Michael Salewski, D.v.m., App. v. Pilchuck Veterinary Hospital, Inc., P.s., Res.

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

DIVISION ONE

MICHAEL SALEWSKI, D.V.M., No. 72314-6-1

en

an individual,

C.C

Appellant,

v.

PILCHUCK VETERINARY HOSPITAL, PUBLISHED OPINION

INC., P.S., a Washington corporation,

FILED: August 31, 2015

Respondent.

Verellen, A.C.J. — The mutual promises of shareholders are adequate

consideration for a noncompete agreement among the shareholders, even if the

noncompete takes the form of promises in the shareholders' individual employment

agreements. And a liquidated damages clause is enforceable if it reasonably forecasts

the unascertainable financial harm that would result from a violation of the noncompete

agreement.

Michael Salewski, DVM, does not establish any error on the face of the

arbitrator's award that relied upon the mutual promises of the shareholders of Pilchuck

Veterinary Hospital, Inc. as the consideration supporting the noncompete agreements

signed by each of the shareholders. Neither is there an error on the face of the award

in concluding that the $300,000 liquidated damages clause was a reasonable forecast

of damages. We affirm.

No. 72012-1-1/2

FACTS

On December 17, 1992, Pilchuck hired Salewski as an associate veterinarian.

That same day, Salewski signed an employment agreement and an agreement not to

compete. Sometime between 1998 and 2000, he became a shareholder in the

professional services corporation and signed a new confidentiality and noncompete

agreement. Subsequently, every time a new shareholder was brought in, a whole new

set of documents, including agreements not to compete, were prepared and signed by

all the shareholders. Consequently, Salewski signed a total of four noncompete

agreements as a shareholder.

The terms of the noncompete agreements changed slightly over time. The

agreement at issue here, signed by Salewski and the eight other shareholders on

January 1, 2007, stated:

3. Agreement Not To Compete. Employee shall not practice

veterinary medicine within 50 miles of the corporate offices of Principal

during the Non-compete Period [of thirty-six (36) months following

Employee's termination of employment with Principal]. Regardless of

geographical location, Employee shall not render services to any Pre

existing Client who was a client at any time within the 24 months

preceding termination of employment during the Non-compete Period.

Each of the parties has reviewed the terms of the Agreement and

acknowledges that the terms hereof are necessary for the protection of the

Principal and the clients of Pilchuck Veterinary Hospital. The parties

further acknowledge that the non-compete provisions contained herein do

not create an undue hardship for either Employee or for Principal and are

reasonable under the circumstances.

4. Remedies in an Event of Breach. Employee hereby recognizes

that irreparable damage will result to Principal and to the business of

Principal in the event of breach by Employee by any of the covenants set

forth in this agreement. In the event of breach of any of the covenants

and assurances contained in this Agreement, Principal shall be entitled to

enjoin and restrain Employee from any continued violation of this

No. 72012-1-1/3

agreement. This equitable remedy shall be in addition to (and not

supercede) any action for damages Principal may have for breach of any

part of this Agreement.

4.1 Additionally, Employee agrees to pay liquidated

damages in the amount of Three Hundred Thousand Dollars ($300,000)

for any violation of the covenant not to compete.[1]

This 2007 agreement reflected the same terms as the two noncompete agreements he

signed in 2002 and 2005, except that the liquidated damages amount increased from

$200,000 in the 2005 agreement to $300,000 in the 2007 agreement.

In 2008, Salewski indicated that he wanted to leave the ownership group. As a

result, he and the remaining eight shareholders executed a stock redemption

agreement effective December 31, 2008. The agreement provided that "a list or

summary of any and all other agreements remaining in effect between Buyer and Seller

from and after the date of mutual execution hereof is attached as Exhibit D hereto."2

Exhibit D listed the noncompete agreement dated January 1, 2007.

