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Bakotic v. Bako Pathology LP

Superior Court of Delaware

December 11, 2019

BRADLEY BAKOTIC and JOSEPH HACKEL, Plaintiffs,
v.
BAKO PATHOLOGY LP, BPA HOLDING CORP., and BAKOTIC PATHOLOGY ASSOCIATES, LLC Defendants.

          Submitted: September 5, 2019

         Plaintiffs' Motion for Summary Judgment - DENIED

         Defendants' Motion for Partial Summary Judgment - GRANTED

          Michael P. Morton, Esquire; Morton, Valihura & Zerbato, LLC, Attorney for Plaintiffs.

          Kristoffer V. Sargent, Esquire; Salmeh K. Fodor, Esquire; KF Law, LLC, Attorneys for Plaintiffs.

          Mary F. Dugan, Esquire; Lauren E.M. Russell, Esquire; Young Conaway Stargatt & Taylor, LLP, Attorneys for Defendants.

          Robert W. Capobianco, Esquire; Adriana R. Midence, Esquire; Mary Claire Smith, Esquire; Jackson Lewis P.C., Attorneys for Defendants.

          MEMORANDUM OPINION

          CARPENTER, J.

         Before the Court is Bradley Bakotic ("Bakotic") and Joseph Hackel's ("Hackel") (jointly, "Plaintiffs") Motion for Summary Judgment and Bako Pathology LP's ("Bako Pathology") and BPA Holding Corp.'s ("BPA") (jointly, "Defendants") Motion for Partial Summary Judgment. For the reasons set forth in this Opinion, Plaintiffs' Motion for Summary Judgment is DENIED and Defendants' Motion for Partial Summary Judgment is GRANTED.

         I. FACTUAL & PROCEDURAL BACKGROUND

         Bako Pathology is a Delaware partnership and BPA is a Delaware corporation.[1] Bako Pathology owns BPA and BPA is the sole member of Bakotic Pathology Associates, L.L.C. (the "Company"), a Georgia limited liability company.[2] The Company "provides clinical pathology, anatomic pathology, and dermatopathology-related services."[3] Defendants Bako Pathology and BPA own and operate a national pathology reference laboratory, known as Bako Diagnostics.[4]Plaintiffs were "senior members of the management team" who continue to hold "significant equity interests in" Bako Pathology.[5] Bakotic was the President and CEO of the Company.[6] Hackel was the Vice President and the Medical Director.[7]

         In 2011, in connection with their employment by the Company, Bakotic and Hackel signed an Employee Confidentiality, Non-Solicitation, and Non-Competition Agreement ("Employee Non-Competition Agreement").[8] In 2015, Plaintiffs entered into the Agreement and Plan of Merger ("Merger Agreement, ") in which Bakotic and Hackel agreed to further restrictive covenants in exchange for $30, 400, 768.51 and $14, 357, 043.92, respectively, in cash and equity as part of the sale of their shares in Bako Pathology and BPA.[9] In 2016, following the merger, Bakotic and Hackel entered the Amended and Restated Limited Partnership Agreement of Bako Pathology (the "Partnership Agreement"), which contained additional non-competition provisions.[10] Pursuant to the Partnership Agreement, Bakotic and Hackel maintain significant ownership interests in Bako Pathology.[11]

         Following an investigation into allegations of misconduct against Bakotic, he was removed as CEO of the Company on September 8, 2017.[12] Hackel "announced his immediate 'retirement' on September 30, 2017."[13] As they are no longer employed by the Company, it is alleged that Bakotic now "intends to form a pathology laboratory and perform both executive and medical functions on its behalf'[14] and Hackel "intends to continue to provide pathology services in his capacity as a physician."[15]

         On October 3, 2017, Plaintiffs formed the Rhett Foundation for Podiatric Medical Education, Inc. (the "Rhett Foundation"), which Defendants claim "is prepared to compete against Defendants as Defendants also engage in educational activities and a residency program."[16] Plaintiffs represented that the Rhett Foundation was founded for educational purposes, not as a for-profit business.[17] On December 27, 2017, Plaintiffs brought suit against Defendants, seeking a declaration that their post-term covenants not to compete with Defendants are unenforceable.[18]On December 28, 2017, Bakotic registered Rhett Diagnostics, LLC, a medical laboratory, with the Georgia Secretary of State.[19] Further, Defendants allege that "Bakotic has begun advertising this medical laboratory to Defendants' clients, soliciting clients and employees for it, obtaining investors for it, and boasting that other individuals will operate it for him to circumvent his restrictive covenants."[20]

         Defendants brought counterclaims against Plaintiffs, seeking a declaratory judgment that the Employee Non-Competition Agreement, the Merger Agreement, and the Partnership Agreement are operative and enforceable, as well as claims for breach of contract, breach of duty of loyalty, unjust enrichment, tortious interference, and slander. Plaintiffs maintain that these counterclaims are "meritless" and "retaliatory."[21]

         On March 6, 2018, Plaintiffs moved for Judgment on the Pleadings, in part arguing that the various non-competition agreements were unenforceable pursuant to 6 Del. C. § 2707.[22] This Court denied Plaintiffs' Motion because, at that stage of the litigation, there were too many disputed issues of material facts to determine whether Section 2707 applied to Plaintiffs' activities. However, the contentions for breach of duty of loyalty, unjust enrichment, and slander were dismissed.[23]

