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In what may signal a dramatic shift in the law of noncompetes, New Jersey courts issued several significant decisions in 2003 which, in some respects, placed in question the enforceability of noncompete provisions in certain circumstances, and in other respects made noncompete provisions more easily enforced. Two of those key cases are already before the New Jersey Supreme Court, and depending on how the Court rules, the law of noncompetes may become just as unsettled as the facts often are. Over the Years Many employers require their employees to sign noncompete agreements that prohibit employees from competing with the employer in a specified geographic area for a certain period of time following termination of employment. In the past, New Jersey courts upheld noncompete agreements to the extent reasonable under the circumstances. New Jersey courts typically found noncompete provisions reasonable if they: (1) protected the legitimate interests of the employer; (2) did not impose undue hardship on the employee; and (3) were not injurious to the public. See Solari Indus., Inc. v. Malady, 55 N.J. 571 (1970), and Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971). Courts measured the reasonableness of noncompetes in terms of time, geographic area and scope of activity. New Jersey courts held that an employer has a protectable interest in its customer relationships, trade secrets and confidential business information. For example, in determining the enforceability of a five-year noncompete prohibiting a physician from practicing within 10 miles of his former partner’s practice, the Supreme Court held in Karlin v. Weinberg, 77 N.J. 408 (1978), that a physician has a protectable interest in his physician-patient relationships and that covenants safeguarding that interest are not per se unreasonable or unenforceable. Prior case law also established that continued employment constituted sufficient consideration to support an employee’s noncompete. See Martindale v. Sandvik, Inc., 173 N.J. 76 (2002); Further, the Appellate Division had held that an employee’s immediate discharge, or threat thereof, is an implied consequence of an employee’s refusal to sign a proposed noncompete. See Hogan v. Bergen Brunswig Corp., 153 N.J. Super. 37 (App. Div. 1977). In other words, the employer could require that an existing employee sign a noncompete without offering the employee a bonus or other additional consideration and the noncompete would be enforceable as long as the noncompete satisfied the other legal requirements articulated in the case law. The 2003 Shift in Law Is continued employment still sufficient consideration? In one of its first decisions of 2003, Al Dubin Glass Co. v. Superior Glass, Inc., A-3027-01T1 (N.J. App. Div. Jan. 15, 2003), the Appellate Division reaffirmed its 1977 holding in Hogan that continuation of employment is sufficient consideration for a noncompetition agreement. In that case, the employer had asked its employees to sign the noncompete in consideration of their continued employment, and made clear that if an employee refused to sign the noncompete, he would be fired. When former employees who had signed the noncompete began a competing business, the employer brought a lawsuit to enforce the agreement. Although the court held that continued employment was sufficient consideration for the noncompete, the Appellate Division refused to enforce it, holding that it was directed principally at lessening competition and the geographic area (75 miles) and duration (five years) placed an undue hardship on the former employees. In August 2003, the Appellate Division issued an opinion limiting its ruling in Hogan. See Grinspec, Inc. v. Lance, A-3313-01T1 at 17-18 (N.J. App. Div. Aug. 13, 2003). The court held that continued employment is sufficient consideration for a noncompete agreement provided the continued employment is for a sufficient amount of time, but if termination occurs shortly after a noncompete agreement is executed, the agreement may be struck as lacking consideration. In Grinspec, an insurance brokerage firm decided to update its noncompete agreements and required its employees to sign new agreements. The employer’s prior noncompete restricted employees from selling insurance in a specific industry for two years, and prohibited employees from servicing any of the company’s clients for two years following the separation of their employment. In its new noncompete, the employer restricted its employees from selling insurance products to a more broadly-defined industry for two years following the employee’s separation; alternatively, the employee could agree to pay liquidated damages rather than comply with the terms of the noncompete. A nine-year employee was terminated four months after he had signed the new noncompete. The court found that consideration was lacking and therefore, the noncompete at issue was unenforceable. This outcome was surprising given the terms of the prior noncompete the employee had signed several years before his termination. The Appellate Division remanded the case to the trial court for consideration of whether the employee’s prior noncompete was enforceable. � Does CEPA protect an employee who refuses to sign a noncompete? Just four months earlier, in April 2003, a different panel of the Appellate Division raised the possibility that an employer that threatens to terminate or terminates an employee for refusing to sign a possibly overbroad noncompete may face liability under the Conscientious Employee Protection Act, N.J.S.A. 34: 19-2 et seq. See Maw v. Advanced Clinical Comm. Inc., 359 N.J. Super. 