Salewski continued to work for Pilchuck as a nonshareholder employee until

December 2010, when he announced that he was moving to start a new practice in

Oregon. Prior to terminating employment, Salewski met with Pilchuck's chief financial

officer and chief executive officer to discuss the provisions of his noncompete

agreement. Shortly after, Pilchuck discovered, and Salewski admitted, that he was

providing veterinary services within 50 miles of Pilchuck, as well as services for former

Pilchuck clients outside the 50-mile radius.

1 Clerk's Papers (CP) at 110.

2 CP at 323.

No. 72012-1-1/4

The parties agreed to arbitrate the enforceability and application of the

noncompete agreement and its corresponding liquidated damages provision. The

arbitrator issued an award in favor of Pilchuck, concluding that "[t]he covenant not to

compete in question is a valid and binding contract, and [Pilchuck] is entitled to

judgment or credit in the amount of the liquidated damages of $300,000."3

Pilchuck filed a motion in Snohomish County Superior Court to confirm the

arbitration award, including attorney fees and costs, and prejudgment interest. Salewski

responded with a motion to vacate the arbitration award. After hearing oral argument,

the superior court granted Pilchuck's motion to confirm the award and denied Salewski's

motion to vacate, entering a judgment in favor of Pilchuck in the amount of

$125,855.66,4 prejudgment interest in the amount of $30,229.20, and statutory costs

and attorney fees in the amount of $39,929.91.

Salewski appeals.

ANALYSIS

Salewski contends that the superior court erred in denying his motion to vacate

the arbitration award. He argues the award is erroneous on its face because the

noncompete agreement lacked valid consideration and because the liquidated damages

provision was an unenforceable penalty. Neither argument is persuasive.

Appellate review of an arbitrator's award is limited to the same standard

applicable in the court which confirmed, vacated, modified or corrected that award.5

3 CP at 150.

4 This amount reflects the liquidated damages amount, $300,000, less the

amount of the principal owed under the stock redemption agreement note, $174,144.40.

5 Pegasus Constr. Corp. v. Turner Constr. Co.. 84 Wn. App. 744, 747, 929 P.2d

1200 (1997) (quoting Barnett v. Hicks, 119Wn.2d 151, 157, 829 P.2d 1087(1992));

No. 72012-1-1/5

Judicial review "is confined to the question of whether any of the statutory grounds for

vacation exist."6 The party seeking to vacate the award bears the burden of showing

that such grounds exist.7 "One of the statutory grounds for vacating an award exists

when the arbitrator has 'exceeded the arbitrator's powers.'"8 To vacate an award on

this ground, the error must appear "on the face of the award."9

The "facial legal error standard is a very narrow ground for vacating an arbitral

award."10 It does not extend to a potential legal error that depends upon the

consideration of the specific evidence offered or to an indirect sufficiency of the

evidence challenge.11 Courts are not permitted to conduct a trial de novo when

reviewing the award, "do not look to the merits of the case, and they do not reexamine

evidence."12 "The error should be recognizable from the language of the award, as, for

instance, where the arbitrator identifies a portion of the award as punitive damages in a

jurisdiction that does not allow punitive damages.'"13 "Where a final award sets forth the

Cummings v. Budget Tank Removal & EnvtI. Servs., LLC, 163 Wn. App. 379, 388, 260

P.3d 220 (2011).

6 Cummings, 163 Wn. App. at 388.

7ld\

8 Jd, (quoting RCW 7.04A.230(d)).

9 Federated Servs. Ins. Co. v. Pers. Representative of Estate of Norberg, 101

Wn. App. 119, 123, 4 P.3d 844 (2000).

10 Broom v. Morgan Stanley DW, Inc.. 169 Wn.2d 231, 239, 236 P.3d 182(2010).

11 See Cummings, 163 Wn. App. at 389-90.

12 Broom, 169 Wn.2d at 239.

13 Cummings, 163 Wn. App. at 389 (quoting Estate of Norberg. 101 Wn. App. at

123-24).

