N.J. Supreme Court

A-75/76 September Term 2003; Supreme Court; opinion by Wallace, J.; partial concurrence and dissent by Rivera-Soto, J.; decided April 5, 2005. On appeal from the Appellate Division, 365 N.J. Super. 84 (2003). [Sat below: Judges Pressler, Ciancia and Alley in the Appellate Division; Judge Messina in the Chancery Division.] DDS No. 29-1-9774

This is a companion to Pierson v. Medical Health Center, P.A., also decided today.

I. Plaintiff, the Community Hospital Group Inc., also known as John F. Kennedy Medical Center (JFK) and the New Jersey Neuroscience Institute, is a not-for-profit hospital in Edison, Middlesex County.

On July 1, 1994, Dr. Jay More began to work as a neurosurgeon at the institute following his residency at Mount Sinai Hospital in New York City. The initial employment agreement was for a one-year period beginning July 1, 1994, and ending June 30, 1995. The following year, Dr. More entered into a four-year agreement effective July 1, 1995, and in 1999, a five-year agreement effective July 1, 1999. Under the terms of the 1999 agreement, either party could terminate the agreement on 365 days’ written notice to the other party.

Each of the three employment agreements contained post-employment restrictive covenants that prohibited Dr. More from engaging in certain medical practices within a 30-mile radius of JFK for two years. The initial post-employment restrictive covenant contained in the 1994 agreement prohibited Dr. More from engaging in the practice of neurosurgery within a 30-mile radius of JFK for a period of two years. The subsequent agreements were similar, but were expanded to prohibit Dr. More from engaging in any practice of medicine, not just neurosurgery.

In the 1999 agreement, Dr. More further agreed that he would not solicit or induce any employee of JFK to leave his or her employment for a two-year period and that the post-employment restraints were reasonable. Another provision in the agreement provided that in the event of a breach, JFK would suffer irreparable harm and damage and would be entitled to injunctive relief to enforce the post-employment restraints.

JFK agreed to pay Dr. More the base annual salary as set forth in the agreement. In addition, JFK bore other costs associated with Dr. More’s employment, including expenses associated with continuing education courses, costs related to keeping his medical licenses current, $25,000 annually in medical malpractice insurance, tuition reimbursement, and reimbursement for numerous business-related expenses. Dr. More developed a patient referral base and his surgical practice increased each year. On occasion, he was the featured speaker at seminars and programs sponsored by the institute aimed toward obtaining referral sources.

On July 17, 2001, Dr. More submitted his letter of resignation to JFK, effective July the following year. At some point, JFK notified Dr. More that it intended to enforce its rights as contained in the 1999 agreement.

Dr. More ceased working at JFK on July 17, 2002. He had received offers to join other practices that were located beyond the 30-mile restrictive area, but declined each one. On July 22, 2002, Dr. More affiliated with another neurosurgeon, James M. Chimenti, M.D., as an employee of Neurosurgical Associates at Park Avenues, P.A. (NAPA), located in Plainfield. In addition to joining NAPA, Dr. More also received medical staff privileges at Somerset Medical Center (Somerset), which is located approximately 13.5 miles from JFK.

At the time Dr. More joined NAPA, Dr. Chimenti was the only neurosurgeon taking emergency-room calls at Somerset. With the addition of Dr. More to the medical staff, Somerset was able to provide complete neurological coverage through the two neurosurgeons.

JFK filed a complaint against Dr. More. The trial court denied JFK’s request for a preliminary injunction. The court found that JFK could not show a reasonable likelihood of success because it could not demonstrate that the covenant protected a legitimate interest of JFK, or that such an interest would not be outweighed by undue hardship to Dr. More, or that the covenant would not impair the public interest.

The Appellate Division reversed and awarded JFK injunctive relief. Cmty. Hosp. Group, Inc. v. More, 365 N.J. Super. 84. The panel found irreparable harm because a later award of damages would not enable JFK to satisfy its goal of providing clinical care, education and research in the field of neurology. The panel concluded that the trial court misapplied the standard for examining the restrictive covenant set forth in Karlin v. Weinberg, 77 N.J. 408 (1978) (holding that a post-employment restrictive covenant in an employment contract between physicians or between a physician and hospital is not per se unreasonable and unenforceable).

The panel applied the three-part test for determining the reasonableness of the restrictive covenant, i.e., “whether the covenant in question protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not injurious to the public.” Id. at 97. The panel found that the evidence supported the conclusion that the restrictive covenant was necessary to protect JFK’s patient and referral relationships. Id. at 102. After rejecting the trial court’s conclusion to the contrary, the panel determined that JFK satisfied its burden of showing that enforcement of the restrictive covenant would not impose an undue hardship on Dr. More. Id. at 104.

