Lawyers working in New Jersey cannot be bound to non-competition agreements. Has the time finally come to treat doctors the same way? In this writer’s opinion the answer is no but the legislature should consider imposing certain restrictions on these agreements to make them less onerous.
Restrictive covenant agreements, also known as “non-competes,” typically preclude doctors from soliciting patients of a practice when they leave that medical group and often also preclude them from working within a geographic radius of a medical group’s offices or a hospital where the doctor previously had privileges. In New Jersey, the enforceability of non-competes is decided on a case-by-case basis and is governed by common law principles rather than a statute. However, there is legislation pending in New Jersey that could drastically alter the landscape concerning restrictive covenants but Bill A3715 has been pending since May 2022 and may never come to fruition.
Restrictive covenants by definition are anti-competitive. According to A3715, these agreements impose special hardships on certain professionals, such as doctors and, because of these non-competes, employers often have to hire skilled physicians from out-of-state or doctors out of their residency programs who do not yet have non-competes. The New Jersey legislature believes that limiting these anti-competitive agreements will stimulate New Jersey’s economy by preserving and providing jobs and will provide opportunities for employees not tethered to restrictive covenant agreements to establish new business ventures.
The New Jersey Supreme Court in the seminal case of Karlin v. Weinberg, 77 N.J. 408 (1978) held that doctors can be bound to non-compete agreements if they are reasonable in duration, geographic territory and scope. For example, a court could enforce a restrictive covenant that is for a term of two-years and precludes a departing physician from working in his or her specialty within a 15-mile radius of his or her former medical group’s offices and hospitals. In reaching this decision, a court must weigh a medical group’s legitimate business interests against the hardship imposed on the physician. If a court determines that a non-compete is overly broad in any of these areas it can “blue Pencil” the agreement to narrow it in a way that would be reasonable and enforceable in the court’s opinion. See Cnty. Hosp. Group, Inc. v. More, 183 N.J. 36 (2005). For example, it could reduce the term to one year or limit the geographic radius to ten miles.
In certain circumstances, non-competes clearly make sense and should be enforced. For example, they are readily enforced if they are entered into as part of a physician’s sale of his or her medical practice. Surely, a doctor buying a medical practice does not want the seller opening a new practice down the street. Likewise, a doctor who joins a practice with no patient base and after many years leaves that practice with a following of patients due to the practice’s marketing efforts, arguably should be precluded from soliciting these patients within a reasonable geographic radius of the practice’s office but not barred from practicing medicine outside the area. Many young physicians, however, sign restrictive covenants when they join their first medical group following their residency believing that non-competes are unenforceable. They are often wrong and realize, far too late, that they must relocate their families if they want to continue to practice their specialty. In fact, many non-competes require doctors who leave a practice to relinquish their right to remain on the medical staff of the hospitals at which they worked when the doctor was part of the former medical practice. This can have significant consequences for those hospitals especially where the doctor was the head of a department and is told by his former practice that he must give up his privileges at that hospital.
There are certain solutions to more level the playing field. For example, the legislature could bar physician non-competes if the doctor is terminated by his or her medical group without “just cause” or if the doctor is compelled to leave for “good reason,” such as the medical group requiring him or her to work at a satellite office located an hour away. In addition, legislation could limit non-competes to a short duration and to a small geographic radius. It also could require the medical practice to continue to pay a doctor’s base salary while he or she is forced to sit on the sideline until the non-compete expires. One of our Fortune 100 clients has been doing this for years to ensure the enforcement of its non-compete.
A3715 includes some of these provisions. It would limit non-competes to twelve (12) months and only apply within New Jersey. Therefore, the restrained physician still could accept a position immediately in New York City for example. The law would also require employers wishing to enforce their agreements to pay the departing employee’s salary and benefits for the time period covered by the non-compete.
The proposed New Jersey legislation may never be adopted into law. New York has a bill that in June 2023 passed the senate and assembly and is awaiting signature from the Governor. If signed it would ban certain non-competes but it will not apply to agreements entered into New Jersey. The Federal Trade Commission (“FTC”) also proposed a rule banning non-competes nationwide as a violation of antitrust laws. The FTC likely will vote in April to implement that ban but there are legitimate challenges to that law being adopted. For now, the bottom line for physicians is to hire experienced counsel to negotiate those restrictive covenants prior to signing any such agreement because, at least at the moment, non-competes are fully enforceable against doctors in New Jersey as long as they are reasonable in duration, scope and geography.