420 (App. Div. Apr. 16, 2003), abrogated on other grounds, Dzwonar v. McDevitt, 177 N.J. 451 (2003). CEPA is a statutory exception to the general rule that an employer may terminate an at-will employee with or without cause. The articulated purpose of CEPA is to protect New Jersey employees from retaliatory action by their employer when employees object to practices that they reasonably believe are incompatible with a clear mandate of law or public policy concerning the public health, safety or welfare. In Maw, the employer required all employees at the level of “coordinator” and above, including the plaintiff, to sign an employment agreement. The employment agreement contained a noncompete provision barring the employee from working for any competitor or customer of the company for two years following termination. The plaintiff, an at-will employee who had been with the company almost four years, refused to sign the agreement; consequently, the company fired her. The plaintiff brought a lawsuit claiming the noncompete violated public policy because the company had no legitimate business reason for requiring her to sign it. The plaintiff argued that under CEPA, the company could not take any retaliatory action against her for objecting to the noncompete because she reasonably believed the noncompete violated public policy. The trial court dismissed the plaintiff’s CEPA claim. On appeal, the Appellate Division reversed and, citing a 2000 California case, held that “New Jersey’s strong prohibition against restraint of trade, and against unduly burdening employees by restricting their right to engage in their chosen field of employment, established the public policy necessary to support a CEPA . . . cause of action.” The Maw case is now on appeal before the New Jersey Supreme Court, which heard oral argument in early February 2004; a decision is anticipated before the end of the Court’s 2003-2004 term in June. For employers, this unpredictable case law and possible shift regarding the continued viability of noncompetes warrants concern. Pending a decision by the Supreme Court on these issues, employers should be wary about merely offering continued employment to their employees in exchange for signing a noncompete and threatening termination upon an employee’s refusal to sign a noncompete. Noncompetes Applied to Physicians While the courts of New Jersey seem to be making it more difficult to enforce noncompetes against nonprofessional employees, the tide may be turning in favor of increased enforceability of noncompetes against New Jersey physicians. In 2003, our courts reaffirmed their view on the enforceability of noncompetes in the context of the medical profession. In fact, the courts expanded on the rule previously announced in Karlin, which signals a potential trend in favor of enforcement of physician noncompetes even when broader in temporal and geographic scope than had been declared enforceable in the past. In June 2003, a New Jersey trial court reaffirmed the rule in Karlin that covenants restricting physicians are not per se unenforceable. See Sunder v. Manalapu, ATL-C-171-00 at 6 (N.J. Super. Ct. June 16, 2003). However, rather than blue-pencil the noncompete, the Sunder court struck down the noncompete provision at issue because it found the 15-mile radius of the noncompete “excessive.” The Sunder court observed that the case had been ongoing for more than two years and held that the noncompete, which was for a two-year duration, would no longer serve its purpose. The court held that the purpose of a physician noncompete “is to allow the employer ‘to demonstrate his effectiveness to the patients.’” Because the employer already was afforded the opportunity to demonstrate effectiveness over a two-year period, the court concluded that “extending the restriction for a time equal to the time it was violated serves no legitimate purpose and is, itself, unenforceable.” Despite the focus on reasonableness in Karlin and Sunder, in one of its most recent decisions, the Appellate Division expanded on the principles established in Karlin and held a noncompete enforceable more than a year-and-a-half after the former employee/physician first began competing. In The Community Hosp. Group, Inc., t/a JFK Medical Center v. More et al., 365 N.J. Super. 