Operational Status Requirement for Enforceable Liquidated Damages in Physician Non-Compete Agreements

Introduction

In Caruso v. Barton, 2025 WL XXXX (Del. May 2, 2025), the Supreme Court of Delaware addressed the enforceability of a liquidated damages clause in a physician employment agreement containing a post-termination non-compete covenant. Richard F. Caruso, M.D., P.A. T/A Seaside Gastroenterology Consultants (“Seaside”) sued its former employee, Dr. Heather Barton, for breach of the two-year, ten-mile non-competition provision and sought $100,000 in liquidated damages. The Superior Court granted summary judgment for Barton on the ground that Seaside had ceased operating and sold its assets before Barton’s resignation took effect, rendering the liquidated damages clause an unenforceable penalty. On appeal, the Supreme Court reversed and remanded, holding that a genuine factual dispute exists as to whether Seaside remained an operating entity when Barton began competing—and that summary judgment was premature until that factual question is resolved.

Summary of the Judgment

The Supreme Court of Delaware reversed the Superior Court’s grant of summary judgment for Barton and remanded for a limited evidentiary determination:

Seaside employed Barton under an Agreement that contained a two-year, ten-mile non-compete and a $100,000 liquidated damages provision.
Barton resigned effective May 28, 2021, and began practicing at a competing gastroenterology group in June 2021.
Seaside sold office furniture and equipment on May 11, 2021, to AmSurg but did not sell its corporate entity.
The Superior Court held that because Seaside “was no longer operating,” enforcing the clause would be a penalty untethered to any business interest.
The Supreme Court applied de novo review, found that contested facts remain about Seaside’s operational status post-sale, and remanded for factfinding on whether Seaside continued to see patients when Barton began competing.

Analysis

Precedents and Statutes Cited

6 Del. C. § 2707 – Physician non-compete statute voiding injunctions but allowing “damages reasonably related to the injury suffered.”
Delaware Bay Surgical Servs., P.C. v. Swier, 900 A.2d 646 (Del. 2006) – Defines liquidated damages vs. penalty and enforces reasonable pre-estimates of unascertainable losses.
GMG Ins. Agency v. Edelstein, 328 A.3d 302 (Del. 2024) – Summary judgment reviewed de novo; material facts must be undisputed.
Lee Builders, Inc. v. Wells, 103 A.2d 918 (Del. Ch. 1954) – Two-part test for liquidated damages: uncertainty of harm and reasonableness of amount.
Palekar, Batra, Faw Casson, & S.H. Deliveries – Trial court decisions elaborating on liquidated damages enforceability in Delaware.

Legal Reasoning

The Court’s decision rests on three core legal principles:

De Novo Review of Summary Judgment: Summary judgment is proper only where there is no genuine dispute as to any material fact. Here, the parties dispute whether Seaside remained operational when Barton began practicing elsewhere.
Statutory Carve-Out for Physician Non-Competes: Although § 2707 voids injunctive relief, it allows “damages reasonably related” to post-termination competition, including liquidated damages clauses if not punitive.
Liquidated Damages vs. Penalty: A valid liquidated damages clause must be a reasonable forecast of probable loss at the time of contracting and not a penalty designed to punish a breach. The $100,000 figure here was presumptively reasonable and uncontested in its reasonableness.

The Superior Court concluded that absence of an operating business destroyed any business interest, rendering the clause punitive. The Supreme Court held that this factual premise—whether Seaside had in fact ceased patient care—must be determined before labeling the clause a penalty.

Impact on Future Cases

Caruso v. Barton clarifies that:

Courts must identify if a medical practice remains an ongoing enterprise before enforcing a post-termination non-compete or related liquidated damages clause.
Sale of tangible assets alone does not necessarily terminate a practice’s interest in enforcing non-competition provisions.
Summary judgment is inappropriate where the employer’s operational status is genuinely contested.
Physician-employers and their counsel should meticulously document operational continuity or cessation when negotiating asset sales overlapping non-compete periods.

Complex Concepts Simplified

Liquidated Damages: A pre-agreed sum to cover anticipated but hard-to-measure losses from a contract breach. Unlike a penalty, it must be a reasonable estimate.
Penalty Clause: A contractual term that imposes an excessive, punitive payment upon breach, unrelated to actual loss.
De Novo Review: The appellate court decides legal issues anew, without deference to the lower court’s legal conclusions.
Summary Judgment: A procedural device to end a case without trial when no material facts are in dispute.
Covenant Not to Compete: A contractual promise that an employee will not engage in a competing business within a defined area and period.

Conclusion

Caruso v. Barton underscores the fact-specific nature of enforcing liquidated damages tied to physician non-competes. By mandating a remand to resolve whether Seaside remained operational post-asset sale, the Supreme Court reinforced the primacy of genuine factual disputes in summary judgment practice and solidified the principle that a liquidated damages provision is only enforceable when it protects an existing business interest. The decision will guide future parties and trial courts in structuring, documenting, and adjudicating non-compete and liquidated damages provisions in healthcare and beyond.