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Confidential information. Trade secrets. These are the protectable interests that are at the heart of a restrictive covenant — a nondisclosure agreement, a nonsolicitation agreement or, often the most controversial, the noncompete agreement. While noncompete agreements generally work in a business context, what if the protectable interests are not launch dates, but relationships with patients? In the health care context, we are talking about a noncompete agreement that is often a part of an employment agreement signed when a new physician is hired or joins a practice. At its heart, the noncompete aims to prevent a departing employee from sharing trade secrets or other nonpublic information by preventing competition with the previous firm for a specified period of time within a limited geographic area. In the corporate context, take for example, a pharmaceutical company. A senior level employee with knowledge of product launch dates and research and development successes and failures might be restricted from working for a competitor for a certain period of time. Because this type of knowledge is not generally known to the public and may give the first firm a significant competitive advantage, the first pharmaceutical company may attempt to protect disclosure by preventing the employee from working for a competitor for a certain period of time. In general, courts uphold a noncompete provision where determined to be reasonable — if it protects a legitimate interest of the employer, does not inflict undue harm on the employee, is reasonably limited in time and scope, and is not injurious to the public interest. THE HEALTH CARE CONTEXT The premise for requesting execution of a noncompete agreement in the medical field would be that a physician who had a reputation in a particular geographic area for a particular specialty would have had access to patients of the prior practice, and could take a large part of a practice with him when he departs — potentially harming the previous practice as a result of having had this confidential access. The economic underpinnings of this analysis are important. Because the United States is a capitalist economy, the courts generally disfavor agreements that restrain free and open competition. However, even though noncompete provisions do restrict free competition somewhat, most states will enforce them as long as they are reasonable — which definition, of course, varies from state to state and from industry to industry. New Jersey courts use a three-pronged test to determine whether a noncompete agreement is enforceable. In order to be enforceable, the provision must (1) protect a “legitimate” interest of the employer-physician group; (2) impose no “undue hardship” on the employee-physician; and (3) not be injurious to the public. See Karlin v. Weinberg, 390 A.2d 1161, at 1166 (1978). In Karlin, the New Jersey Supreme Court established parameters for each of the three prongs regarding the enforcement of physician noncompetition clauses. The employer’s “legitimate interests” include patient relationships, employees and referral sources. The argument of the practice group was that this restriction allows the practice an opportunity to demonstrate its effectiveness to the former patients of the departing physician for a certain period of time after his departure. TIME What constitutes a reasonable time period for noncompete clauses can vary among the differing specialized fields of medical practice. Some have suggested that a noncompete agreement with a more limited duration will be sufficient to protect the interests of the former practice of a physician who treats patients on a routine or regular basis since the patient will likely have a chance to be treated at the employer-physician’s office soon after the employee-physician’s departure. This, some say, allows the employer to demonstrate the effectiveness of the remaining physicians. However, some medical specialists may only treat a patient very infrequently. Under these circumstances, a reasonable noncompete period, some might say, potentially could be longer since, it has been suggested, the new practice will not have an opportunity to demonstrate its effectiveness until the patient has visited the office a few times. According to the Karlin court, the covenant “should not be enforced beyond the period needed for the employer (or any new associate he may have taken on) to demonstrate his effectiveness to the patients.” PLACE Any geographic restrictions placed on the employee’s ability to practice medicine must also be reasonable. According to one New Jersey court, the area protected by the noncompete agreement should not be larger than the area from which the employer’s patients are drawn. In Sunder v. Mandalapu, Docket No. ATL-C-171-00, at 2 (N.J. Super. 