Goodwill-noncompete connection trips up buyer of medical practice

Healthcare v. Orr, 2016 Cal. App. Unpub. LEXIS 440 (Jan. 20, 2016)

Goodwill has its price. That's the message the California Court of Appeal recently sent to a medical entity that sought to affect a noncompete/nonsolicitation agreement following the purchase of a doctor's practice. The decision also sends a note of caution to appraisers who work on asset valuations in similar transactions.

When a solo independent practitioner expressed interest in selling her medical practice, a large medical provider offered a generous price for the building in which the practice was housed (also owned by the doctor) but told the doctor the practice itself had no monetary or goodwill value. The doctor responded she was not "comfortable" with the proposition that the business had no value, but negotiations continued.

Ultimately, the parties reached a deal that included the sale of the building and the sale of the assets of the practice, as well as an employment contract for the doctor. The asset purchase agreement said the assets being sold included all of the practice's goodwill. At the same time, it allocated 100% of the purchase price to tangible assets: furniture, fixtures, equipment, and supplies. The agreement also included noncompete and nonsolicitation clauses.

The price allocation came to haunt the buyer later when it tried to enforce the restraints against the doctor.

Noncompetes and nonsolicitation clauses are generally unenforceable under California law. An exception applies only when the sale of a business includes the sale of the business's goodwill and there is a clear indication that the parties valued goodwill as part of the sales price. The "clear indication" requirement is where the buyer's arrangement ran into trouble.

To find out why the appeals court invalidated the noncompete/nonsolicitation clauses, click here.