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NYS Appellate Division, Second Judicial Department Upholds Invalidation of a Physician’s Restrictive Covenant

In a recent decision by the New York State Supreme Court, Appellate Division, Second Department the court upheld a lower court ruling striking down a restrictive covenant against a surgeon and refusing to modify the offending restriction. In Long Island Minimally Invasive Surgery, P.C. v. St. John’s Episcopal Hospital, Long Island Minimally Invasive Surgery, P.C. (the “Practice”) had filed suit for breach of an employment agreement against St. John’s Episcopal Hospital and Javier Andrade, M.D.

The Practice and Dr. Andrade had entered into an employment agreement (the “Agreement”) that included a restrictive covenant barring Dr. Andrade from performing any type of surgery for two years within 10 miles of any of the Practice’s seven offices following the termination of the Agreement. During the term of his employment, Dr. Andrade worked almost exclusively in two of the Practice’s offices.

After being terminated from the Practice, Dr. Andrade accepted a position at St. John’s Episcopal Hospital (St. John’s), which was located within the restricted area. The Practice subsequently commenced an action against Dr. Andrade and St. John’s, seeking damages and injunctive relief, based on an alleged breach of the restrictive covenant.

The Appellate Division upheld a lower court’s ruling against the Practice, refusing to enforce the restrictive covenant or to modify the Agreement’s terms related to the restrictive covenant — a practice often referred to as “Blue Penciling.” The Court applied a three-prong test to assess the reasonableness of the restriction, considering whether a restriction, (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.

The court found that the covenant prohibiting Dr. Andrade for a period of two years from practicing surgery of any kind, within a 10-mile radius of all of the Practice’s offices, even those at which he had never worked, was geographically unreasonable, because it effectively barred him from performing surgery anywhere in the New York metropolitan area. The court also found that the Practice failed to demonstrate that imposing such a broad geographical restriction was necessary to protect its interests.

The Appellate Division also upheld the lower court’s refusal to “Blue Pencil” the restrictive covenant rather than invalidating it. The court opined that partial enforcement may be justified if an employer demonstrates, that in addition to having a legitimate business interest, an absence of overreaching, coercive use of dominant bargaining power, or other anti-competitive misconduct is present. The fact that the covenant is clearly overbroad casts doubt on the Practice’s good faith in imposing it. The Practice held a superior bargaining position over Dr. Andrade and required him to sign the Agreement as a term of employment while refusing to negotiate the restriction.

Although this is only one case, it provides useful insight for both employers and employees in the healthcare space. Employers’ primary takeaway is the importance of having a well-crafted employment agreement that contains a restrictive covenant that is likely to be enforceable. There is no guarantee of enforceability, but following the principles of the three-prong test, cited by the court, provides a greater likelihood of enforceability. For employees, when negotiating an employment agreement should always consider the restrictive covenant and what the implication may be to the employee’s career. No one should take for granted that a restrictive covenant will not be enforced, and where a broad restrictive area is enforceable, the employee may very well have to uproot and move outside of the restrictive area. To avoid costly litigation, parties to an employment agreement should retain experienced healthcare counsel to assist in the negotiation of the agreement. Contact Frier Levitt today to speak to an attorney.