Contractual Illegality and Medical Fee-Sharing

A contract law axiom states that an illegal contract is unenforceable.  The prototypical example involves a plaintiff attempting to sue on a contract that violates a statute or encourages criminal or fraudulent conduct.  Those situations clearly give rise to an illegality defense.  But what if a contract term technically violates a statute, but the resulting damage is either trivial or nonexistent? A “no harm no foul” situation.  Can the illegal contract term still be enforced?

That’s one of the questions the First District recently addressed in Ritacca v. Girardi, 2013 IL App (1st) 113511 (Sept. 2013), where a plaintiff physician sued to enforce a settlement agreement stemming from an earlier, illegal fee-sharing agreement with two of his former business partners.

After the plaintiff paid over $60,000 to settle a lawsuit filed by an equipment lender (suing on loans which were the parties’ joint responsibility), he sued his two former business partners for reimbursement under a written agreement to operate a medical facility. 

Defendants moved for summary judgment on the basis that the written agreement was unenforceable since it called for doctors and non-doctors sharing profits. The trial court agreed and granted summary judgment for the defendants.

Holding: Reversed.  Plaintiff could enforce the agreement against the defendants.

Rules/Reasons:

The contract – that amended an earlier fee-splitting agreement – clearly violated the Illinois Medical Practices Act’s (the “MPA”) anti-fee-splitting section. 226 ILCS 60/22.2(a)(physicians and non-physicians are precluded from sharing professional fees).  The agreement involved improper fee-splitting between two doctors (plaintiff and one defendant) and a lay person (the other defendant) and so was facially illegal.  ¶ 9. 

However, the Court stressed that just because a new contract stems from an earlier illegal one, this doesn’t mean the later contract is always void. As long as the new/later contract isn’t a continuation or modification of the prior illegal contract, the new contract can be upheld.  ¶ 27.

Plaintiff’s suit was premised on a second agreement that made it clear that the underlying (and illegal) first agreement was dissolved and the parties were no longer conducting business.  ¶¶ 29-30.  This led the Court to find that the second agreement wasn’t a continuation or modification of the earlier illegal agreement.

The Court ruled that the two contracts were sufficiently remote in time and substance from each other so that the plaintiff could enforce the second agreement and seek money damages from the defendants. 

The Restatement of Contracts’ Balancing Test

The Court went further and held that even if the second Agreement was sufficiently intertwined with the earlier one, the Court would still enforce it.

In Illinois, a Court can void a contract if a public policy against enforcing the contract “clearly outweighs” upholding it.  ¶ 36.  The factors that weigh in favor of enforcing a contract that violates public policy include: (a) the parties expectations, (b) the forfeiture that would result if the contract ‘t enforced, and (c) the public interest in enforcing the contract. 

The factors weighing against enforcement are (a) the strength of the policy manifested by the legislature or judicial decisions, (b) the likelihood that refusing to enforce a contract term will promote that policy,  (c) the serious of the misconduct involved, and (d) the connection between the misconduct and the contract term.  Id.

Applying these factors, the Court held that if the latter contract wasn’t enforced, it would result in a $60K plus forfeiture by the plaintiff and unjust enrichment for the defendants – since defendants were jointly responsible for the loan. 

The Court also noted that the Medical Practice Act’s dual policies of (1) discouraging profit-seeking doctors from churning their services and (2) deterring non-physicians from recommending doctors out of financial self-interest weren’t served by voiding the second agreement as the parties had long ceased doing business together.  The Court ruled that the public policy against medical services fee-sharing didn’t “clearly outweigh” allowing plaintiff to sue on the second agreement.  ¶ 40.

Lessons: Ritacca emphasizes that a technical statutory violation won’t always result in a finding of illegality.  But if a facially valid contract continues or refers to an earlier illegal one, the “new” contract will be illegal and unenforceable.  By contrast, if that new contract is far enough removed from the prior contract in time and subject matter, the new contract can be enforced.  

 

 

 

 

Facebook Announcement Doesn’t Equal Improper Client Solicitation: Mass. Court

In Invidia v. DiFonzo, 30 Mass. L.Rptr 390 (2012), a hair salon sued a former stylist for breaching a non-compete and non-solicitation clause in her employment agreement.  The Court examined whether the new employer’s posting a job change on defendant’s Facebook page and “friending” former clients was improper solicitation.

The employment contract contained a non-compete spanning two years and 10 miles and a two-year non-solicitation clause.  After she resigned, the defendant went to work for a competing salon less than two miles away.  Her new employer then posted an announcement on its Facebook page, promoting defendant’s new affiliation with the competing salon. 