2003), the covenant restricted competition within a 15-mile radius of the employer’s office. The defendant’s office was located slightly more than 14 miles away as calculated by the most likely driving distance. Since most of the employer’s patients were located between the two offices, it would not have made a difference to the employer’s business whether the office was one mile further away. The court found that enforcement of this provision would have served no legitimate end, and therefore held the restriction to be unreasonable. There is no fixed limitation for what is determined to be a reasonable geographical restriction. While the court in Sunder found 15 miles to be unreasonable under the particular circumstances of that case, a Missouri court found that a 125- to 350-mile geographic radius was reasonable. See Silvers et al. v. Batchu, 16 S.W.3d 340 (Mo. Ct. App. 2000). In Sunder, the physician-employee was a pediatrician, of which there are often very many in a given area. Because of this, most of the patients were located very close to the offices, and only a small radius was necessary to protect the interests of the employer. However, in Silvers, the physicians were neurologists, which are much more sparsely located. Due to the specialized nature of their field, patients from a large geographic area traveled to the neurologists’ office. Thus a much larger geographic area was reasonable to protect the employer’s interests. The specifics of what is geographically reasonable depend on the particular specialization of the physician-employers as well as the size of the area from which patients are drawn. The employer must identify a legitimate protectable interest that justifies the need for a restrictive covenant. For example, an employer may not restrict the departing physician from using information about patients or a referral source that is publicly available. Also, the employer must have some proprietary interest in the patients if the noncompete is to be enforceable. As an illustration, consider the Indiana case Duneland Emergency Physician’s Medical Group, P.C. v. Brunk, 723 N.E.2d 963, at 966 (Ind. Ct. App. 2000), in which the plaintiff failed to show a protectable interest because the plaintiff operated an emergency room in which patients did not have ongoing or repeated interactions with one doctor. The court stated that “[a]n employer may not simply forbid his employee from subsequently operating a similar business…the employee should only be enjoined if he has gained some advantage at the employer’s expense which would not be available to the general public.”In this case, the departing employee was not pilfering the patients of the emergency room, since the emergency room patients simply chose the emergency room for a given visit and were not regular patients. Therefore, according to the court, the emergency room employers did not have proprietary interests in any of their patients, and consequently had no legitimate protectable interest that would cause the noncompetition agreement to be enforceable. ACTIVITIES As the Karlin court noted, the agreement must also be specific about what activities are prohibited, since it is “unenforceable if it restricts the employee from engaging in activities not in competition with those of his former employer.” This clause could apply in a scenario where the departing employee is highly specialized in a certain aspect of medicine that does not compete directly with the employer. Since the departing employee-physician’s narrow practice did not compete directly with the former employer, that part of the provision would be unenforceable. However, if the employee performs specialized and noncompetitive treatments along with practices that are competitive, the employer may, according to the court, still seek an injunction to enforce the noncompetition agreement with respect to the competitive practices. The “undue hardship” issue is often difficult to nail down. In Karlin, the court stated that “mere showing of personal hardship does not amount to an ‘undue’ hardship on the employee.” Rather, the “undue hardship” prong is often used in examining the circumstances surrounding the termination of the employment relationship. When the relationship terminates because of an employer’s breach of an employment agreement, “enforcement of the covenant may cause hardship on the employee that may fairly be characterized as ‘undue’ in that the employee has not, by his conduct, contributed to it.” That is to say, when an employer violates the employee contract, the contract becomes unenforceable. A Florida court found that “the general rule is that a material breach of the agreement allows the non-breaching party to treat the breach as a discharge of his contract liability.” See Benemerito & Flores v. Roche, 751 So.2d 91 (Fla. Dist. Ct. App. 1999). Similarly, according to the court in Karlin, if the employee decides to voluntarily terminate the contract, “a court should be hesitant to find undue hardship on the employee, he in effect having brought that hardship on himself.” However, Sunder qualified this provision, finding that the employee did not voluntarily breach the contract by opening a firm within the restricted area, since “she did so entirely out of circumstances that included her inability to find work with another employer.” Thus, the court found that the noncompete provision did cause “undue hardship” on the employee. PUBLIC INTEREST The “public interest” analysis of restrictive covenants is perhaps the area in which, it might potentially be argued, a noncompetition provision in a physician agreement diverges from that in other business contexts involving nonprofessionals. Since the patient-doctor relationship is arguably more personal than a traditional customer-merchant relationship, the public interest consequences, it could be suggested, are significantly different. A customer is often “loyal” to a product or service she receives when she purchases from a company, rather than to an individual from whom she purchases the product or service. Even