ISU wins first round in litigation against veterinarians

Specialists barred from competing with ISU hospitals fight back

Published: May 03, 2011
By David DeKok

The Iowa Veterinary Referral Center in Des Moines could be a casualty of a legal battle between Iowa State University and specialists employed by the practice. Photo courtesy of Russell Adams.

A federal judge in Iowa has come down hard on two Des Moines veterinarians who set up a specialty animal hospital in competition with two similar hospitals owned by Iowa State University (ISU).

U.S. District Judge John A. Jarvey issued preliminary injunctions against Drs. Brent Reimer and Derek Nestor of Iowa Veterinary Referral Center last week, barring the specialists from competing for two years against ISU Veterinary Services Corporation, owner of their former employer, Iowa Veterinary Specialties Hospital.

The basis for the decision: The specialists violated non-compete contracts signed with Iowa Veterinary Specialties in 2009, the ruling states. (The ownership of Iowa Veterinary Specialties transferred to ISU on Feb. 1, 2011.)

The non-compete ban covers Polk County, which includes Des Moines, and two smaller counties, Dallas and Warren, that adjoin Polk to the west and south. In all, Reimer and Nester are barred from practicing in a territory that covers than 1,700 square miles and encompasses more than half-a-million residents.

And that has the two specialists fighting back by filing an antitrust lawsuit against ISU. The veterinarians portray ISU's litigation as an attempt by the area's dominant provider of tertiary veterinary care to squash a small competitor in the business of treating critically ill or injured animals.

“Our clients are not giving up,” said Jesse Linebaugh, one of the lawyers at the Des Moines office of Faegre & Benson, which represents the veterinarians. “However, everything is very fluid right now including potential settlement discussions. We simply are not in a position to comment at the moment.”

Meanwhile, the university did not seek an injunction against Dr. Stan Wagner, another veterinarian named in the lawsuit, and failed to win court approval for one against Paul Hanika, who is operations manager at the doctors’ new hospital and held the same position with their former employer, ISU. Judge Jarvey said Reimer and Nestor were too much in debt from setting up Iowa Veterinary Referral Center to pay damages.

Asked if he thought ISU's litigation would continue, Michael Reck, a lawyer for the firm of Belin McCormick, which represents the university, said: “You never know. We don’t know what will happen with this one.” He declined to speak about the facts and issues in the case, stating that it was not proper for a lawyer to do that.

The specialists, Reimer and Nestor, did not return a call from the VIN News Service seeking comment. Both veterinarians are 1999 graduates of ISU's College of Veterinary Medicine. Reimer is a board-certified surgeon who had worked at Iowa Veterinary Services, also known as IVS, since 2007. Nestor is a board-certified internist who had worked there since 2005. They were paid about $155,000 a year plus a monthly bonus based on revenues. The facts of the case — as each side sees them — are laid out in court documents.

In January 2008, Nestor and Reimer offered to purchase IVS from its owners, 26 primary care veterinarians who practice in the Des Moines region, but their offer was rejected. Nestor then secured a position at a veterinary hospital in South Carolina and Reimer began exploring his options. “As an inducement for both to return and stay with IVS hospital, the IVS hospital medical director agreed to increase Dr. Nestor's salary, make organizational improvements within the company, share IVS hospital financial information with Dr. Nestor and Dr. Reimer, and sell the IVS hospital to Dr. Nestor and Dr. Reimer within five years of their return,” lawyers for the two veterinarians state in court documents.
In the summer of 2009, the hospital asked both men to sign non-compete agreements — contracts that would, if they quit, bar them from working in competition with IVS for two years in three of the five counties that comprise the Des Moines metropolitan area. Those contracts were made transferable to a new owner of the specialty care hospital, but at the time, Reimer and Nestor assumed that would be them. In return for signing the non-competes, the two veterinarians each received a $250 bonus.

In most states where the law allows and recognizes non-compete contracts, it is required that the person being asked to sign a non-compete receive something “reasonable” in return. If they are new employees, that can be the job itself. But Nestor and Reimer already were employed, so the hospital gave them a $250 bonus.

Two hundred and fifty dollars amounts to what each might earn in about four hours of work, in exchange for potentially giving up more than $310,000 in annual income apiece if they quit. In some states, such as Pennsylvania, lawyers say such a small amount might not be viewed as “reasonable” by the courts. But the law on non-competes varies from state-to-state, and in Iowa, previous court rulings have suggested that the size of such compensation does not matter.

“I don’t know that the amount of compensation factors into the reasonableness test at all,” said Maura Strassberg, a professor at Drake University Law School in Des Moines. “I certainly have seen ‘reasonable’ non-competes enforced in exchange for a few months of severance pay.”

Strassberg, who is not involved with the case, said that if a verbal promise to sell the hospital to Reimer and Nestor was indeed part of the non-compete contract, “then perhaps there was a breach of contract.”

