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What Damages Are Available for Breach of Noncompete Clause When a Physician Leaves a Practice?

Friday, January 30, 2009

The New Jersey Superior Court, Appellate Division, in Salartash Surgical Associates, L.L.C. v. Del Rosario, No. A-0434-07T1 (App. Div. Dec. 4, 2008), has clarified the type of damages available for breach of a noncompete clause in an employment contract.

The Superior Court, in a per curiam opinion, indicated that "investment costs" are not available as damages for the defendant physician’s breach of a covenant not to compete.

Plaintiff Salartash Surgical Associates, L.L.C. (Salartash) hired defendant Michael Del Rosario in 2002 under a three-year employment contract that provided for termination upon 60 days’ notice by either party. The employment contract also contained a restrictive covenant that prohibited Del Rosario from practicing medicine within a 20-mile radius of Salartash’s offices, both during the term of the contract and for a period of two years after Del Rosario left the practice. The arrangement continued for one year, until Del Rosario provided 60 days’ notice that he would no longer continue in the practice. However, Del Rosario left the physician practice before the notice period expired and subsequently opened an office within the 20-mile radius, in breach of the restrictive covenant in the employment contract between the parties. Salartash filed a lawsuit against Del Rosario asserting, inter alia, that Del Rosario breached the notice provision and the restrictive covenant in the contract.

The trial court declined to enjoin Del Rosario after a bench trial between the parties, but it found that Del Rosario had breached the contract by refusing to perform surgery within the 60-day period after providing the notice of his intention to leave the practice. Despite finding that the restrictive covenant was valid, the trial court declined to enforce it. Further, the trial court dismissed with prejudice Salartash’s damage claims for breach of the restrictive covenant. Upon appeal, Salartash conceded that enforcement of the restrictive covenant was moot because of the passage of time. However, Salartash asserted it was entitled to damages for breach of the restrictive covenant and for breach of the notice provision. The Appellate Division agreed and reversed, finding that Salartash was entitled to pursue its claims for damages for Del Rosario’s breach of the two provisions in the contract. Salartash Surgical Associates L.L.C. v. Del Rosario, No. A-1420-05 (App. Div. Mar. 27, 2007).

On remand, Salartash sought compensation for certain expenses it had incurred: (1) the placement fee it paid to a search agency for services rendered in the hiring of Del Rosario; (2) staff fees, professional dues and other fees paid on behalf of Del Rosario; (3) the amount of reimbursement it paid Del Rosario toward parking fees, tolls and other travel expenses; (4) medical malpractice insurance it provided for him; and (5) any advertising expenses paid for him. Salartash characterized these damages as representing its "investment" losses and asserted that they are compensable damages. Surprisingly, Salartash did not seek damages for any lost profits due to Del Rosario’s breach of the restrictive covenant, or any damages or losses it may have incurred due to Del Rosario’s departure before the 60-day notice period expired.

On remand, the trial court granted summary judgment to Del Rosario, holding that the expenses sought by Salartash did not constitute compensatory damages recoverable for breach of contract since they did not arise from the breach.

Salartash filed a second appeal contending that the trial court erred in not awarding the aforementioned category of damages as compensation for the breach of contract, relying upon Community Hospital Group, Inc. v. More, 183 N.J. 36 (2005). The Community Hospital case concerned the enforceability of a restrictive covenant against a physician, and the Supreme Court held in that decision that an employer’s legitimate protectable interest in enforcing a restrictive covenant 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." Id. at 57-58. The Supreme Court noted at the end of the opinion that an employer’s claim for damages under a restrictive covenant included but was "not limited to the loss of patients." Id. at 64.

In deciding Salartash’s second appeal, the Superior Court affirmed the trial court’s summary judgment decision for substantially the same reasons, but went further to explain what the Supreme Court meant in the Community Hospital case concerning the "investment" damages that Salartash was seeking. The Superior Court held that the reference in Community Hospital to the "investment" the employer made in training the physician was directed towards a necessary requirement to enforce a restrictive covenant, namely, whether or not the restrictive covenant was necessary to protect the employer’s legitimate interests. See Community Hospital, supra, 183 N.J. at 58. The Superior Court clarified that the reference to investment costs was in the context of determining the enforceability of the restrictive covenant and not in fixing damages for its breach. It further held that lost profits and diminution in the value of the practice are acceptable ways to measure damages for the breach of a restrictive covenant.

What can be learned from this decision? Unless the New Jersey Supreme Court states otherwise, it appears that "investment" costs an employer incurs in hiring, training and supporting an employee physician are not compensable damages when that physician breaches a restrictive covenant in an employment contract. Any lost profits and diminution in the value of the practice because of a breach are acceptable ways to measure damages in these types of cases. It was not clear why Salartash did not seek damages for any lost profits due to Del Rosario’s breach of the restrictive covenant, or for any additional expenses or losses it may have incurred due to Del Rosario’s departure before the 60-day notice period expired. The Superior Court assumed that this may have been due to the difficulty in proving these kinds of losses with any certainty. Although it was not clarified in the appellate decision, presumably at the trial level, despite establishing the validity of the restrictive covenant, Salartash did not provide evidence that Del Rosario had taken or was using its confidential business information or was somehow interfering with existing patients or patient referrals. Consequently, Salartash did not establish a legitimate protectable interest for the enforcement of the restrictive covenant against Del Rosario.

Frank P. Spada, Jr.

Written by

Frank P. Spada, Jr.
Phone: 609.951.4150
Fax: 609.452.1147
spadaf@pepperlaw.com


The material in this publication is based on laws, court decisions, administrative rulings and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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