Restrictive covenants are commonplace in the healthcare space. Doctors and hospitals routinely enter into non-compete and non-solicitation agreements in an effort to retain talent, among other reasons. However, in May of 2022 the New Jersey Assembly proposed legislation that may serve to significantly limit the scope of restrictive covenants, both within the healthcare space and beyond
Assembly Bill A3715 seeks to limit the reach of restrictive covenants in New Jersey, finding that “Post-employment contracts and severance agreements that restrict or prohibit competition, also known as ‘restrictive covenants,’ ‘covenants not to compete,’ ‘no-poach agreements,’ or ‘non-compete agreements,’ impede the development of business in the State by driving skilled workers to other jurisdictions and by requiring businesses to solicit skilled workers from out-of-State.” The bill defines a “restrictive covenant” as an “agreement between an employer and an employee arising out of an existing or anticipated employment relationship, or an agreement between an employer and an employee with respect to severance pay, under which the employee or expected employee agrees not to engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.”
A3715 seeks to codify New Jersey’s common-law precedent that a restrictive covenant must be narrowly tailored to the employer’s legitimate business interests, cannot be unduly burdensome on the employee, and cannot run afoul of public policy or the general public interest. Notably, the bill limits the duration of restrictive covenants to twelve months, places requirements on when an employee must be notified of the restrictive covenant, provides that an employer cannot prohibit the employee from seeking employment outside the State of New Jersey, and provides that an employer cannot prevent an employee from providing a service to the employer’s customer or client, as long as the employee does not initiate or “solicit” the customer or client, among other significant protections.
This proposed legislation stands in contrast to the current controlling case regarding a court’s interpretation and enforcement of a restrictive covenant. In 2005, the Supreme Court of New Jersey, in Community Hospital Group, Inc., v. More, M.D., upheld a hospital’s restrictive covenant contained in an employment agreement, finding that the hospital had “legitimate protectable interests” for enforcing restrictive covenants contained in such agreements.
In Community Hospital, the Supreme Court considered whether “the restrictive covenant was necessary to protect the employer’s legitimate interests in enforcement,” which is one of the requirements to enforce a restrictive covenant. The Court noted that the employer’s legitimate protectable interests included “(1) protecting confidential business information, including patient lists; (2) protecting patient and patient referral bases; and (3) protecting investment in the training of a physician.” The Court held that a two-year non-compete agreement between the hospital and Dr. More, where Dr. More could not practice neurosurgery, was reasonable.
Also of note, A3715 would empower the court “to void any agreement,” but is silent as to the court’s current ability to blue-pencil the agreement to conform it to the law. Accordingly, entities seeking to utilize restrictive covenants in their agreements may no longer be able to rely on a court modifying, rather than completely striking, an overly broad restrictive covenant. This would mark a significant divergence from current practice and place into question whether the parties would be permitted to contract to give the court such a right.
Whether Bill A3715 will be passed or not – and in what form – remains unclear, but the enforceability of non-compete agreements is likely to remain a hotly litigated issue, and selecting competent counsel when challenging or defending such agreements is critical.