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Community Hospital Group, Inc. v. More

April 5, 2005

THE COMMUNITY HOSPITAL GROUP, INC., T/A JFK MEDICAL CENTER, PLAINTIFF-RESPONDENT,
v.
JAY MORE, M.D. AND SOMERSET MEDICAL CENTER, DEFENDANTS-APPELLANTS, AND DR. JAMES CHIMENTI AND NEUROSURGICAL ASSOCIATES AT PARK AVENUE, DEFENDANTS.



On appeal from to the Superior Court, Appellate Division, whose opinion is reported at 365 N.J. Super. 84 (2003).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

[NOTE: This is a companion case to Pierson v. Medical Health Centers, P.A., et al., also decided today.]

In this appeal the Court re-examines the issue decided in Karlin v. Weinberg, 77 N.J. 408 (1978), that a post-employment restrictive covenant in an employment contract between physicians or between a physician and a hospital is not per se unreasonable and unenforceable. In addition, the Court is asked whether, assuming Karlin has continuing vitality, the trial court erred in denying plaintiff's application for a preliminary injunction.

Plaintiff, the Community Hospital Group, also known as John F. Kennedy Medical Center (JFK) and the New Jersey Neuroscience Institute (Institute), is a not-for-profit hospital in Edison, Middlesex County, New Jersey. In 1992, JFK created the Institute, a not-for-profit medical care provider specializing in the diagnosis and treatment of neurological diseases and neurosurgical conditions. The Institute receives the majority of its patients through referrals from physicians in other specialties.

On July 1, 1994, Dr. Jay More began to work as a neurosurgeon at the Institute following his residency at Mt. Sinai Hospital, in New York City. Thereafter, Dr. More entered into three separate employment agreements with the Institute, the most recent one being a five-year agreement effective July 1, 1999. Under the terms of the 1999 agreement, either party could terminate the agreement upon three hundred and sixty-five (365) days written notice to the other party. Critical to this appeal, each of the three employment agreements contained postemployment restrictive covenants that prohibited Dr. More from engaging in certain medical practices within a thirty-mile radius of JFK for two years. 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.

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 thirty-mile restrictive area, but declined each one. Between the date of his notice of resignation and his separation date, Dr. More removed documents from the Institute identifying patients' names and addresses, as well as the identity and location of the Institute's referral sources.

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, New Jersey. In addition, Dr. More received medical staff privileges at Somerset Medical Center (Somerset), which is located approximately thirteen and a half 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, Somerset was able to provide complete neurological coverage through the two neurosurgeons.

Believing that Dr. More was in violation of the 1999 agreement, on September 6, 2002, JFK filed a complaint against him, seeking among other things a preliminary injunction prohibiting him from the practice of neurosurgery with NAPA or Somerset. On November 21, 2002, the trial court denied JFK's request for a preliminary injunction. JFK's motion for leave to appeal was denied by the Appellate Division on January 8, 2002. Eventually, the Supreme Court granted JFK leave to appeal and summarily remanded the matter to the Appellate Division to consider the appeal on the merits. In a published opinion dated December 29, 2003, the Appellate Division reversed the trial court and awarded JFK injunctive relief. The panel found that the evidence supported the conclusion that the restrictive covenant was necessary to protect JFK's patient and referral relationships. The panel found the two-year period of the restriction was reasonable and consistent with other restrictions that have been upheld and that the thirty-mile geographic restriction was reasonable. In addition, 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. The panel directed the trial court to enter a preliminary injunction enjoining Dr. More from engaging in the practice of neurosurgery within a thirty-mile radius of JFK.

The Supreme Court granted a stay of the Appellate Division decision on January 5, 2004, and on March 11, 2004, it granted Dr. More's and Somerset's motions for leave to appeal. The Court also granted amicus curiae status to the Medical Society of New Jersey and the New Jersey Hospital Association.

HELD: A restrictive covenant in an employment contract between a hospital and a physician is not per se unreasonable and unenforceable. Under the circumstances of this case, however, the geographic restrictive area is excessive and must be reduced to avoid being detrimental to the public interest. In addition, because the two-year period for the restrictive covenant in this case has expired, the request for injunctive relief is moot.