The plaintiff saw the Facebook activity and sued.  The Court denied the request for injunctive relief because plaintiff failed to show a likelihood of success on the merits or irreparable harm.

Rules/Reasoning:

A preliminary injunction plaintiff must show (1) likelihood of success on the merits; (2) irreparable harm if the injunction is denied; and (3) the risk of irreparable harm to the movant outweighs similar risk of harm to the opposing party.  *2. 

Massachusetts courts scrutinize non-competition agreements because they often result from unequal bargaining power.  A covenant not to compete is enforceable only if it’s necessary to protect a legitimate business interest, is reasonably limited in time and space, and supported by the public interest.  *4.

The Non-Compete Provision

The salon plaintiff failed to show that it was likely to succeed on the merits on the noncompete because it was questionable whether a two-year/10-mile restriction was necessary to protect plaintiff’s interest and because plaintiff failed to show that its “legitimate business interest” – the goodwill which plaintiff claimed it lost – belonged entirely to plaintiff.  *5.  

The Court noted that in the hairdressing business, goodwill often belongs to the individual stylist rather than the salon.  That is, customers likely patronize a salon for a specific hairdresser; not because they like the salon itself. 

The Court also found the plaintiff failed to show irreparable harm, since plaintiff could clearly quantify its damages.  The Court pointed out that plaintiff offered evidence of the number of clients that it lost since defendant left (90) and the average dollar amount spent ($87.16) by each lost client.  This militated against a finding of irreparable harm.  *5.

The Non-Solicitation Clause

Turning to the non-solicitation clause, the Court found that the Facebook announcement of defendant’s affiliation with the new salon (by that salon) did not equate to active solicitation.*5.  

Nor did the defendant’s sending  friend requests to eight clients of plaintiff amount to a breach of the non-solicitation provision. 

The employer did however have some circumstantial evidence in support of its solicitation argument.  It offered documents at the injunction hearing that demonstrated that some 90 salon clients had cancelled (without rescheduling) appointments in the two-plus months since defendant’s departure. *6.  Yet the Court wasn’t prepared to find this a breach of the anti-solicitation provision.  The Court stressed that no current or former clients testified that defendant contacted them and solicited their business.

Take-aways: A third party’s passive Facebook posting and direct Facebook friends requests are not enough to establish solicitation for preliminary injunction purposes.  Instead, there must be direct evidence of active solicitation to merit injunctive relief.

 

 

 

New Illinois Law To Impose Strict Timing Requirements on Settling Defendants

Getting a settling defendant to pay is sometimes a Herculean task. So much so that it often spawns multiple rounds of satellite litigation just to enforce the settlement terms. I recall one case I had in McHenry County that required no less than five or six 2-hour drives to the courthouse in order to enforce a settlement agreement.  The defendant’s continual delays in making good on its settlement payment obligations caused my client considerable frustration and unnecessary expense.

Enter Public Act 98-548 (Raoul, D-Chicago; Sims, D-Chicago). This law goes into effect January 1, 2014 and amends the Code of Civil Procedure to provide personal injury plaintiff’s with an enforcement tool to enforce settlement agreements. It requires a settling defendant to (a) provide a release within 14 days of written confirmation of a settlement agreement; and (b) to pay the settlement funds within 30 days of receiving signed settlement documents from a plaintiff.  If a particular case requires court approval of a settlement, the plaintiff must provide to the defendant a copy of the court order approving settlement.

To protect third-party lien claimant’s (such as physicians or attorneys), a plaintiff receiving settlement funds should provide (a) a signed release of the lien to the defendant and (b) a letter from the plaintiff’s attorney or from health care provider, Medicare or health insurer in which the parties agreeing to hold the full amount of the third-party’s claimed lien in the plaintiff’s attorney’s client-fund account pending final resolution of lien amount.

The rule’s “teeth”: if the court finds, after a hearing, that payment has not been made within 30 days of tender of the necessary documents, judgment must be entered against that defendant for the amount in the executed release, costs (but not attorneys’ fees) incurred in obtaining the judgment, and 9 percent interest from the date of the plaintiff furnishing the necessary documents.  The Act exempts units of local government, the State of Illinois, and state employees. Effective January 1, 2014. 

Defense firms should notify clients of these rule changes with sufficient lead time to ensure a seamless transition to the new settlement payment obligations.

For additional reading see:

http://iln.isba.org/blog/2013/09/05/new-law-requires-timely-executed-settlement-releases-most-cases