when there is interaction between the employee and the customers, the employee fundamentally provides a service or product that is, it could be argued, potentially “replaceable” by other members of the company sales team. In contrast, the physician’s interaction with the patient — from the patient’s point of view — may be considered irreplaceable, because of the trust and deep familiarity often developed with respect to an individual physician, particularly where a serious illness is involved. When a physician decides to leave a practice and join another, then, a patient may believe that following the physician is key to her own survival. In Karlin, addressing the issue of public interest, the court stated: significant here is the demand for the services rendered by the employee and the likelihood that those services could be provided by other physicians already practicing in the area. … If the geographical limitations make it impossible, as a practical matter, for existing patients to continue treatment, the trial court should consider advisability of restricting the covenant’s geographical scope. The ruling in Karlin has been critical to the enforcement of noncompete clauses in New Jersey and the same type of analysis has been applied elsewhere. Interestingly though, the basis for the Karlin decision is no longer accurate. In fact, the Karlin court based its decision on the ethical principles established by the American Medical Association in 1960. Before 1960, the group classified noncompetition provisions as unethical. However, in 1960, the association published a set of ethical principles for doctors. One such principle was: “There is no ethical proscription against suggesting or entering into a reasonable agreement not to practice within a certain area for a certain time, if it is knowingly made, understood, and consistent with local law.” American Medical Association, Principles of Medical Ethics � 4.63 (1960). The Karlin court took this ethical principle and applied it in making the decision to enforce reasonable noncompetition agreements among physicians. However, in 1994, the association reversed its stance again, stating “The Council on Ethical and Judicial Affairs discourages any agreement between physicians which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of employment” American Medical Association, Code of Ethics (1994). The New Jersey State Board of Psychological Examiners also has promulgated a provision that expressly prohibits noncompetition clauses. “A licensee shall not participate in offering or making a partnership or employment agreement that restricts the right of a licensed health care professional to practice the licensed profession after termination of the relationship” ( N.J. Admin. Code . tit. 13 � 42-10.16 (2003)). THE ‘EMPLOYEE CHOICE’ DOCTRINE The “employee choice” doctrine arises out of New York state law, and the principle generally goes as follows: Courts will enforce a restrictive covenant without regard to its reasonableness if the employee has been afforded the choice between not competing (thereby preserving the benefits offered) or competing (and thereby risking forfeiture). Generally the employee-choice cases brought before the courts have dealt with forfeiture of benefits from a retirement plan. Although this “forfeiture for competition” principle has its genesis in the retirement plan context, it is being used, more and more, in employment agreements with physicians, to the tune of the following: We will not prevent you from competing — but if you do, you have to pay — and forfeit any compensation received as a result of such competition. Whether this is, in fact, a real “choice” such that the restriction should be upheld has been questioned in some jurisdictions. And whether such a provision would withstand scrutiny in New Jersey such that it could skirt the reasonableness analysis that applies to restrictive covenants generally remains to be seen — so far, it has not. In Ellis v. Lionikis, 162 N.J. Super. 579 (1978), aff’d., Ellis v. Lionikis, 162 N.J. Super. 579 (1978), the court stated that “Whatever may be the rule in other jurisdictions, we discern no sound basis for determining the validity of the forfeiture provision … in a manner any different from that used to determine the validity of a noncompetition clause in an employment contract.” So here’s the question going forward: What is the likely future of the physician noncompete, given that attorney noncompete agreements are prohibited? Is a physician more like an attorney whose competition may not be restricted, or an accountant, who may be held to a stringent noncompete agreement? And is forfeiture of compensation for competition a true employee choice? Where these lines end up being drawn in New Jersey in the near term will, in large part, likely depend on the differing public interests at issue in these various milieus. Clients have unfettered freedom to choose counsel. What about unfettered choice of care? The last word has likely not been written on the distinctions between these professional roles, and the business and public interests at stake. Buckle up and hold on tight. It is likely to be a wild ride. Mitchell, a partner at MillerMitchell of Princeton, wishes to thank Jeffrey Miller, a student at Harvard University, for his assistance in the preparation of this article. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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