After finding that some patients traveled 30 miles or more to seek specialized care such as neurosurgery and that more than 17 percent of JFK’s patients resided outside of the 30-mile radius, the panel concluded that the scope of the restriction was reasonable.

The panel stressed Dr. More’s admission that five hospitals, aside from JFK, provided neurosurgery within the restricted area and did not lack qualified neurosurgeons, and as a result, enforcement of the restrictions would not have an impact on the public’s access to other qualified neurosurgeons within that area.

II. Dr. More argues that the restrictive covenant is unenforceable because it is against the public interest. Alternatively, Dr. More asks the Court to overrule Karlin and adopt a per se ban on restrictive covenants involving physicians. He urges that because the American Medical Association (AMA) now strongly disfavors post-employment restrictive covenants involving physicians and specifically regards them as unethical if they restrict a patient’s choice of physician, this Court should treat physicians like attorneys and impose a per se rule against such covenants.

III. On the record here there is insufficient justification to overrule Karlin and adopt a per se rule invalidating restrictive covenants between physicians or between a physician and a hospital.

The medical profession has accommodated the Karlin test for more than 25 years. The relationships among individual physicians, medical practice groups and hospitals in delivering health care are complex. An established rule that has governed those relationships for several decades should not be discarded unless it is reasonably certain that there is a problem in need of a cure. Further, the Karlin analysis includes a public-interest component that we today emphasize. So long as the public interest takes precedence over private or parochial concerns, the plaintiff’s arguments in support of a per se rule voiding restrictive covenants are less persuasive. On the current record, we cannot conclude that prohibiting restrictive covenants among physicians and hospitals will in fact advance the public interest.

Except for attorneys, see Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 27 (1992), and more recently, psychologists, see Comprehensive Psychology System, P.C. v. Prince, 2005 WL 275822 (App. Div. 2005), courts have consistently used a reasonableness test to determine the enforceability of restrictive covenants. There is no logical justification to treat a hospital-employer differently from a physician-employer. If either the hospital-employer or the physician-employer cannot establish that it has a legitimate business interest and, most important, that enforcement of the restriction will not be injurious to patient care, then enforcement of the restriction should be denied.

Several commentators have criticized the distinction our law makes between physicians and attorneys in respect of restrictive covenants. Despite that criticism, the Court’s power to govern the ethical standards of the legal profession is justification to treat attorneys and physicians differently.

Notably, the AMA, which governs the ethical standards of the medical profession, does not declare restrictive covenants per se unethical. See AMA, E-9.02: Restrictive Covenants and the Practice of Medicine, available at www.ama-assn.org/ama/pub/category/8519.html (last visited Feb. 10, 2005). Although the AMA discourages restrictive covenants between physicians, it only declares them unethical if “excessive in geographic scope or duration, or if they fail to make reasonable accommodation of patients’ choice of physician.” Ibid. That is essentially the same reasonableness standard we apply under Karlin. Thus, the AMA’s ethical rules are consistent with, and not contrary to, the Karlin analysis.

Held: In short, the Karlin test strikes the proper balance between an employer’s and employee’s freedom to contract on the one hand and the public interest on the other. In addition, the Karlin reasonableness test, with emphasis on the public interest, is sufficiently flexible to account for varying factual patterns that may arise.

IV. A. The first prong of the Karlin test requires the Court to consider whether the covenant protects the legitimate interests of JFK. Those legitimate interests may include (1) protecting confidential business information, including patient lists; (2) protecting patient and patient referral bases; and (3) protecting investment in the training of a physician. JFK, like every other employer, however, does not have a legitimate business interest in restricting competition.

The evidence established that JFK made a substantial investment in Dr. More by giving him the opportunity to accumulate knowledge and hone his skills as a neurosurgeon. Further, Dr. More admitted he removed patient and patient referral lists from JFK between the time of his resignation and his eventual departure from JFK. It was also undisputed that many of the patients Dr. More treated after joining NAPA and Somerset were once patients of JFK or were referred to Dr. More from one of JFK’s referral sources. Further, in addition to training Dr. More, JFK paid for his attendance at seminars and other events, and paid for his malpractice insurance as well. Thus, JFK established that it had several legitimate protectable interests in enforcement of the restriction.

Beyond that, three additional factors should be considered in determining whether the restrictive covenant is overbroad: its duration, the geographic limits and the scope of activities prohibited. Each of those factors must be narrowly tailored to ensure the covenant is no broader than necessary to protect the employer’s interests.

Here, the restrictive covenant was for a period of two years. Dr. More was employed by JFK for approximately eight years. On its face two years appears to be a reasonable period for JFK to replace and train a person to assume Dr. More’s prior role. Moreover, JFK only sought to prohibit Dr. More from the practice of neurosurgery. That single restriction was not overbroad.

