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Crocker v. Greater Colorado Anesthesia, P.C.

Court of Appeals of Colorado, Fourth Division

March 8, 2018

Michael A. Crocker, M.D., Plaintiff-Appellee and Cross-Appellant,
Greater Colorado Anesthesia, P.C., n/k/a Greater Colorado Anesthesia, Inc., Defendant-Appellant and Cross-Appellee.

         City and County of Denver District Court No. 14CV34512 Honorable Karen L. Brody, Judge

          Zonies Law LLC, Sean Connelly, Denver, Colorado, for Plaintiff-Appellee and Cross-Appellant

          Holland & Knight LLP, Leah E. Capritta, Thomas D. Leland, Denver, Colorado, for Defendant-Appellant and Cross-Appellee


          DAVIDSON, JUDGE [*]

         ¶ 1 Greater Colorado Anesthesia, P.C. (old GCA), now known as Greater Colorado Anesthesia, Inc. (new GCA), (collectively GCA) appeals the district court's judgment finding that the noncompetition provision of an employment agreement between GCA and Michael A. Crocker, M.D., an anesthesiologist, is unenforceable. Crocker, a former shareholder of old GCA, cross-appeals the court's valuation of his share of old GCA upon exercising his right of dissent against a merger-acquisition with U.S. Anesthesia Partners (USAP) to form new GCA. We affirm.

         I. Background

         ¶ 2 Crocker was a shareholder in Metro Denver Anesthesia from 2001 until 2013, when that entity merged with another to form old GCA. In conjunction with that merger, Crocker purchased one share of old GCA stock for $100. In April 2013, he signed a shareholder employment agreement (the Agreement), which contained a provision for liquidated damages to be paid to old GCA in the event that the former employee violated the "Damages Upon Competition" section within the two years immediately following termination of the Agreement.

         ¶ 3 In late 2014, old GCA began entertaining a "merger" with USAP. USAP would buy out all existing GCA shares for a substantial lump sum of cash plus USAP common stock. To receive that payment, shareholders of old GCA would be required to execute various agreements, including a new employment agreement reflecting a 21.3% reduction in pay and a five-year employment commitment. To effectuate the merger, old GCA would form an interim company (GCA Merger Sub, Inc.), file amended and restated articles of incorporation, and convert the company into a C-corporation, new GCA.

         ¶ 4 Crocker opposed the action. He voted against it on January 27, 2015, and provided notice pursuant to section 7-113-202, C.R.S. 2017, that he would demand payment for his share of old GCA if the shareholders approved the merger, in exercise of his dissenter's rights.

         ¶ 5 Shareholders approved the merger on January 30, 2015. The merger took place eleven days later. Each shareholder who had voted for the merger and had executed the related agreements would receive (1) $626, 000 in cash; (2) $224, 000 in USAP common stock, to fully vest in five years; and (3) a signing/retention bonus reflective of his or her prior income. Old GCA sent Crocker $100 for his share, an amount that he refused. He later demanded payment in the amount of $1, 030, 996.

         ¶ 6 Crocker communicated that he did not understand how the merger would affect his employment status and offered to work under a temporary placeholder contract, which GCA did not offer. He did not return to work for GCA; he took a temporary position in Grand Junction. In March 2015, he signed an employment agreement with Guardian Anesthesia Services and began providing anesthesia services at Parker Adventist Hospital, a hospital within the noncompete area of the Agreement.

         ¶ 7 As relevant to this appeal, the district court held a trial to address (1) new GCA's claim for damages resulting from Crocker's alleged breach of the noncompete terms of the Agreement; and (2) new GCA's request for a judicial appraisal of the fair value of Crocker's 1.1% share of old GCA, pursuant to section 7-113-301, C.R.S. 2017.

         ¶ 8 The court found, in an extraordinarily thorough order, that Crocker was no longer bound by the Agreement and that the covenant not to compete could not be enforced against him because (1) the Agreement was no longer valid — it was terminated and superseded by a new GCA agreement to which Crocker was not a party; (2) Crocker's exercise of dissenter's rights forced him to cease his employment with GCA, and he was not bound by the terms of a subsequent merger agreement; and (3) even if Crocker remained bound by the covenant not to compete, the liquidated damages to be assessed according to the terms of the Agreement were not reasonably related to the injury suffered by GCA, and the noncompete provision was therefore unenforceable under section 8-2-113(3), C.R.S. 2017.

         ¶ 9 The district court also found, after considering expert testimony from each side, that the fair value of Crocker's share of old GCA under section 7-113-101(4), C.R.S. 2017, was $56, 044, plus interest.

         ¶ 10 GCA appeals, contending that the district court erred by finding the noncompetition provision of the Agreement unenforceable. Crocker cross-appeals, contending that the court erred by excluding evidence of the price USAP paid for old GCA in valuing his share. We reject each contention.

         II. Enforceability of the Noncompete Provision

         ¶ 11 GCA argues that the district court erred in finding the noncompete provision of the Agreement unenforceable, specifically because the court (1) found that the noncompete provision did not survive termination of the Agreement; (2) found that new GCA could not enforce the Agreement entered into by old GCA; (3) considered Crocker's exercise of dissenter's rights in the context of his employment agreement; and (4) failed to consider evidence of the parties' intent at the time of contracting when evaluating the reasonableness of the liquidated damages formula.

         ¶ 12 In order to affirm, we need only find the noncompete provision unenforceable on one basis. However, because we find a dearth of Colorado case law dealing with two specific aspects of enforceability of a noncompete provision in this context, we discuss both below. First, we agree with the district court that new GCA could not enforce a noncompete provision against a dissenting shareholder forced out of employment by the action of a merger. And second, we agree with the district court that any damages awarded pursuant to a noncompete agreement and section 8-2-113(3) must be reasonably related to the injury actually suffered and not simply related to an injury prospectively estimated at the time of contract formation.

         A. The Agreement

         ¶ 13 As relevant to our analysis of the noncompete provision, the Agreement between Crocker and old ...

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