Healthcare/Employment Law
advertisement
JULY 2005 Healthcare/Employment Law New Jersey Supreme Court Reaffirms that Restrictive Covenants Against Physicians are Valid if Reasonable Are restrictive covenants in the health care industry permissible? The answer to that question is a clear and resounding “yes” according to two April 2005 decisions by the New Jersey Supreme Court. In Community Hospital Group, Inc. v. More, and Pierson v. Medical Health Centers, P.A., the State’s highest Court reaffirmed its nearly thirty year old decision in Karlin v. Weinberg, that restrictive covenants against physicians are valid if reasonable. Because restrictive covenants are so common in the health care industry, it is important for physicians and health care organizations alike to understand the parameters of a legally enforceable restrictive covenant. practicing medicine within a ten mile radius for five years following the termination of his employment. When Dr. Weinberg resigned and began his own practice on the same street, Dr. Karlin brought a lawsuit to enforce the terms of the restrictive covenant. In a 4-3 decision, the New Jersey Supreme Court ruled that restrictive covenants among physicians are permissible as long as they are reasonable. According to the Court, a non-compete restriction is reasonable if: RESTRICTIVE COVENANTS IN THE MEDICAL PROFESSION – THE BASICS (2) it does not impose an undue hardship upon the physician employee by being too broad in geographic scope or in the amount of time during which it will be in effect; and, A restrictive covenant is an agreement between parties that limits the scope of certain activities in which an individual can engage upon termination of the relationship between the parties. These agreements arise in a multitude of settings, including physician employment agreements, practice buy-sell and purchase agreements, and shareholders’ agreements when a physician acquires an interest in a practice group. The New Jersey Supreme Court’s 1978 decision in Karlin examined the validity of non-compete restrictions between physicians and concluded that restrictive covenants are enforceable if reasonable. Dr. Karlin, a dermatologist, hired Dr. Weinberg to join his established medical practice. Dr. Weinberg’s employment agreement contained a restrictive covenant which precluded Dr. Weinberg from (1) it protects the physician employer’s trade secrets, confidential information, and customer relationships; (3) the restriction is not injurious to the public interest by prohibiting patients from receiving appropriate medical treatment or continuing care. MEDICAL CARE’S CHANGING LANDSCAPE PROMPTS NEW JERSEY SUPREME COURT TO RE-EXAMINE RESTRICTIVE COVENANTS AGAINST PHYSICIANS In the thirty years since Karlin was decided, traditional physician practice arrangements, such as solo or small single specialty group practices, have evolved into large multi-specialty group practices, ambulatory surgery centers, and other physician-owned medical businesses that compete with hospitals. Naturally, these changes in the medical care delivery system have altered relationships between physicians and health care organizations. As a result of the medical profession’s changing landscape, the concept of restrictive covenants in the profession has recently been challenged. In the More case, Jay More, M.D., a neurosurgeon, began working at JFK Medical Center in Edison, New Jersey in 1994. During his employment, Dr. More signed several employment agreements that contained restrictive covenants prohibiting his practice of neurosurgery within thirty miles of JFK Medical Center for two years if he chose to leave JFK before the expiration of his contract in July 2004. Dr. More voluntarily resigned from JFK in July 2002, rejected employment offers outside the restricted thirty mile radius, and joined a neurosurgical group in Plainfield, New Jersey, at a site within the prohibited area. In addition, Dr. More enjoyed hospital privileges at Somerset Medical Center, only thirteen and one-half miles away from JFK. Believing that Dr. More was in violation of his latest employment agreement, JFK filed a complaint against him seeking a preliminary injunction, a remedy that would prohibit him from practicing neurosurgery within the prohibited area. The trial court denied JFK’s request for a preliminary injunction, and JFK appealed. The Appellate Division reversed the trial court and approved JFK’s proposed restrictions against Dr. More. The panel found that the two-year, thirtymile restriction was reasonable, and also noted that several hospitals within the restricted area provided neurosurgical services. Therefore, enforcing the restrictive covenant against Dr. More would not impact the public’s access to neurosurgical care. Dr. More appealed to the New Jersey Supreme Court. The New Jersey Supreme Court relied on the reasonableness test earlier developed in Karlin and held that the restrictive covenant in Dr. More’s contract protected the JFK Medical Center’s legitimate interests in safeguarding confidential information, customer relationships, referral bases, and the hospital’s investment in physician training. In ruling that Dr. More’s restrictive covenant was enforceable against him, the Court expanded on its thirty year old list of 2 JULY 2005 protected employer interests in order to address concerns brought about by the evolution of the health care industry. Newly recognized legitimate interests include: (1) protection of the employer’s referral relationships, and (2) protection of the employer’s investment in physician training. The Court also found that Dr. More’s restrictive covenant did not cause any undue hardship for Dr. More because he admittedly rejected employment opportunities beyond the restricted area and had voluntarily left JFK Medical Center. The Court, however, scrutinized the thirty mile radius in Dr. More’s restrictive covenant focusing on the potential to injure the public. The Court found that the thirty mile restriction was overbroad for two reasons: (1) it would prohibit Dr. More from treating patients at Somerset Medical Center, which lacked sufficient emergency neurosurgery care, and (2) many patients would not have the ability to travel outside the restricted area to obtain ongoing neurosurgery care from Dr. More. As a result, the Court sent the case back to the Appellate Division