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COPYRIGHT 2005 Aspen Publishers, Inc.
A recent decision by New Jersey's top court has important implications for employers, sending a signal and instruction to lower courts that, to the extent they are reasonable, restrictive covenants in employment agreements are to be upheld.
For decades, employers have utilized restrictive covenants to protect the profitability, trade secrets, and customer base of their businesses. Restrictive covenants are legal tools which, when incorporated into employment agreements, are designed to prohibit departing employees from competing with or soliciting the customers or business of: their former employers after the employment relationship concludes. Their use has been employed in most every major American industry and private sector service, including the medical profession, which has used restrictive covenants to provide medical practices--and hospitals--with the ability to protect their patient and referral bases when new physicians are hired or brought into a practice group,
Recently in New Jersey, however, the protection enjoyed by physicians through the use of restrictive covenants seemed to be in jeopardy. Fearing that the use of restrictive covenants in physician agreements was on the verge of being prohibited, deemed unenforceable or, at the very least, limited--many physician-employers feared that an even greater strain would be placed upon practitioners who were already struggling to remain profitable in light of the array of regulatory and financial challenges currently facing physicians.
For the past quarter century, New Jersey courts have enforced restrictive covenants in physician agreements. In 1978, the New Jersey Supreme Court in Karlin v. Weinberg (1) held that restrictive covenants in physician employment agreements are enforceable if they protect a legitimate interest of the employer, impose no undue hardship on the employee and are not injurious to the public. At the time that the Karlin Court issued its decision, the American Medical Association (AMA) had not expressed any ethical concerns regarding the use of reasonable restrictive covenants. In the years since 1978, however, the AMA's position has changed, and now maintains that non-competition agreements amongst physicians are not in the public interest and could implicate considerable ethical concerns for treating physicians.
In the recent case of Community Hospital Group, Inc. v. More, the New Jersey Supreme Court considered whether it was time to address and, potentially overturn, Karlin v. Weinberg. At issue before the Court was whether a restrictive covenant that barred a physician from practicing neurosurgery for a period of two years within 30 miles of his former employer was enforceable. Also at issue was whether restrictions that prevent physicians from practicing at specific hospitals or require relinquishment of hospital privileges are enforceable. The Court's decision in More is not only expected to have far-reaching effects on the medical profession in New Jersey, but may very well impact other states as they address the scope in which restrictive covenants can be enforced.
SURVEY OF OTHER STATES
A review of the authority governing restrictive covenants in physicians' agreements reveals that the majority of states, including New Jersey, still view noncompetition clauses in employment agreements as partial restraints on trade and will enforce clauses deemed to be reasonable under the circumstances. Such states include Arizona, Illinois, Oregon, Tennessee, Virginia, and West Virginia.
As a practice matter, it is often difficult to understand and trace current legal trends regarding restrictive covenants in physicians' agreements. For example, some courts focus on the manner in which the employment relationship was terminated. Some states have statutes on point, but most do not. Other courts "blue pencil" the restrictive covenant in order to uphold a reasonable restriction on the departing physician. Some courts rule that the geographic scope is too broad, but that the time period for the restriction is reasonable. Other courts focus on the point in time during the physician's employment when he or she was confronted with the restrictions. Overall, enforcement of any covenant is a fact-sensitive exercise.
Not all states, however, will enforce such covenants. In some instances, state legislatures have rendered physician restrictive covenants unenforceable. The Massachusetts legislature has deemed such covenants void and unenforceable. Colorado (2) and Delaware (3) have also enacted statutes that expressly forbid noncompetition clauses in physician agreements. Alabama has enacted legislation that addressed restraining the exercise of a lawful profession and subsequent cases have interpreted this statute to apply to the medical profession. (4) Unfortunately (or fortunately) for physicians in this state, the New Jersey legislature has not yet addressed the issue. As a result of this silence, New Jersey courts have been forced to navigate between the rights of both medical practices and departing physicians and the rights of patients to freely choose their physician once his or her employment relationship has ended.
NEW JERSEY RESTRICTIVE COVENANTS
Keeping with the state's business-friendly policies, New Jersey courts have expressed some reluctance to enforce noncompetition clauses in employment agreements. In 1965, this policy was stated by the New Jersey Chancery Division in Magic Fingers, Inc. v. Robins:
Courts have attributed much strength to the social policy that every man should be free to earn his own living and have also recognized that an employee who is asked to sign a covenant may not have a full freedom to bargain about its terms that exist in other business situations. In other words, contracts of this type-if they are to be enforced-must pass a stricter test than other types of contracts; it...
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