No. 72012-1-1/6

arbitrator's reasoning along with the actual dollar amounts awarded, any issue of law

evident in the reasoning may also be considered as part of the face of the award."14

Noncompete Agreement

Salewski argues that there is an error on the face of the award because "[t]here

is no authority in Washington to support the arbitrator's conclusion that a promise by

another shareholder... is sufficient consideration for a noncompetition agreement

entered into by a different individual after the start of his or her initial employment."15

We disagree.

Generally, owners of a business entity can agree to reasonable limits on their

ability to compete with each other without regard to the terms of their employment. This

concept is recognized in Restatement (Second) of Contracts: "Promises imposing

restraints that are ancillary to a valid transaction or relationship include ... a promise by

a partner not to compete with the partnership."16 This principle expressly applies both to

partnerships and joint ventures,17 and particularly to professional partners.18

14 Jd

15 Appellant's Br. at 19.

16 Restatement (Second) of Contracts § 188 (1981).

17 Restatement! 188 cmt. h; 6 Samuel Williston & Richard A. Lord, A

Treatise on the Law of Contracts § 13:18 (4th ed. 2009).

18 2 Louis Altman & Malla Pollack, Callmann on Unfair Competition,

Trademarks and Monopolies § 16:27, at 16-112 to -113 (4th ed. 2009) ("When a

covenant not to compete is signed by a true partner in a professional partnership, some

courts have recognized that this presents a situation which is entitled to a level of

scrutiny intermediate between that which is applicable to an employment and that which

is applicable to a sale of a business interest.").

No. 72012-1-1/7

Such noncompete agreements are not uncommon, especially in small business

entities where the owners are professionals who are also employees.19 For purposes of

restraints on competition, we see no distinction between the shareholders of Pilchuck

and partners or joint venturers who have agreed to restrict their competition with the

partnership or joint venture. Most importantly here, the adequacy of consideration

should be viewed in the context of the agreement among owners and not merely as an

employee/employer relationship.20 The mutual promises of all the owners of a business

are adequate consideration for a noncompete agreement among all the owners.21

19 See Emerick v. Cardiac Study Ctr., Inc.. 170 Wn. App. 248, 255, 286 P.3d 689

(2012) (explaining that restrictive covenants are common among professionals because

they allow a new professional to step into an already established practice while

protecting the employer from future competition); see also Columbia Physical Therapy.

Inc. v. Benton Franklin Orthopedic Assocs.. 168 Wn.2d 421, 430, 228 P.3d 1260(2010)

(concluding that the professional services for which a professional service corporation is

incorporated and in which it may therefore engage are those for which the shareholders

are licensed); RCW 18.100.010 (the shareholders in a professional services

corporation, such as Pilchuck, are all required by statute to be licensed professionals

rather than mere passive investors).

20 See Ashley v. Lance. 75 Wn.2d 471, 475, 451 P.2d 916 (1969) ("In interpreting

the partnership agreement, including the restrictive covenant, the agreement must be

read as a whole. It must also be construed in the light of the history of the partnership

and its purpose.").

21 See generally id. (holding that in a five-man medical partnership, where a new

partnership agreement was signed each time a new partner was added, the plaintiff

doctor could invoke the partnership agreement despite being the only remaining partner

after four partners left in concert to start a competitive practice); Alexander & Alexander,

Inc. v. Wohlman, 19 Wn. App. 670, 682-84, 578 P.2d 530 (1978) (holding that there was

adequate consideration to support noncompete agreements made by shareholders as

part of the sale of an insurance business); Paula Berg, Judicial Enforcement of

Covenants Not to Compete Between Physicians: Protecting Doctors' Interests at

Patients' Expense, 45 Rutgers L. Rev. 1, 4 n.14 (1992) ("The requirement of

consideration is not particularly problematic in the context of noncompetition clauses

ancillary to partnership agreements, because all partners are equally benefitted and

burdened by the provision and the parties' bargaining power is presumed to be equal.").

