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Supreme Court Strengthens Physician’s Restrictive Covenants
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By a 6-1 vote on April 5, 2005, the New Jersey Supreme Court upheld the effectiveness of restrictive covenants between physician/employers and employee/physicians. In doing so, the Court amplified on certain factors that will be considered by the Courts in deciding future disputes between employers and departing physicians. The Supreme Court also reaffirmed the departing physician’s (and his or her new employer’s) liability for damages if the employer’s patients are lost because the physician has breached a restrictive covenant.
In Community Hosp. Group v. More, (A-75/76-03), Dr. More joined Community Hospital (a/k/a JFK Medical Center) following his neurosurgery residency. Dr. More worked at JFK’s Neuroscience Institute which specialized in the diagnosis and treatment of neurological diseases and neurosurgical conditions. The Institute received the majority of its patients through referrals from physicians in other specialties.
Dr. More signed three separate employment agreements each of which contained clauses that prohibited Dr. More from practicing neurosurgery within a 30 mile radius of JFK for a period of two years.
Dr. More resigned from JFK after working there for several years. He turned down offers to join practices outside of the 30 mile restrictive area. Instead, he affiliated with a neurosurgeon in Plainfield whose office staffed Somerset Medical Center—13 and 1/2 miles from JFK. He was only one of two neurosurgeons who staffed Somerset Hospital. In connection with his departure, Dr. More removed patient identifying information as well as the information identifying JFK referral sources.
JFK sued Dr. More for breach of contract and Somerset Hospital for interfering with JFK’s contract with Dr. More. The Appellate Division granted JFK’s request for an injunction against Dr. More practicing neurosurgery within the 30 mile radius.
The Supreme Court reversed the Appellate Division and vacated the injunction on a narrow ground. In doing so, however, it reaffirmed the legal effectiveness of physician’s restrictive covenants and, indeed, elaborated on the economic justifications for those covenants.
The Court noted that a physician’s restrictive covenant (as is the case with a typical restrictive covenant) is enforceable if it (i) protects the legitimate interests of the employer; (ii) imposes no undue hardship on the employee and (iii) is not injurious to the public. According to the Court, the legitimate interests worthy of protection include protecting confidential business information, protecting patient referral bases and protecting the investment in the training of a physician.
On the first element, the Court found that JFK had established several of the legitimate interests that were found to be worthy of legal protection. Also, on this element, the Court found that the two year prohibition was reasonable. It also found reasonable the fact that the covenant prohibited Dr. More from practicing only neurosurgery and not medicine in general.
As to the undue hardship element, the questions were whether Dr. More would be likely to find employment in his field and what the burden would be as a result of the restriction placed on him. The Court observed that if the employee terminates his or her employment, the employee will have a more difficult time proving this element because he or she brought the restriction into play. On this element, Dr. More lost, as he received several offers of employment from across the country.
On the issue of injury to the public interest, the Court found that the covenant was unreasonable because Dr. More and Somerset were able to show that there was a shortage of neurosurgeons in the area encompassed by the covenant. The evidence showed that there were only two neurosurgeons available to provide emergency coverage at Somerset. The Court thus ordered that the covenant be cut back to no more than 13 miles so that Dr. More could continue to work at Somerset.
Although the Court allowed Dr. More to practice neurosurgery at Somerset, it did not leave JFK without a remedy. It held that Dr. More’s breach of the covenant subjected him to a damages claim that would include, but not be limited to, the loss of patients resulting from his departure. The new employer was also exposed to what could be a substantial damages claim given the two year period of time.
The More case has substantial implications for medical and other health related practices that are parties to restrictive covenants. The Supreme Court’s specific description of the “legitimate” economic interests of the employing practice or hospital should be integrated into restrictive covenant agreements to bolster their enforceability in the event of a physician departure. A well-drafted restrictive covenant should specifically prohibit the departing employee from exploiting relationships with the practice’s referral sources as well as its patients. Additionally, in view of the Court’s willingness to pare back the geographical restriction in the “public interest”, consideration should be given to including in the restrictive covenant a “liquidated damages” clause which imposes a formula by which reasonable damages for a practice’s loss or anticipated loss of patients/referral sources can be readily computed.
Orloff, Lowenbach, Stifelman & Siegel, P.A.
Roseland, New Jersey
973-622-6200
This case synopsis was prepared by Samuel Feldman, a partner in the litigation department of Orloff, Lowenbach, Stifelman & Seigel, P.A. |
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