84 (App. Div. 2003), the plaintiff/employer sought to preliminarily enjoin a physician after the physician had resigned from the plaintiff’s employ in July 2002 and joined another nearby neurosurgery practice. The Chancery Division denied the plaintiff relief and the Appellate Division denied the plaintiff’s motion for leave to appeal. But, on March 25, 2003, the Supreme Court granted the plaintiff’s motion for leave to appeal and summarily remanded the matter to the Appellate Division for consideration on the merits. On Dec. 29, 2003, more than a year-and-a-half after the former employee/physician had resigned and began working for another nearby neurosurgery practice, the Appellate Division granted the preliminary injunction. In its application, the former employer sought to enforce the noncompete agreement that prohibited the employee/physician from practicing neurosurgery within a 30-mile radius for two years after his resignation. On remand, the Appellate Division upheld the noncompete as enforceable for several reasons. Significantly, the Appellate Division expanded on Karlin‘s holding and found that a medical business has a legitimate interest in protecting its patient and referral base. Also, the court found the 30-mile radius of the noncompete reasonable under the circumstances because patients are willing to travel farther for specialized care and a specialty practice, such as neurosurgery, must draw its patient base from a larger geographic area than a general practitioner. The Supreme Court has granted a stay pending review of the Appellate Division’s decision in More. Because the employee/physician is one of only two neurosurgeons who covers emergency service at Somerset Medical Center, he argued that his removal will leave the hospital understaffed with respect to neurosurgeons and, ultimately, patients may suffer. For physicians subject to noncompetes , More suggests that specialists may be bound to noncompetes that are geographically and temporally broader than those for other employees. It also suggests that physicians may be restricted from practicing not only at a private office, but also at a hospital within the restricted area where the doctor has privileges. Thus, physicians should be especially vigilant when negotiating and agreeing to noncompete terms. Most recently, in Pierson v. Medical Health Centers, P.A., et al., No. A-6319-01T2 (App. Div. Mar. 4, 2004), the Appellate Division held that the trial court correctly had dismissed the complaint of the plaintiff, an interventional cardiologist and former member of defendant’s group of physicians, who sought to challenge a provision in his employment agreement that restricted his post-employment right to practice medicine within a twelve-mile radius for a two-year period. The Appellate Division held that the trial judge had relied correctly upon Karlin v. Weinberg, 77 N.J. 408 (1978), and rejected plaintiff’s argument that the restrictive covenant was invalid per se as violative of public policy. In addition, the court rejected the plaintiff/employee’s attempt to invalidate the noncompete as it pertained to his ability to exercise his staff privileges at certain hospitals located within the noncompete’s geographic scope, as opposed to his practicing in an office located within the 12-mile radius. Applying Karlin, the court determined there was no distinction between exercising hospital staff privileges and practicing in one’s office because the employer’s legitimate interest in protecting against the erosion of its patient base is the same in both contexts. The plaintiff/employee had urged the trial and appellate courts to overrule Karlin because of the dramatic changes in health care since Karlin was decided in 1978. Although it ultimately rejected this argument, the Pierson court commented that the plaintiff/employee’s “suggestion that Karlin should be repudiated because of the present health-care landscape may have some merit.” Nevertheless, the Appellate Division concluded that it is for the Supreme Court or the Legislature � rather than for an intermediate appellate court � to decide whether Karlin should remain the law, and until such time, lower courts are duty-bound to follow Karlin. The past year was one of the most significant in the history of New Jersey noncompete law in over 30 years. New Jersey courts re-examined basic long-standing principles and expanded others. With two important decisions soon to be released by the Supreme Court, Maw and More, employers, employees and legal practitioners must be cognizant that noncompete agreements face new and different scrutiny by our courts. Wissert is a partner and Werner is counsel at Lowenstein Sandler of Roseland. Both are members of the firm’s employment law practices group. The authors thank Denise Walsh, a former associate, for her contributions to this article.

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