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New Jersey Supreme Court Again Endorses Non-Compete Agreements Between Physicians and Health Care Facilities

By Richard J. Cino
  • April 26, 2005

The New Jersey Supreme Court recently reiterated that employment agreements between hospitals and physicians may restrict the right of a physician to practice medicine after the employment relationship is terminated. [Cmty. Hosp. Group, Inc. v. More, 2005 N.J. LEXIS 299 (2005)].  The court declined an invitation to overturn the long-standing practice under New Jersey law that permits restrictive covenants among physicians, as established in Karlin v. Weinberg, 77 N.J. 408 (1978).  Rather than rule such claims to be per se unenforceable, the court chose to continue the case-by-case approach of evaluating reasonableness.

In Karlin, the plaintiff, an experienced dermatologist, hired the defendant to join his established practice.  The defendant, however, was an inexperienced physician without any prior ties to New Jersey.  The employment agreement between the physicians contained a restrictive covenant, which precluded the defendant from practicing medicine within a ten-mile radius for five years after his employment with the plaintiff ended.  When the defendant subsequently left the plaintiff's practice and began his own practice on the same street, the plaintiff 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 were permissible as long as they are reasonable as a matter of law:

  1. The covenant protects the legitimate interests of the employer,
  2. The covenant does not impose an undue hardship on the physician, and
  3. The covenant is not injurious to the public interest. 

The court observed that when a restrictive covenant exceeds the duration, geographic limitations, or scope of activities necessary to protect the employer's legitimate interest, it constitutes an undue hardship on the physician.            

In the Cmty. Hosp. Group, Inc. v. More case, the plaintiff was a not-for-profit teaching hospital.  In 1994, the hospital hired the defendant as a neurosurgeon following the completion of his residency at another facility.  The hospital and neurosurgeon entered into several employment agreements during the neurosurgeon's tenure, each containing a restrictive covenant prohibiting him from practicing neurology within a 30-mile radius of the hospital for a period of two years.  Less than one week after leaving the hospital, the neurosurgeon joined a neurology practice with privileges at a hospital located approximately 13 miles from the plaintiff hospital.  In response, the plaintiff hospital sought an injunction to prohibit the neurosurgeon from practicing within the restricted area. 

The matter made its way to the New Jersey Supreme Court, where it held that restrictive covenants between hospitals and physicians are enforceable provided they meet the three-part test adopted in Karlin.  In particular, the court found that the hospital had a protectable interest in preserving its patient-referral base, which was vital to its teaching mission.  The court also observed that the reasons for termination of the employment relationship are relevant to whether the restrictive covenant imposes an undue hardship on the physician.  Importantly, the court observed that these types of agreements are not detrimental per se to the public.  The court acknowledged that the two-year duration appeared to represent a reasonable amount of time for the hospital to protect its interests, and that since the neurosurgeon had resigned his employment, any claim of undue hardship was compromised.    

However, the court found the 30-mile geographic restriction too expansive given the lack of qualified neurosurgeons in the area.  The public would be harmed if the neurosurgeon was precluded from providing treatment to patients admitted in the emergency room of the competing hospital, the court said, even though there were several other hospitals in the area.   Reducing the restricted area to a 13-mile radius – the distance between the plaintiff hospital and the competing hospital, the court sent the case back to the trial court to determine the amount of monetary damages, if any, to which the hospital was entitled.

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