Restrictive covenants are private agreements that restrict an individual’s business activities within a specific geographic area for a period of time, in return for wages, access to information, or some other type of tangible benefit. Like the spots of a leopard, they come in all shapes and sizes. Their enforceability varies from state to state, from occupation to occupation, and from industry to industry. Many states have quirky or arcane rules or regulations tailored to specific occupations. Some industries have specific rules and practices that dictate the parties’ course of dealing and determine the “reasonableness” of the restrictions. Some employers prefer non-competes, while others prefer non-solicitations or non-disclosures, or some combination of each. In any event, before agreeing to be restricted, or before asking someone to be restricted, this legal landscape should be explored and understood because litigation in this area of the law can be financially and emotionally draining. This article discusses restrictive covenants and psychologists and psychiatrists.[1]
An Offer You Can’t Refuse
As anyone who has watched the HBO series The Sopranos observed, Dr. Jennifer Melfi, a psychiatrist, occupied a unique position of trust and confidence with her patient, Tony Soprano. Dr. Melfi was a sole practitioner with no other partners, so she probably did not have to worry about non-competes. But what if she had just graduated from medical school, found a dream job with a well-established psychiatry practice in her home state of New Jersey, and was asked to sign an employment agreement that contained “non-compete” and “non-solicitation” provisions that restricted her from engaging in psychiatry, or from having any contact with patients, within twenty miles of her office, for two years after she left that practice? What are Dr. Melfi’s options? Should she accept, reject or negotiate a new deal? What would be the financial and ethical impact to her and the patients?
New Jersey Regulations Prohibit Non-Competes for Licensed Psychologists
There is good news for Dr. Melfi, at least if she decides to stay in New Jersey. She does not have to walk away from the deal. Her post-employment restrictions most likely would not be enforceable because of New Jersey Administrative Code Section 13:42–10.16, a provision of the rules adopted by the State Board of Psychological Examiners, which reads: “A licensee shall not enter into any business agreement that interferes with or restricts the ability of a client to see or continue to see his or her therapist of choice.”
In 2005, a New Jersey Appellate Court, in Comprehensive Psychology System, P.C. v. Prince, held that the State Board of Psychological Examiners adopted a regulation that restricted licensed psychologists from entering into non-competes. In addition to this regulation, the court found that “the nature of the practice of psychology” and “the uniquely personal patient-psychologist relationship forbid any restrictions which might interfere with an ongoing course of treatment.” The court did not elaborate on the particulars of this “unique personal relationship”, or compare or contrast it to a patient’s relationship with other types of doctors, social workers or therapists. And interestingly, if the State Board of Psychological Examiners had not adopted this specific regulation, New Jersey courts, following the Supreme Court’s decisions in Community Hosp. Grp., Inc. v. Moore (2005), and Pierson v. Medical Health Ctrs., PA (2005), might have enforced some or all (New Jersey is a “blue-pencil” state) of Dr. Prince’s restrictions if they were otherwise found reasonable to protect a legitimate business interest of her employer (e.g., training, customer relationships, confidential information), not injurious to the public, and did not impose an undue hardship on her. Future articles in this Series will address restrictive covenants and health care providers in other fields of medicine.
One issue that frequently arises when doctors leave a practice is whether they can contact patients to notify them of their departure and new whereabouts. Often times, the employment agreement will not address this issue directly. The court in Comprehensive Psychology System, P.C. explained that, “a psychologist who changes his office location, voluntarily or involuntarily, has a duty to inform patients of the change and the new location and phone number.” Otherwise, in the court’s view, the psychologist would “abandon” his obligations to the patient. The plaintiff argued that it could have informed “its” patients of Dr. Prince’s departure, and the geographic restrictions were reasonable because Dr. Prince could have treated his patients outside of the restricted area. However, the court was not persuaded by these arguments and leaned heavily on the “critical patient-psychologist and . . . the right of the patient to continued treatment from that psychologist.”
Other Jurisdictions Might or Might Not Enforce Non-Competes for Psychologists or Psychiatrists
Dr. Melfi would likely fare the same if her job offer were from a practice in California, Colorado, Delaware, Massachusetts or Tennessee, where either the state legislatures or the courts in those states have prohibited, or significantly curtailed, restrictive covenants in physician employment contracts. These states find persuasive the American Medical Association Council on Ethical and Judicial Affairs, Op. E-9.02 (1998), which provides: “Covenants-not-to-compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services. The Council of Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership, or corporate agreement. Restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician.”
However, if Dr. Melfi’s job offer was from a psychiatry practice located just across the Hudson River in “Johnny Sack” territory, her restrictions might be enforced completely or in part. For example, in Metropolitan Medical Group, P.C. v. Eaton (1989), a corporation that provided medical, psychiatric and psychological treatment for private patients sued Dr. Eaton, a licensed psychologist, for violating a one-year non-compete that prohibited her from rendering clinical or psychological services within 20 miles of Regent Hospital in New York County. Although the employer did not successfully obtain a preliminary injunction (because it failed to show irreparable harm), the court nevertheless allowed the employer to proceed with the case against Dr. Eaton for monetary damages. The court appeared to strike a balance between a patient’s right to choose his or her own psychologist and an employer’s right to protect and recoup its legitimate business interests in training Dr. Eaton and providing him with access to patients.
The difference in approach to restrictive covenants between New Jersey and New York highlights that there is no “one size fits all” rule. Each state’s laws, rules, regulations, and judicial decisions must be consulted to determine applicability and enforceability.
This is the first article in a continuing series entitled, “The Restricting Covenant.” The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues or special circumstances that might arise in the context of restrictive covenants and a particular occupation or industry. It is not intended to provide and should not be construed as providing legal advice. Each situation is different and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs. Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for other occupations and industries, including accountants, actors, agents, attorneys, and more. And that’s just the “A’s.”
Click here to view all posts in “The Restricting Covenant” series.
[1] Future articles in this Series will discuss how similar restrictions might or might not apply to other mental health professionals such as social workers and therapists.
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