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The Community Hospital Group, Inc. v. More

183 N.J. 36, 869 A.2d 884 (2005)

EMPLOYER-EMPLOYEE; RESTRICTIVE COVENANTS; NON-COMPETITION—The New Jersey Supreme Court has reaffirmed that restrictive covenant agreements between physicians and other physicians or hospitals are not per se invalid.

The New Jersey Supreme Court was asked to reexamine “the issue decided in Karlin v. Weinberg, 77 N.J. 408 (1978), that a post-employment restrictive covenant in an employment contract between physicians or between a physician and a hospital is not per se unreasonable and unenforceable.” A not-for-profit hospital created an institute as a not-for-profit “medical care provider specializing in the diagnosis and treatment of neurological diseases and neurosurgical conditions. The Institute receive[d] the majority of its patients through referrals from physicians and other specialties.” The institute hired a doctor away from a New York City hospital. That doctor entered into three separate employment agreements, the most recent one being a five-year agreement. Under the terms of that agreement, “either party could terminate the agreement upon three hundred and sixty-five (365) days written notice to the other party.” Each of the three agreements “contained post-employment restrictive covenants that prohibited [the doctor] from engaging in certain medical practices within a thirty-mile radius” of the Institute for two years. “The agreement provided that in the event of a breach, [the hospital] would suffer irreparable harm and damage and would be entitled to injunctive relief to enforce the post-employment restraint.

The doctor submitted a one year notice of resignation and the hospital responded “that it intended to enforce its right as contained in the [latest] agreement.” The doctor had received offers to join practices that were located more than thirty miles from the hospital, but declined each one. “Between the date of his notice of resignation and his separation date, [the doctor] removed documents from the Institute identifying patients’ names and addresses, as well as the identity and location of the Institute’s referral sources.” Five days after leaving the Institute, the doctor affiliated with another neurosurgeon as an employee of a practice within thirty miles of the hospital. In addition, the doctor received medical privileges at a hospital only thirteen and a half miles from the hospital. At that time, he “was the only neurosurgeon taking emergency calls at [the new hospital].” The new hospital was now able to provide complete neurological coverage. Shortly thereafter, the old hospital filed a complaint against the doctor, seeking among other things, a preliminary injunction prohibiting him from the practice of neurosurgery with [his new practice or the new hospital].” After the case made it to the New Jersey Supreme Court and eventually back to the Appellate Division, the Appellate Division reversed the lower court and awarded the hospital injunctive relief. The Appellate Division “found that the evidence supported the conclusion that the restrictive covenant was necessary to protect [the old hospital’s] patient and referral relationships. [It] found the two-year period of the restriction was reasonable and consistent with other restrictions that have been upheld and that the thirty-mile geographic restriction was reasonable. In addition, the Appellate Division stressed [the doctor’s] admission that five hospitals, aside from [the old hospital], provided neurosurgery within the restricted area and did not lack qualified neurosurgeons, and as a result, enforcement of the restrictions would not have an impact on the public’s access to other qualified neurosurgeons within that area.” The Supreme Court granted a stay and eventually decided that “[a] restrictive covenant in an employment contract between a hospital and a physician is not per se unreasonable and unenforceable.”

The Court held that, “nder the circumstances of this case, however, the geographic restrictive area is excessive and must be reduced to avoid being detrimental to the public interest. In addition, because the two-year period for the restrictive covenant in this case [had] expired, the [hospital’s] request for injunctive relief [was] moot.” Essentially, the Supreme Court upheld its decision in Karlin, which, “although acknowledging that a physician, like any other employer, has no legitimate interest in preventing competition, [] the physician-employer has a legitimate interest in protecting ongoing relationships with patients.” The Court rejected this particular physician’s argument to extend to physicians the holding in case law that restrictive covenants among attorneys are unreasonable per se. Under the Karlin Court, a test was established to determine “whether the restrictive covenant protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not adverse to the public interest.” The Court found that nothing had changed in the commercial context to require a change to these standards. It “recognize[d] the importance of patient choice in the initial selection and continuation of the relationship with a physician,” and agreed that the “similarities between the attorney-client and the physician-patient relationships are substantial.” Nonetheless, it found nothing on the record to justify overruling Karlin or to adopt a per se rule “invalidating restrictive covenants between physicians or between a physician and a hospital.” In deference to history, it stated that “[a]n established rule that has governed those relationships for several decades should not be discarded unless we are reasonably certain that we have problem in need of a cure. Moreover, on the current record, [the Court could not] conclude that prohibiting restrictive covenants among physicians and hospitals [would] in fact advance the public interest.”

According to the Court, “[o]n its face, two years appear[ed] to be a reasonable period for [the old hospital] to replace and train a person to assume [the doctor’s] prior role.” Further, the hospital only sought to prohibit its former employee from the practice of neurosurgery. The Court did not find that “single restriction” to be overbroad. The Court was further satisfied that the hospital “demonstrated legitimate business reasons for enforcing restrictive covenants, ... [and was] convinced that [the hospital] demonstrated that enforcement of the restriction would not impose undue hardship upon [the doctor].”

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