[On Pp. 11-17 the Court outlines the positions of the respective parties, including amici curiae]

1. In Karlin, although acknowledging that a physician, like any other employer, has no legitimate interest in preventing competition, the Court found that the physician-employer has a legitimate interest in protecting ongoing relationships with patients. The Court also rejected the defendant's argument to extend to physicians the holding in Dwyer v. Jung, 133 N.J. Super. 343 (Ch. Div. 1975), aff'd, o.b. 137 N. J. Super. 135 (App. Div. 1975) (restrictive covenants among attorneys are unreasonable per se because they are injurious to the public as a matter of law). The Karlin Court concluded that restrictive covenants between physicians are not per se unreasonable and unenforceable, and instead adopted the test established in Solari Industries, Inc. v. Malady, 55 N.J. 571, 576 (1970) - 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. Writing for three dissenters, Justice Sullivan argued that restrictive covenants involving physicians should be held per se invalid as against public policy because of the nature of the physician-patient relationship. (Pp. 17-21)

2. Since Solari and Karlin, the test for determining the validity of restrictive covenants between physicians and restrictive covenants in the commercial context has not changed. We recognize the importance of patient choice in the initial selection and continuation of the relationship with a physician. We also agree that the similarities between the attorney-client and physician-patient relationships are substantial. Notwithstanding those considerations, on the record before us we find insufficient justification to overrule Karlin and adopt a per se rule invalidating restrictive covenants between physicians or between a physician and a hospital. An established rule that has governed those relationships for several decades should not be discarded unless we are reasonably certain that we have a problem in need of a cure. Moreover, on the current record, we cannot conclude that prohibiting restrictive covenants among physicians and hospitals will in fact advance the public interest. (Pp. 21-23)

3. We recognize that several commentators have criticized the distinction our law makes between physicians and attorneys in respect of restrictive covenants. Despite that criticism, we continue to rely on this Court's power to govern the ethical standards of the legal profession as justification for our decision to treat attorneys and physicians differently. In addition, although the American Medical Association (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." (citation omitted) 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. (Pp. 23-26)

4. The test that we now apply requires us to determine whether (1) the restrictive covenant was necessary to protect the employer's legitimate interests in enforcement, (2) whether it would cause undue hardship to the employee, and (3) whether it would be injurious to the public. Karlin, supra, 77 N.J. at 417. We agree with the Appellate Division's conclusion that 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. 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. We are satisfied that JFK demonstrated legitimate business reasons for enforcing the restrictive covenant. Furthermore, we are convinced that JFK demonstrated that enforcement of the restriction would not impose an undue hardship upon Dr. More. Finally, 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. 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. 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 thirteen miles or include Somerset. (Pp. 26-35)

5. Under JFK's interpretation of the agreement the two-year period for the term of the restrictive covenant has expired. Because restrictive covenants are not favored in the law, we find no justification to extend the agreement beyond July 17, 2004, and, therefore, JFK's request for injunctive relief is moot. JFK's claim is limited to damages, including but not limited to the loss of patients, as a result of Dr. More's departure. (Pp. 35-36)

The judgment of the Appellate Division is AFFIRMED in part and REVERSED in part. The matter is REMANDED to the Chancery Division for further proceedings consistent with this opinion.

JUSTICE RIVERA-SOTO filed a separate opinion, concurring in part and dissenting in part, stating that because he would affirm in all respects the thoughtful opinion of the Appellate Division, he must respectfully dissent from that part of the majority's opinion that "blue pencils" the geographic limits of the restrictive covenant and remands the case to the Chancery Division.

CHIEF JUSTICE PORITZ and JUSTICES LONG, LaVECCHIA, ZAZZALI, and ALBIN join in JUSTICE WALLACE's opinion. JUSTICE RIVERA-SOTO filed a separate opinion, concurring in part and dissenting in part.

The opinion of the court was delivered by: Justice Wallace

Argued November 30, 2004

In this case and in the companion case of Pierson v. Medical Health Center, P.A., ___ N.J. ___ (2005), also decided today, we granted leave to appeal to re-examine the issue decided in Karlin v. Weinberg, 77 N.J. 408 (1978), 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. Secondary to that issue, in this case, is whether, assuming Karlin has continuing vitality, the trial court erred in denying plaintiff's application for a preliminary injunction. The trial court denied relief, but the Appellate Division reversed and ordered temporary injunctive relief.