         A. The Instant Motion

         On June 30, 2019, Plaintiffs filed a Motion for Summary Judgment again asserting, among other arguments, [24] that the non-compete provisions are void pursuant to 6 Del. C. § 2707.[25] This statute provides that:

Any covenant not to compete provision of an employment, partnership or corporate agreement between and/or among physicians which restricts the right of a physician to practice medicine in a particular locale and/or for a defined period of time, upon the termination of the principal agreement of which the said provision is a part, shall be void[26]

         Plaintiffs contend that Bakotic and Hackel "are indisputably 'physicians' as defined by 24 Del. C. § 1702(11)."[27] As such, Plaintiffs claim they cannot be restricted in their right to practice medicine and "the Court must declare all three non-compete provisions void as a matter of law."[28] They further argue that, since the provisions must be completely stricken, "no justification exists to allow Plaintiffs, on the one hand, to practice dermatopathology as employees, while on the other hand barring them from practicing dermatopathology as owners of their own practice."[29]

         In response, Defendants argue that Section 2707 is inapplicable to Bakotic and Hackel. First, they claim that none of the agreements are "between and/or among physicians" and instead are "agreements between Plaintiffs and various non-physician and corporate entities."[30] Second, the statute requires "termination of the principal agreement" and the Partnership Agreement has not terminated; Bakotic and Hackel remain Limited Partners.[31] They further argue that Plaintiffs' work "does not constitute the practice of medicine within the meaning of Delaware law."[32]Finally, they claim that even if Section 2707 applies to their work as dermatopathologists, "it does not apply to Plaintiffs' competing Lecturing and Sponsorship Activities, nor does it permit Plaintiffs to own a competing laboratory."[33]

         This is the Court's decision on Plaintiffs' Motion for Summary Judgment and Defendants' Motion for Partial Summary Judgment on the application of Section 2707 to the Plaintiffs in the instant matter.

         II. STANDARD OF REVIEW

         In reviewing a motion for summary judgment pursuant to Superior Court Civil Rule 56, the Court must determine whether any genuine issues of material fact exist.[34] The moving party bears the burden of showing that there are no genuine issues of material fact, such that he or she is entitled to judgment as a matter of law.[35]The Court must view all factual inferences in a light most favorable to the non-moving party.[36] Where it appears that there is a material fact in dispute or that further inquiry into the facts would be appropriate, summary judgment will not be granted.[37]Additionally, "the standard for summary judgment 'is not altered'" with cross-motions for summary judgment.[38]

         III. DISCUSSION

         The parties fundamentally disagree about the character of this case. Plaintiffs contend that they "are doctors who want to treat patients" and have brought this suit to determine whether the various restrictive covenants prevent them from doing so.[39]In contrast, Defendants assert "this action is not about two regular doctors who simply want to resume treating patients;" instead, it is about Plaintiffs' "failure to abide by their contractual and legal obligations to Defendants," and their attempt "to build a competing business and solicit Defendants' employees and customers."[40]

         The dispositive issue is whether Section 2707 applies to Plaintiffs, two Georgia physicians and executives, who agreed to restrictive covenants with Defendants, whose laboratory is located in Georgia. Importantly, the restrictive covenants contained Delaware choice of law provisions and Bako Pathology is a Delaware partnership and BPA is a Delaware corporation.

         The Court believes an analysis of the recent case, Dunn v. FastMed Urgent Care, P.C., [41] is instructive. In Dunn, the plaintiff was both a physician and an executive of an urgent care medical services provider in Arizona who agreed to a restrictive covenant that prohibited him from working in a "competitive executive capacity," but expressly permitted practicing medicine.[42] The agreement contained Delaware choice of law and forum provisions.[43] The plaintiff argued, unsuccessfully, that Section 2707 applied to invalidate the non-competition clause.[44] The Court noted that Section 2707 was adopted "in furtherance of... 'protecting the physician patient relationship'"[45] so that patients are not '"deprived of the services of the physician of their choice because of an economic contract entered into between two physicians.'"[46] The restriction preventing the plaintiff from engaging in a competing executive position did not violate the statute because it did not "provoke Section 27O7's protections of the physician-patient relationship;" the restriction was wholly unconnected to patient care.[47]

         Largely due to the express carve out in the restrictive covenant permitting the plaintiff to practice medicine, the Dunn Court found that Section 2707, if applicable, was not violated.[48] In reaching that conclusion, the Court cast doubt on whether Section 2707 was even applicable to the Arizona physician because the statute provides "no indication that the General Assembly intended to regulate the practice of medicine in other states."[49] The statute "pertain[s] to the provision of medical services or treatment within Delaware" and there were no allegations that the Arizona physician "ever offered, performed, or was licensed to provide any medical services in Delaware."[50] The Court noted that "Section 2707 is meant to protect physician-patient relationships within Delaware by prohibiting restrictions on the practice of medicine in Delaware," not elsewhere.[51]

         In order for a covenant not to compete provision to be void under Section 2707, it must be "between and/or among physicians," and it must "restrict the right of a physician to practice medicine."[52] The statute further provides that "upon the termination of the principal agreement of which the said provision is a part, [the covenant] shall be void; except that all other provisions" remain enforceable, including those related to any injury suffered by ...


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