Legal: Restrictive covenants: Are they enforceable when a partner leaves the practice?

October 1, 2008

Dr. C has been in practice for many years with Dr. W. They have an enormously successful dermatology practice and have a standard partnership agreement, the sole purpose of which is to protect the interests of their practice. The agreement has various paragraphs that deal with salaries, benefits, coverage and restrictive covenants.

Key Points

Dr. C has been in practice for many years with Dr. W. They have an enormously successful dermatology practice and have a standard partnership agreement, the sole purpose of which is to protect the interests of their practice. The agreement has various paragraphs that deal with salaries, benefits, coverage and restrictive covenants.

Recently, Dr. C has become unhappy with many aspects of his partnership. He has always had an amicable relationship with his senior partner, and has always been able to resolve issues in the past after discussion with Dr. W.

Unfortunately, this time the two dermatologists are unable to resolve their issues. Dr. W finally tells Dr. C that he can go in either of two directions: Dr. C can accept his senior partner's wishes, or he can simply leave the practice.

Dr. C is overwhelmed. He has four children, extensive credit card debt and a huge mortgage on his house. It is economically unrealistic for him to open a brand-new office at least 10 miles from his current patient base, with a huge attendant debt and no hope of making a meaningful salary for at least six months. However, Dr. C also realizes that he can no longer work with Dr. W.

He decides that he will open a new office only one block from his current office. This way, his current patients are likely to continue to see him. Dr. C also assumes that his partner would show compassion and never try to enforce the contract's restriction. After all, he assumes, a 10-mile restriction is unreasonable.

Dr. C does not reveal to Dr. W his true intentions, and while still working with him, signs a five-year lease on new office space less than six blocks from his current office; undertakes a three-month, $500,000 renovation; and hires all new staff - all before announcing that he is leaving.

No sooner does Dr. C begin working in his new office then he is served papers announcing that his ex-partner is suing him.

Dr. C is shocked that he will need to defend his right to open a new office. He assumes the 10-mile restriction is unreasonable and seeks legal advice to confirm this. Is he right?

Is it reasonable?

Restrictive covenants are a common portion of many legal partnerships, including medical partnerships. They have also been found to be legally enforceable in many medical partnerships. In fact, the pivotal case taught in almost all first-year law school contract courses is the famous New Jersey case between two dermatologists known as Weinberg vs. Karlin.

In this case, the fact pattern was nearly identical to that of the case of Dr. C and Dr. W. The New Jersey court looked at the geographic and time restrictions of the partnership agreement and asked the now-accepted threshold question: Is the restrictive covenant "reasonable" in terms of both its geographic and time restrictions? If it is reasonable, then the restriction would stand. What makes it reasonable may be open to interpretation.

The courts in medical partnership agreements will often look at both the medical specialty and the need to have a certain number of those doctors located in a geographic area.

The court will be much less concerned about the squabbles between two physicians than the perceived medical needs of the public.

While a court in New Jersey may feel a 10-mile restrictive covenant between two suburban dermatologists is perfectly acceptable, a court in overcrowded New York City would likely hold such a restriction is unreasonable.

Dr. C may have spent a significant amount of money establishing his new office and may spend thousands of dollars defending the lawsuit brought against him. However, the court may find that his partnership agreement restrictive covenant is enforceable.

Dr. C could be forced to start another practice many miles away. The court will not be concerned about his economics. The court will only look at the reasonableness of his contract.

Dr. Goldberg is the director of SkinLaser & Surgery Specialists of New York and New Jersey; director of Mohs surgery and laser research, Mount Sinai School of Medicine; and adjunct professor of law, Fordham Law School.