Restrictive Covenants for Physicians in New Jersey and New York
A restrictive covenant is an agreement by which an employee agrees not to engage in competition against an employer, after the employment has ended. Not all states recognize restrictive covenants for physicians. New Jersey and New York, however, do allow such agreements. Restrictive covenants physicians generally include:
1. A non-compete agreement (the physician will not practice medicine within a certain geographic area for a specified period of time),
2. A non-solicitation agreement (the physician will not solicit patients from the employer),
3. An agreement that the physician will not have privileges at specified hospitals, and
4. A confidentiality agreement, whereby the physician will not use or disclose proprietary information of the practice (e.g., patient lists).
A. NEW JERSEY
New Jersey courts recognize and enforce restrictive covenants in appropriate circumstances. The Courts have held that restrictive covenants for physicians are acceptable, as long as they are reasonable. These agreements must be in writing. A sample agreement is attached as Exhibit “C”
In The Community Hospital Group, Inc. t/a JFK Medical Center v. Jay More, 183 N.J. 36 (2005), and its companion case, Pierson v. Medical Health Centers, P.A., 183 N.J. 65 (2005), The New Jersey Supreme Court recently upheld a long-standing ruling, that restrictive covenants for physicians can be valid if they are reasonable. (see, Karlin v. Weinberg, 77 N.J. 408, 1978).
Although post-employment restrictive covenants are not viewed with favor, if under the circumstances a factual determination is made that the covenant protects the legitimate interests of the hospital, imposes no undue hardship on the physician and is not injurious to the public, it may be enforced as written or, if appropriate, as reduced in scope.
(Community Hospital Group v. More, supra)
Thus, a restrictive covenant for physicians is considered reasonable if it meets this three-prong test:
1. The covenant must be necessary to protect legitimate interests of the employer,
2. It must not pose an undue hardship on the employee (factors to consider are whether it is reasonable in both duration and geographic scope) and
3. The covenant must not be harmful to the public.
In evaluating a restrictive covenant according to this test, New Jersey courts take into account many factors. The following is a non-exhaustive list of relevant factors to consider when determining the enforceability of restrictive covenants among physicians:
a. The time the employer-physician needs to rebuild the practice following the employee-physician’s departure;
b. The reasonableness of the geographic scope;
c. Whether the activities the departing physician is prohibited from engaging in are the same as those performed by the employer physician;
d. The hardship on the employee and the reason for the departure (e.g., physicians who choose to leave can be seen as bringing the hardship on themselves);
e. The likelihood that another physician in the area can provide the medical services left vacant by the departing physician; and
f. The effect that enforcement of the covenant would have on the public interest.
In Community Hospital Group v. More, the court found applied this standard and found that the restrictive covenant was valid. Under this covenant, Dr. More was prohibited from practicing within a 30-mile radius of his former employer for a period of two years. The court was willing to enforce this VERY STRONG restrictive covenant because:
1. The hospital had been working to develop a broad clinical neurological program and had devoted about $14 million to this since 1992, including $200,000 on advertising and promotion each year.
2. Dr. More, a neurosurgeon, was hired immediately after completing his residency, having no patient base or practice prior to his employment with the hospital. He built his base during eight years at the hospital, and then decided to leave and compete with the hospital.
3. Dr. More was a specialist, a neurosurgeon, and it was shown that patients regularly travel over 30 miles to seek specialized care; New Jersey is a state with great mobility and 17% of the hospital’s patients live more than 30 miles away from the hospital.
If a departing employee violates a restrictive covenant agreement, you should consult with counsel, to discuss the next step to protect the company. These measures generally take the form of applications for emergent relief which must be filed in a timely manner. Thus, your consultation with counsel should occur in a timely fashion.
If you are a department employee who signed a restrictive covenant, you should consult with counsel – prior to giving any notice to the practice group that you are considering leaving.
B. NEW YORK
As you recall, New Jersey courts use a three-prong test to evaluate restrictive covenants (To be reasonable, a restrictive covenant for physicians must: be necessary to protect legitimate interests of the employer; not pose undue hardship on the employee; and not be harmful to the public). New York courts use basically the same standard. The court in North Shore Hematology/Oncology et al. v. George A. Zervos, 717 N.Y.S.2d 250, 2000, held that,
“Covenants restricting . . . a physician, from competing with a former employer or associate are common and generally acceptable (see, e.g., Karpinski v. Ingrasci, 28 NY2d 45, 47-49; see generally, Validity and Construction of Contractual Restrictions on Right of Medical Practitioner to Practice, Incident to Partnership Agreement, Ann., 62 ALR3d, 970). As with all restrictive covenants, if they are reasonable as to time and area, necessary to protect legitimate interests, not harmful to the public, and not unduly burdensome, they will be enforced (see, Reed, Roberts Assoc. v. Strauman, 40 NY2d 303, 307 mot for rearg den 40 NY2d 918; Karpinski v. Ingrasci, 28 NY2d 45, 49-51, supra)” (Gelder Med. Group, 177 AD2d 623).
In Gelder Med. Group, supra, the court found that a restrictive covenant barring the physician from practicing within 30 miles of a rural village, for a period of five years, was reasonable; this was enforceable even though, unlike in the New Jersey case, the physician was expelled from the practice without cause. Gelder Med. Group, 177 AD2d 623 (N.Y. 1977). In this case, the court took into consideration that: (1) the doctor did not allege that the practice sought to enforce the provision in bad faith, (2) the practice had been developed over twenty years at great cost, (3) the doctor had no roots in the area, and had had affiliations with other practices in several other areas, and (4) enforcing the covenant would not harm the public interest, as there were other physicians available to serve the public need.
As noted above, an agreement which is too restrictive can be revised by the Court, which will amend one or more terms. This is known as “blue-pencilling.” This technique is used by both New Jersey and New York courts, which will modify agreements as necessary. A restrictive covenant which is too stringent can be relaxed, so that overall the agreement is reasonable. (see, e.g., Muller v. N.Y. Heart Center, 238 A.D.2d 776, 3rd Dept. 1997).
This blog post a is a Tayeb Hyderally production.