with instructions that the lower court establish a geographical restriction of no more than thirteen miles in radius to permit Dr. More to continue practicing at Somerset Medical Center. Pierson, the companion case to More, also involved a restrictive covenant against a physician employee. Dr. Pierson signed an employment agreement with Medical Health Center (“MHC”), a multi-specialty, fifteen-member practice group in Monmouth County, New Jersey. The agreement restricted Dr. Pierson’s post-MHC employment by prohibiting him from practicing medicine within a twelve-mile radius of MHC for two years. MHC informed Dr. Pierson that he would be terminated before his employment agreement expired. Although Dr. Pierson did not voluntarily terminate his employment agreement as was the case in More, MHC sought to enforce the restrictive covenant against Dr. Pierson. Consistent with its decision in More, the New Jersey Supreme Court held that restrictive covenants signed by physicians are not, per se, unreasonable or KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP unenforceable. The Court did not decide whether the restrictive covenant in this case was reasonable because Dr. Pierson agreed, in exchange for the opportunity to arbitrate certain issues, not to challenge the reasonableness of the covenant against him. DRAFTING RESTRICTIVE COVENANTS THAT BIND PHYSICIANS – PRACTICAL CONSIDERATIONS Although More and Pierson end the debate over whether restrictive covenants are acceptable in the expansive world of medical care, the cases by no means permit unreasonable, overbroad, or unduly burdensome restrictions. Restrictive covenants must be properly crafted and conform to the reasonableness standard described by the New Jersey Supreme Court. The following are only some of the considerations that must be kept in mind when creating a restrictive covenant for a physician employment agreement, practice buy-sell and purchase agreement, or shareholders’ agreement when a physician acquires an interest in a practice group: activities. The restriction’s duration should be reasonable and justifiable. 4. The covenant should specify the restriction’s geographic boundaries. The geographic scope should be reasonable and justifiable. 5. Consider whether the individual bound by the covenant will endure any hardship if the restrictive covenant is enforced. 6. Consider whether the public will be negatively impacted by virtue of enforcing the covenant. 7. Consider, in the case of a physician employee, whether another physician in the area can provide the same services for patients as the departing physician. 8. Consider whether reasonable efforts have been made to ensure that a restrictive covenant is not unnecessarily prohibitive or unduly burdensome. Marilyn Sneirson msneirson@klng.com 1. The restrictive covenant should include an explanation of the legitimate interests that must be protected. 2. The covenant should indicate the manner in which the individual will be restricted if the relationship between the agreeing parties voluntarily ceases, if an agreement is breached in any way or, in the employment context, if the physician is terminated. (973) 848-4028 Stephen A. Timoni stimoni@klng.com (973) 848-4020 Rosalia Niforatos rniforatos@klng.com (973) 848-4113 3. The covenant should specify the exact time period during which it will restrict an individual’s 3 JULY 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP If you have questions or would like more information about K&LNG’s Employment and Labor practice, please contact one of our lawyers listed below: Boston Dallas Henry T. Goldman Mark D. Pomfret Jaime Ramón 617.951.9156 617.261.3147 214.939.4902 hgoldman@klng.com mpomfret@klng.com jramon@klng.com Harrisburg Carleton O. Strouss 717.231.4503 cstrouss@klng.com London Paul Callegari +44.20.7360.8194 pcallegari@klng.com Los Angeles Thomas H. Petrides Paul W. Sweeney, Jr. 310.552.5077 310.552.5055 tpetrides@klng.com psweeney@klng.com Miami April L. Boyer Carol C. Lumpkin Michael C. Marsh 305.539.3380 305.539.3323 305.539.3321 aboyer@klng.com clumpkin@klng.com mmarsh@klng.com Newark Rosemary Alito Vincent N. Avallone Marilyn Sneirson 973.848.4022 973.848.4027 973.848.4028 ralito@klng.com vavallone@klng.com msneirson@klng.com New York Eva M. Ciko 212.536.3905 eciko@klng.com Pittsburgh Stephen M. Olson Michael A. Pavlick Hayes C. Stover 412.355.6496 412.355.6275 412.355.6476 solson@klng.com mpavlick@klng.com hstover@klng.com San Francisco Jonathan M. Cohen 415.249.1029 jcohen@klng.com Washington Lawrence C. Lanpher 202.778.9011 llanpher@klng.com If you have questions or would like more information about K&LNG’s Healthcare practice, please contact one of our lawyers listed below: Boston R. Bruce Allensworth Edward J. Brennan, Jr. 617.261.3119 617.951.9143 ballensworth@klng.com ebrennan@klng.com Harrisburg Ruth E. Granfors Raymond P. Pepe 717.231.5835 717.231.5988 rgranfors@klng.com rpepe@klng.com Miami Marc H. Auerbach William J. Spratt, Jr. 305.539.3304 305.539.3320 mauerbach@klng.com wspratt@klng.com Newark Stephen A. Timoni 973.848.4020 stimoni@klng.com Pittsburgh Edward V. Weisgerber 412.355.8980 eweisgerber@klng.com Washington Alan J. Berkeley 202.778.9050 aberkeley@klng.com www w.. k l n g . c o m BOSTON DALLAS HARRISBURG LONDON LOS ANGELES MIAMI NEWARK NEW YORK PALO ALTO PITTSBURGH SAN FRANCISCO WASHINGTON ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ Kirkpatrick & Lockhart Nicholson Graham LLP (K&LNG) has approximately 1000 lawyers and represents entrepreneurs, growth and middle market, capital markets participants, companies and leading FORTUNE 100 and FTSE 100 global corporations nationally and internationally. K&LNG is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one qualified in Delaware, U.S.A. and practicing from offices in Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Palo Alto, Pittsburgh, San Francisco and Washington and one incorporated in England practicing from the London office. This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Data Protection Act 1988 - We may contact you from time to time with information on Kirkpatrick & Lockhart Nicholson Graham LLP seminars and with our regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please e-mail cgregory@klng.com if you would prefer not to receive this information. © 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.
