions were deemed irrelevant and unenforceable.
The clear message in this case is that purchase agreements and purchase price allocations must be consistent with the actual financial terms of the deal in order to be valid. Careful consideration should be made when memorializing deal terms.0