Early in 2010, according to court documents, Reimer and Nestor learned that IVS had solicited offers from three potential buyers, not including them. In June 2010, acting on what they believed was a verbal contract in 2009, they submitted a letter of intent to purchase the hospital. What they offered to pay, either in 2008 or 2010, has not been disclosed.

ISU, which told the court it wanted to purchase the hospital to improve clinical training opportunities for veterinary students, then submitted a higher offer — $4.5 million — and last fall, the 26 owners agreed to sell. The money came mainly from a trust created in 1994 after the university sold WOI Television to Capital Cities Communications, according to an internal university newsletter dated Jan. 20. The sales agreement required the 26 owners to refer all animals needing specialty care either to IVS or to ISU’s Lloyd Veterinary Medical Center at the veterinary college in Ames, about 35 miles north of Des Moines. The deal is valid through 2015.

“A primary goal of the college is to enhance and regain academic preeminence in the United States,” said Dr. John Thomson, outgoing dean of the veterinary medical program, in the internal university newsletter. “Serving the main metropolitan area in Iowa is one part of that process.”

Indeed, the university may see providing specialty animal care for the entire state of Iowa as part of that process. According to Russell Adams, who is familiar with the case because his wife, Dr. Christine Adams, is a co-owner of Iowa Veterinary Referral Center, the university owns every specialty animal hospital in the state except for two: a practice in Cedar Rapids and the one where his wife, Reimer, and Nestor are co-owners.

Reck, the lawyer for ISU, did not immediately respond to a request for comment about the university's stake in the tertiary care veterinary market.

Neither Reimer nor Nestor wanted to work for ISU, though their reasons are not cited in court documents, and made plans to start their own hospital in Des Moines. Nestor was offered the chance to stay on at IVS, but Reimer was not. According to Judge Jarvey, the new owners didn’t like his attitude. In any case, Reimer and Nestor advertised they would open Iowa Veterinary Referral Center on March 1 of this year, billing themselves as “Iowa’s only locally owned and operated veterinary specialty center.” Almost immediately, their old hospital and new competition, IVS, “experienced a drop in both revenue and patients,” according to court documents.

Legal response from the university was swift. So was the counter-response from the veterinarians. They filed an antitrust suit against ISU and the entity it set up to run the hospital, accusing them of taking “illegal actions to monopolize the market for emergency and specialty care veterinary service in central Iowa.” They said that if the university succeeded, there would be only one choice, an ISU-owned specialty animal hospital, and no place to seek a second opinion without driving more than 110 miles to Cedar Rapids. They said ISU controlled 90 percent of the market for specialty animal care in central Iowa with its acquisition of IVS and would control 100 percent of the market if their Iowa Veterinary Referral Center was effectively forced out of business by the courts. Finally, they argued in court documents that there had been a “small, but significant non-transitory increase in the price” of specialty animal care since the takeover. The doctors sought triple damages (standard in antitrust cases) and punitive damages.

In a strongly pro-business opinion handed down April 27, Judge Jarvey dismissed most of the claims and arguments advanced by Reimer and Nestor in defense of their actions. He described them as disloyal employees and waived away their claim that they had a verbal contract to be allowed to purchase the hospital. He said they were were “highly compensated, very well-educated and certainly capable of obtaining legal advice before and after signing those (non-compete) agreements.” He said the public interest was served by enforcing valid non-compete agreements and that the public interest would not be harmed by a two-year absence of Reimer and Nestor from the Des Moines market.

Jarvey ruled only on the ISU complaint against the veterinarians and not on the countering anti-trust complaint against the university. There is no indication when or if a hearing will be held.

Russell Adams, husband of Dr. Christine Adams, said the litigation has been extremely stressful for his wife and everyone who works at Iowa Veterinary Referral Center. He said that after Judge Jarvey issued the preliminary injunctions, ISU faxed a letter to the legal counsel of his wife’s hospital demanding it dismiss by May 4 two other staff veterinarians for alleged violation of their non-compete contracts. He believes the hospital will survive but concedes that it needs to quickly recruit other specialists to replace Reimer and Nestor and anyone else on the professional staff who is forced to stop practice in the Des Moines area for the next two years.

Worse, he said, other employees of the hospital have heard rumors they will be blacklisted by ISU and unable to find other veterinary employment in Iowa if the hospital is forced into bankruptcy and closes. Legal fees for the litigation have been crushing. “I don’t know how any small business can compete with a university with unlimited resources,” Adams said. “We’re trying to keep the doors open as long as possible and get through all this.” His wife, he said, has been crying herself to sleep.

Thankfully, Adams said, the veterinary community and the general public have been highly supportive.

“They have been coming in to express support,” he said. “People have been bringing in food. We get calls every day from vets offering to work shifts to help out.”

David DeKok is a freelance journalist writing for the VIN News Service. He is based in Harrisburg, Pa.

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