We reject the invitation to overrule Karlin. Instead, we hold that a restrictive covenant in an employment contract between a hospital and a physician is not per se unreasonable and unenforceable. We conclude, however, that under the circumstances of this case the geographic restrictive area is excessive and must be reduced to avoid being detrimental to the public interest.

I.

Plaintiff, the Community Hospital Group, also known as John F. Kennedy Medical Center (JFK) and the New Jersey Neuroscience Institute (Institute), is a not-for-profit hospital in Edison, Middlesex County, New Jersey. In 1992, JFK created the Institute, a not-for-profit medical care provider specializing in the diagnosis and treatment of neurological diseases and neurosurgical conditions. The Institute receives the majority of its patients through referrals from physicians in other specialties.

On July 1, 1994, Dr. Jay More began to work as a neurosurgeon at the Institute following his residency at Mt. 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 upon three hundred and sixty-five (365) days written notice to the other party. Critical to this appeal, each of the three employment agreements contained post-employment restrictive covenants that prohibited Dr. More from engaging in certain medical practices within a thirty-mile radius of JFK for two years.*fn1 The initial post-employment restrictive covenant contained in the 1994 agreement prohibited Dr. More from engaging in the practice of neurosurgery within a thirty-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.

The July 1, 1999 agreement, which was to run for a period of five years, is the contract that governs the dispute in this case. Article 7.14 of that agreement provided in part that for a period of one (2) [sic] years following the date of termination of MORE's employment for any reason whatsoever, MORE shall not, directly or indirectly, own, manage, operate, control or be employed by, participate in or be connected in any manner with the ownership, management, operation or control of any medical practice, nor engage in the practice of medicine, in any of its branches, within a 30 mile radius of the HOSPITAL, providing the same or substantially the same medical care as the Services outlined in this agreement. In the event, and only in the event, that the HOSPITAL terminates this Agreement without cause, the HOSPITAL agrees to make two exceptions to this non-competitive covenant and thus permit MORE to practice neurosurgery in New York City, defined as and limited to Queens, Brooklyn, Manhattan, and the two general hospitals in Elizabeth, New Jersey. In the event that MORE terminates this Agreement without cause or either party terminates this agreement for cause, then the aforementioned exceptions do not apply.

During the term of this Agreement and for a period of two (2) years following the date of termination of MORE's employment for any reason whatsoever, MORE shall not, directly or indirectly, for his own account or for the account of others, induce any patients of the HOSPITAL to patronize any professional health care provider other than the HOSPITAL; canvas or solicit any business relationship from any patients of the HOSPITAL; directly or indirectly request or advise any patients of the HOSPITAL to withdraw, curtail, or cancel any patients' business with the HOSPITAL; or directly or indirectly disclose to any other person, firm or corporation the names or addresses of any patients of the HOSPITAL.

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, stating that "the [Institute's] restrictive environment has become increasingly difficult to work in," and that he had "outgrown the Institute's current model." 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 thirty-mile restrictive area, but declined each one. Between the date of his notice of resignation and his separation date, Dr. More removed documents from the Institute identifying patients' names and addresses, as well as the identity and location of the Institute's referral sources.

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 at 1111 Park Avenue, Plainfield, New Jersey. In addition to joining NAPA, Dr. More also received medical staff privileges at Somerset Medical Center (Somerset), which is located approximately thirteen and a half miles from JFK. At the time Dr. More joined NAPA, Dr. Chimenti was the only neurosurgeon taking emergency room calls at Somerset. Dr. Chimenti had been searching for over eight months for an experienced, board certified neurosurgeon to join his practice, but until Dr. More became available he was not able to locate a suitable candidate because of the shortage of experienced, skilled neurosurgeons in the area. With the addition of Dr. More to the medical staff, Somerset was able to provide complete neurological coverage through the two neurosurgeons.

On August 15, 2002, JFK wrote Dr. More that Somerset had inquired about his application for medical privileges at Somerset. JFK sought written assurance from Dr. More that he had not and did not intend to violate the agreement. Dr. More replied that he had not ...


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