No. 72012-1-1/8

Here, the face of the award reveals the determination by the arbitrator that the

shareholders all agreed to and signed new noncompete agreements each time a new

shareholder joined the practice.22 On the face of the award, the arbitrator relied upon

the mutual promises of the shareholders as consideration for the noncompete

agreements.23 The agreements here took the form of ancillary promises contained in

the individual "employment agreements" between each shareholder and the

professional services corporation. But the arbitrator expressly found that new

agreements were signed by all of the shareholders each time a new shareholder joined.

Accordingly, the mutual agreement of all the Pilchuck shareholders not to compete with

the professional service corporation provided adequate consideration for the 2007

noncompete agreement.24

Salewski relies upon employment law decisions recognizing that where a

noncompete agreement is entered into or modified after employment, mere continued

employment does not provide adequate consideration to enforce the agreement

because independent consideration is required.25 But he provides no authority that

such limitations apply to the modification of a noncompete agreement mutually entered

22 CP at 147 ("Every time a new owner was brought in as a shareholder of

[Pilchuck], a whole new set of documents, including agreements] to not compete, were

prepared and signed by all.").

23 CP at 148 ("The promises of the other shareholders were consideration for

[Salewski]'s promise. Thus there was a bargained for exchange of promises.").

24 Here, Salewski was not an employee who acquired a negligible or revocable

ownership interest in order to qualify as a partial "owner" of the business for the purpose

of enforcing the covenant not to compete. See 2 Altman & Pollack, supra.

25 Labriolav. Pollard Grp.. Inc., 152 Wn.2d 828, 100 P.3d 791 (2004).

8

No. 72012-1-1/9

into by all shareholders of a corporation.26 Thus, there is no legal error revealed on the

face of the award. To the extent Salewski suggests that we should somehow evaluate

the strength of the evidence that the shareholders mutually agreed and mutually

executed identical new "employment agreements" each time a new shareholder joined,

that approach would far exceed our narrow review.

The impact of the stock redemption agreement by which Salewski became a

former shareholder and employee does not alter our analysis. The redemption

agreement expressly provides that the 2007 noncompete agreement continues in effect.

The redemption agreement is entirely consistent with the arbitrator's determination that

the 2007 agreement continued to apply after the stock redemption.27

There is no error on the face of the award. The 2007 noncompete agreement is

supported by adequate consideration and applies to Salewski's post-2010 conduct.

26 Consistent with the arbitrator's observations, some courts and commentators

recognize that the reason for greater scrutiny in an employee/employer noncompete

agreement is the leverage held by the employer in that relationship. See 2 Altman &

Pollack, supra, at 16-113 ("In one such case[,] the court said that a professional

partner is like an employee, but does not suffer from the same inequality of bargaining

power and impairment of his ability to find subsequent employment."); 10A William

Meade Fletcher & Carol A. Jones, Fletcher Cyclopedia of the Law of

Corporations § 4979, at 52-53 (perm, ed., rev. vol. 2011) ("The rationale behind the

distinction in analyzing covenants not to compete is that a contract of employment

inherently involves parties of unequal bargaining power to the extent that the result is

often a contract of adhesion, while a contract for the sale of a business interest is far

more likely to be one entered into by parties on equal footing."); see also Restatement

§ 188 cmt. g ("Post-employment restraints are scrutinized with particular care because

they are often the product of unequal bargaining power and because the employee is

likely to give scant attention to the hardship he may later suffer through loss of his

livelihood.").

27 Salewski did not become a mere employee; he was a former

shareholder/employee who was owed more than $200,000 under the redemption

agreement.

No. 72012-1-1/10

Liquidated Damages

Salewski argues that the liquidated damages provision "is not based on any

formula and bears no reasonable relation to any actual damage that might befall

Pilchuck ifa veterinarian were to leave the practice and compete."28 We disagree.

