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The Community Hospital Group Inc. v. More

A-3861-02T3 (N.J. Super. App. Div. 2003) (Unpublished)

NON-COMPETITION—A hospital has a legitimate interest in protecting its patient base in specialty practice areas and because loss of that critical base cannot be replaced by an award of damages, enforcement of a restrictive employment covenant against a departing physician specialist is reasonable.

A hospital sought to enforce a neurosurgeon’s post-employment restrictive covenant. The covenant barred the neurosurgeon from practicing within thirty miles of the hospital for a period of two years. When the neurosurgeon left the hospital’s employ, he joined another neurosurgery practice only several miles from the hospital and accepted staff privileges at a nearby competing hospital. Even though a number of other hospitals outside the thirty mile radius had a significant number of neurological patients, the doctor did not apply for privileges at any of them.

The old employer was a not-for-profit hospital. It had a Neuroscience Institute whose goals were “clinical care, education, and research in the area of neurology and neurosurgery.” Considerable investment was made in developing that program and there was continuing advertising and promotion. The Institute also established a residency program, “an activity that can be distinguished from a neurosurgery program.” It claimed that the viability of the Institute was dependent on its ability to “recruit and retain a sufficient number of skilled physicians that [would] enable it to generate the necessary volume of patients to support its services, such as the residency program.” When the doctor joined the hospital, he did not bring with him any practice or patient base. Through the course of his employment, the hospital made significant investments in the doctor and his practice grew steadily. The doctor referred to himself as the “top producer” and “rainmaker” among the hospital’s physicians.

The Chancery Division clearly has the authority to grant injunctive relief for breach of restrictive covenants. There are four prongs to the test for granting preliminary injunctive relief. First, it should be granted only “when necessary to prevent irreparable harm. The second prong requires that the legal right underlying the applicant’s claim be settled as a matter of law. The third prong requires the applicant to ‘make a preliminary showing of a reasonable probability of ultimate success on the merits.’ Fourth, the court also must balance the resulting hardship to the parties in granting or denying preliminary injunctive relief.” The lower court held that the hospital failed to carry its burden with respect to the first and third prongs. It held that the hospital failed to show that its was faced with irreparable harm if temporary relief was denied, apparently believing that the hospital’s damages only amounted to a loss of income, which could be recovered by way a monetary judgment.

The Appellate Division disagreed. It felt that the hospital was “a non-profit institution established not only to provide clinical care but also education and research in the field of neurology. It need[ed] a broad patient base to provide the diversity and caseload required to support education and research. An ‘after-the-fact-award’ of damages [would] not enable it to meet these goals.” Its investment in training and developing patients on a referral basis could not, in the Court’s opinion, be “recouped through monetary damage awards because [its] referral networks result[ed] from relationships formed between secondary care providers and [the hospital’s] specialists.” According to the Court, a threat to the hospital’s institutional framework was not capable of “being truly remedied by damages.” In addition, the hospital relied on its “reputation and institutional standing to attract a sufficient number of neurosurgeons and residents to support [its] programs.” If the hospital could not maintain a sufficient patient or referral base, it “could have a chilling effect on its ability to recruit. Any diminution of its reputation regarding these types of services [was] not readily capable of being remedied by monetary damages.”

The Appellate Division also disagreed with the lower court’s observation that the hospital had “failed to show that the covenant protected a legitimate, protectable interest.” The Court accepted the hospital’s argument that “there [was] no way to calculate presently the future harm resultant from lost relationships because eventually there is a house of cards effect that can threaten the very existence of a practice particularly for an institution that requires not only a minimum number of patients to survive but a diverse number of cases to support its research and teaching goals.” In accepting that proposition, the Court rejected the doctor’s contention “that an institution does not have a legitimate interest in protecting its patient base.” In essence, the Appellate Division was persuaded that “legitimate interests arise in protecting patient relationships.”

Lastly, the Court addressed the issue as to whether the departing doctor would be exposed to an undue hardship. The doctor contended that enforcing the restrictive covenant would “preclude him from practicing in the heart of northern and central New Jersey where he and his family [had] deep and life-long ties.” The Court thought that “to determine whether a covenant imposes an undue burden, the court ‘should look to the likelihood of the employee finding work in his field elsewhere.” Essentially, “‘personal hardship, without more,’ will not constitute undue hardship thereby preventing enforcement of the covenant.” Here, the covenant did not place a substantial limitation on where the doctor could work. It did not prevent the doctor from engaging in his livelihood. Further, the Court believed that it was “reasonable to conclude that a medical specialty such as neurosurgery would involve a need for a longer term of protection for an employer,” and two-year restrictions “have generally been upheld as reasonable by [New Jersey] courts.” Although a restrictive covenant “will not be enforceable beyond the area necessary to protect the employer’s practice,” the Court had no problem with this particular distance restriction. It found that it was evident that patients would travel more than thirty miles to seek specialized care because New Jersey “is characterized by great mobility as well as compactness.” Further, “because neurosurgery is considered a speciality, it [was] reasonable to conclude that [the hospital] must draw its patient base from a larger geographic area than a general practitioner would.” Public policy was not offended because, even though some patients might have to travel farther distances, they still were not deprived “of the opportunity to continue [their] relationship with the departing physician.”

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