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N.J. Superior Court, Appellate Division

A-10 September Term 2004; Supreme Court; opinion by Wallace, J.; decided April 5, 2005. On certification to the Appellate Division. [Sat below: Judges Havey, Fall and Parrillo in the Appellate Division; Judge Fisher in the Chancery Division.] DDS No. 29-1-9775

This is a companion case to Community Hospital Group, Inc. v. More, — N.J. — (2005). Medical Health Center (MHC) is a multispecialty 15-member practice group located in Middletown, Monmouth County. Joseph Clemente, M.D., is president, director, and the majority shareholder in MHC. Dr. Christopher Pierson is a specialist in interventional cardiology.

MHC hired Dr. Pierson to establish a patient base and referral sources at Jersey Shore Medical Center. The parties entered into a three-year employment agreement effective July 1, 1997. The agreement would continue until June 30, 2000, unless otherwise terminated.

The agreement restricted Dr. Pierson’s post-MHC employment in two significant ways. First, he could not practice within a 12-mile radius of MHC’s Middletown office for two years. Second, he no longer had the privileges of accessing, admitting, or treating patients at Riverview Medical Center located within the 12-mile radius restriction. Other hospitals where Dr. Pierson has staff privileges were not affected. The agreement provided for liquidated damages to be paid to MHC for any breach and contained an arbitration clause for disputes. Dr. Pierson was represented by an attorney in the negotiation of the agreement.

On Dec. 26, 2001, the parties extended the original agreement. However, on March 22, 2002, consistent with the agreement, MHC gave Dr. Pierson 90 days’ notice that his employment would terminate June 30, 2002.

Dr. Pierson filed a complaint requesting that the court declare the restrictive covenant per se void as against public policy. MHC responded with a motion to compel arbitration in accordance with the agreement.

Dr. Pierson stipulated that if his argument that a restrictive covenant is per se unenforceable were arbitrated, he would not challenge the reasonableness of the covenant. The trial court rejected Dr. Pierson’s attack on restrictive covenants and his motion for injunctive relief because it was bound to follow Karlin v. Weinberg, 77 N.J. 408 (1978) (holding post-employment restrictive covenants between physicians not per se unreasonable and unenforceable).

Thereafter, the matter proceeded on dual paths, one in arbitration and one in court. In the arbitration proceeding, the arbitrator found that Dr. Pierson violated the agreement, awarded MHC $250,000 in damages and $75,000 in legal fees, plus interest, but denied MHC’s request for injunctive relief. In December 2003, the court entered final judgment confirming the arbitration award, but stayed Dr. Pierson’s obligation to pay the judgment pending decision by the Appellate Division.

In an unpublished, per curiam decision, the Appellate Division affirmed the trial court’s dismissal of Dr. Pierson’s complaint on the grounds that it was bound to follow Karlin.

Held: The Court declines to reverse Karlin and continues to adhere to the case-by-case approach for determining whether a restrictive covenant in a post-employment contract is unreasonable and unenforceable. Employment contracts that contain a restrictive covenant between a physician and a hospital, although not favored, are not per se unreasonable and unenforceable. Rather, the trial court must 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. For the reasons expressed in Community Hospital, the Karlin test still provides a fair approach to accommodate the interests of the employer, the employee and the public. Because Dr. Pierson stipulated that the restrictive covenant was reasonable, it is not necessary to address the Karlin factors in the context of this case.

Affirmed.

Chief Justice Poritz and Justices Long, LaVecchia, Zazzali, Albin and Rivera-Soto join in this opinion.

— Digested by Steven P. Bann

[The slip opinion is 9 pages long.]

For appellant — James A. Maggs (Maggs & McDermott). For respondents — Paul H. Schneider (Giordano, Halleran & Ciesla; Schneider and Michael A. Bruno of counsel; Hana S. Wolf on the brief). For amicus curiae: University of Medicine and Dentistry of New Jersey — Thomas M. Toman Jr. (Genova, Burns & Vernoia; Angelo J. Genova of counsel; Toman and Michelle A. Brown on the brief); National Employment Lawyers Association of New Jersey Inc. — Richard M. Schall (Schall & Barasch; Schall and Patricia A. Barasch on the brief).

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