Washington courts "are loathf ] to interfere with the rights of parties to contract as

they please between themselves."29

It is not the role of the court to enforce contracts so as to produce the most

equitable result. The parties themselves know best what motivations and

considerations influenced their bargaining, and, while "[t]he bargain may

be an unfortunate one for the delinquent party, ... it is not the duty of

courts of common law to relieve parties from the consequences of their

own improvidence . . . ."[30]

Liquidated damage clauses "are favored and are enforceable ifthey do not

constitute a penalty or are otherwise unlawful."31 The arbitrator correctly stated the test

for the enforceability of such clauses, that "(1) the amount fixed must be a reasonable

forecast of just compensation for the harm that is caused by the breach, and (2) the

harm must be such that it is incapable or very difficult of ascertainment."32

28 Appellant's Reply Br. at 7.

29 Mqmt.. Inc. v. Schassberger, 39 Wn.2d 321, 326, 235 P.2d 293 (1951).

30 Watson v. Ingram, 124 Wn.2d 845, 852, 881 P.2d 247 (1994) (alterations in

original) (quoting Reichenbach v. Sage, 13 Wash. 364, 368, 43 P. 354 (1896)).

31 Knight, Vale & Gregory v. McDaniel, 37 Wn. App. 366, 371, 680 P.2d 448

(1984).

32 Id.

10

No. 72012-1-1/11

"Harm resulting to one business from the competition of another business is

difficult to estimate accurately."33 The main inquiry is "whether the specified liquidated

damages were reasonable at the time of contract formation."34

The reasonableness of liquidated damages is not determined retroactively

by their correspondence with actual damages, but by reference to the

prospective difficulty of estimating the possible damages that would flow

from a breach. . . . The greater the prospective difficulty of estimating

possible damages, the greater the range of reasonableness used in

assessing a liquidated damages provision.[35]

Here, the arbitrator determined that the 2007 agreement to pay $300,000 for

violation of the noncompete agreement was a reasonable forecast of damages. This

agreement was negotiated and signed by all of the shareholders. As the arbitrator

observed, it "was not something rammed down the throat of an employee" by someone

with unequal bargaining power.36 We do not go beyond the face of the award to

evaluate the evidence that was before the arbitrator. The face of the award reveals no

legal error. To the extent Salewski's arguments imply that there could not have been

adequate evidence to support the arbitrator's determination that $300,000 was a

reasonable forecast of damages, such an inquiry would require us to go behind the face

of the award to consider evidence not before us.37

Accordingly, there is no error on the face of the arbitration award.

33 Id; Walter Implement, Inc. v. Focht, 107 Wn.2d 553, 559, 730 P.2d 1340

(1987).

34 Watson, 124 Wn.2d at 853.

35 ]d

36 CP at 150.

37 We note that the amount that would likely be owing to a redeemed shareholder

could be considerable, more than $200,000 in this case. Such a factor might be a valid

consideration in forecasting the harm if a redeemed shareholder chooses to breach the

noncompete agreement.

11

No. 72012-1-1/12

Attorney Fees

Lastly, Pilchuck contends it is entitled to attorney fees and costs as provided in

the noncompete agreement. In Washington, reasonable attorney fees may be awarded

when authorized by a contract.38 "A contract which provides for attorney fees to enforce

a provision of the contract necessarily provides for attorney's fees on appeal."39 Here,

the noncompete agreement provides that "[s]hould the Principal be the prevailing party

in any action to enforce this Agreement (Contract) the Principal shall be entitled to all

attorneys' fees and costs incurred enforcing its right under this Agreement."40 Pilchuck

remains the prevailing party and thus, is entitled to an award of reasonable attorney

fees and costs on appeal upon compliance with RAP 18.1.

We affirm.

WE CONCUR:

|o<^kcy

38 Marine Enters, Inc. v. Sec. Pac. Trading Corp., 50 Wn. App. 768, 771, 750

P.2d 1290(1988).

39 ]d at 774.

40 CP at 111.

12