B. The second prong requires that the restrictive covenant impose no undue hardship on the employee. That inquiry requires the court to determine the likelihood of the employee finding other work in his or her field, and the burden the restriction places on the employee. If the employee terminates the relationship, the court is less likely to find undue hardship as the employee put himself or herself in the position of bringing the restriction into play.

Dr. More is a highly qualified neurosurgeon and his services are in demand. He received substantial offers from across the country. Although there may be some additional burden as a result of a longer commute, Dr. More need not uproot his family to practice outside the restricted area. Further, as Dr. More voluntarily resigned and brought any hardship on himself, that hardship is not an impediment to enforcement of the restriction.

C. The final prong of the test is that enforcement of the restriction should not cause harm to the public. The impact a covenant not to compete in the medical field may have on the public is of critical importance. In each case, the varying circumstances must be considered in the effort to evaluate that impact.

Dr. More and Somerset presented evidence to show that preventing Dr. More from practicing within the 30-mile radius will be injurious to the public because there is a shortage of neurosurgeons in that area. The Appellate Division nevertheless concluded that the covenant would not appear injurious to the public interest. The panel found that because six hospitals in the area, including JFK, have qualified neurosurgeons, “enforcement of the covenant would not restrict the public’s access to other qualified neurosurgeons within that area.” Cmty. Hosp., 365 N.J. Super. at 108-10. The panel reasoned that the burden on patients having to travel an increased distance did not automatically prevent Dr. More’s patients from seeking treatment from him. Unfortunately, the panel failed to focus on the adverse impact the geographic restriction would have on neurological patients seeking treatment at Somerset’s emergency room. Without Dr. More, Somerset’s ability to provide necessary neurological treatment to an emergency-room patient could be compromised. Moreover, the panel appeared to consider only patients who had the ability to travel beyond the restrictive area to visit Dr. More, and did not address those patients needing emergency neurological care in the area of Somerset or those patients who might not have the ability to travel beyond the large restricted area.

The evidence was overwhelming that prohibiting Dr. More from attending to neurological patients in Somerset’s emergency room would be injurious to the public interest. A number of out-of-state cases have found that similar evidence invalidated a restrictive covenant. Because the geographic restricted area encompassed an area plagued with a shortage of neurosurgeons, the Appellate Division should have decreased the geographical limitation of the covenant. When it is reasonable to do so, courts should not hesitate to partially enforce a restrictive covenant.

Somerset is located approximately 13 miles from JFK and therefore is included in the restricted area. If the covenant were limited to a distance less than 13 miles so that Somerset was not within the restricted area, the covenant would not have the same adverse impact on the public that it presently has. A remand is necessary for the Chancery Division to determine the precise limits of the geographic area of the restriction, but in no event should it exceed 13 miles or include Somerset.

The dissent points to the language of the restrictive covenant in which the parties agree that the terms are “reasonable.” Because Dr. More “voluntarily signed” three separate covenants containing that language, the dissent concludes that the doctor’s actions “deserve our condemnation.” Although acknowledging that “equitable considerations are paramount,” when the validity of a restrictive covenant is at issue, the dissent disregards that principle, and instead, chastises Dr. More. The interests of patients at Somerset who need emergent neurological care come first, and should not be put aside because Dr. More disregarded the terms of his agreement with JFK.

V. Finally, under JFK’s interpretation of the agreement the two-year period for the term of the restrictive covenant was to run from July 17, 2002, until July 17, 2004. That period has expired. Because restrictive covenants are not favored in the law, there is no justification to extend the agreement beyond that period. Plaintiff, of course, may press its claim for damages for the period prior to July 17, 2004.

Affirmed in part, reversed in part and remanded to the Chancery Division.

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

Rivera-Soto, J., concurring in part and dissenting in part, joins in reaffirming that a restrictive covenant in an employment contract between a hospital and a physician is not per se unreasonable and unenforceable.

However, circumscribing the geographic limits of the restrictive covenant so as to place the very conduct prohibited by the restrictive covenant tantalizingly outside the restrictive covenant’s reach gives the party that successfully sought to enforce the restrictive covenant nothing more than a Pyrrhic victory. There can be no question that considerations of patient care are critically important in the judicial calculus of whether a restrictive covenant is injurious to the public. However, the conduct of the restricted physician here in singling out the one hospital most convenient to his personal preferences that also has a need for his medical specialty as his justification for violating a restrictive covenant he voluntarily signed three different times over a five-year period — and ignoring all other alternatives that would not have violated the covenant he freely and voluntarily entered into with the hospital-employer that allowed him to develop his expertise in the first instance — is little more than rank bootstrapping. This is even more so because the employment agreement this physician voluntarily signed contained his representation that the terms of the restrictive covenant