Enforceability of Liquidated Damage Clauses in Physician Non-Compete Agreements in Colorado

by J. Mark Baird | Jan 17, 2020 | Colorado Employment Law Blog

While physicians may not be enjoined (legally prohibited) from practicing medicine in Colorado under the Colorado non-compete statute, the statute does allow for non-compete provisions with physicians that “require the payment of damages in an amount that is reasonably related to the injury suffered by reason of termination of the agreement.” C.R.S. § 8-2-113(3).

Because physicians cannot be outright restricted from practicing, medical employers often include liquidated damages clauses in non-compete agreements as an alternative means of protecting their business interests. These clauses predefine the amount a physician must pay if they leave a practice and engage in competitive activity, ensuring compensation for any resulting financial harm. However, Colorado courts have emphasized that for these provisions to be enforceable, the damages must reflect actual economic injury rather than speculative or arbitrary estimates.

This post examines key Colorado court decisions that clarify when liquidated damages clauses in physician employment agreements meet the legal standard for enforceability under C.R.S. § 8-2-113(3).

What Are Liquidated Damages in Colorado Physician Non-Compete Agreements?

As a result, it has been increasingly common for medical practices to include “liquidated damage” clauses in non-compete provisions in physician employment agreements. A liquidated damages clause is a contractual provision that establishes a predetermined amount of compensation an employee must pay if they violate a contract, such as by engaging in competitive medical practice after leaving an employer.

In Colorado physician non-compete agreements, medical employers often use liquidated damages clauses as an alternative to outright prohibiting competition, ensuring financial compensation for any competitive harm suffered.

However, courts have ruled that such clauses must be:

Reasonably related to actual damages suffered by the employer.
Not speculative, excessive, or punitive.

Two key cases in Colorado employment law have shaped how courts assess the enforceability of liquidated damages clauses under C.R.S. § 8-2-113(3).

Key Court Cases on Physician Non-Compete Agreements in Colorado

Wojtowicz v. Greely Anesthesia Services, P.C. (1997)

In Wojtowicz v. Greely Anesthesia Services, P.C., 961 P.2d 520 (Colo. App. 1997), the Colorado Court of Appeals examined a liquidated damages provision that required a physician to pay 50% of their fees from practicing medicine in competition with their former employer.

The court ruled the liquidated damages clause unenforceable, citing the requirement that such provisions cannot be “based on speculation or conjecture” or be “sustained by evidence that is speculative, remote, imaginary, or impossible of ascertainment.” Id. at 522.

The employer failed to prove actual financial harm, as the net profits of the practice remained unchanged after the physician left.

The court held that because the employer could not show that the liquidated damages amount was “reasonably related to the injury suffered,” as required by C.R.S. § 8-2-113(3), the clause was thus unenforceable.

This ruling established that liquidated damages clauses in Colorado physician non-compete agreements must be supported by demonstrable economic loss rather than hypothetical projections or broad penalty clauses.

Crocker v. Greater Colorado Anesthesia, P.C. (2018)

In Crocker v. Greater Colorado Anesthesia, P.C., 2018 COA 33 (Colo. App. 2018), the Colorado Court of Appeals provided further clarification on the enforceability of liquidated damages in physician employment agreements.

The non-compete agreement included a liquidated damages clause that required a departing physician to pay:
1. The three-year annual average of gross revenue the physician generated.
2. Minus the three-year annual average of direct costs the employer incurred in employing the physician.
3. Multiplied by two, representing two years of restricted competition.
4. Plus $30,000, covering administrative costs associated with terminating and replacing the physician.

The trial court ruled the liquidated damages clause unenforceable, as the employer failed to demonstrate any actual financial loss, such as lost patients or reduced revenue.

The Court of Appeals affirmed the decision, holding that “the statute directs that a damages term in a non-compete provision such as here is enforceable only if the amount (whether a fixed sum or calculated pursuant to a formula) is reasonably related to ‘the injury suffered,’” in the past tense.” Id. at 3

Thus, under this analysis, the court found that “the reasonableness of the relationship between the two amounts must be demonstrated, and it cannot be analyzed prospectively; by definition, it can only be determined upon the termination of employment.” Id.

Colorado Physician Non-Compete Laws: The Crawford Analysis

Following the Crocker decision, courts now apply what is informally called the Crawford Analysis to determine if liquidated damages clauses in Colorado physician non-compete agreements are enforceable.

To be valid under C.R.S. § 8-2-113(3), liquidated damages must:

Be directly linked to the actual harm suffered at the time of termination.
Not be based on speculative projections or arbitrary calculations.
Be supported by evidence of financial loss due to competition.

If no reasonable relationship between the liquidated damages and actual injury can be demonstrated, Colorado courts will declare the clause unenforceable.

Implications for Physicians and Medical Employers in Colorado

For Physicians:

Review non-compete agreements carefully before signing, particularly the liquidated damages clause.
Consult a Colorado employment lawyer if the damages clause seems excessive or unfairly punitive.
If leaving a practice, consider whether the liquidated damages are enforceable under the Crawford Analysis.

For Medical Employers:

Ensure liquidated damages clauses comply with C.R.S. § 8-2-113(3) by tying the damages directly to actual financial harm suffered.
Maintain accurate financial records to support any liquidated damages claims.
Avoid speculative damages calculations—courts will invalidate unenforceable liquidated damages clauses.

Need Legal Advice on Physician Non-Compete Agreements in Colorado?

If you are a physician or medical employer in Colorado dealing with non-compete agreements or liquidated damages clauses, the attorneys at Baird Quinn LLC can provide legal guidance.