Concord Orthopaedics Prof'l Ass'n v. Forbes

Decision Date04 December 1997
Docket NumberNo. 95–865.,95–865.
Citation142 N.H. 440,702 A.2d 1273
CourtNew Hampshire Supreme Court

Nelson, Kinder, Mosseau & Gordon, P.C., Manchester (Martha V. Gordon, on the brief and orally), for plaintiff.

Upton, Sanders & Smith, Concord (Russell F. Hilliard, orally and on the brief, and David P. Slawsky, on the brief), for defendant.

Glenn W. Bricker, M.D., Ashland, by brief, pro se, as amicus curiae.

THAYER, Justice.

Pursuant to Supreme Court Rule 8, we accepted the Superior Court's (Smukler, J.) transfer of the following two questions: First, whether the trial court correctly concluded as a matter of law and public policy that the analysis of a covenant not to compete between a physician and a professional association is no different than that generally applied to such covenants? We hold that it did. Second, whether the trial court erred when it granted Concord Orthopaedics Professional Association's (COPA's) request to enforce the covenant not to compete to the extent it applies to COPA's existing patients, but denied COPA's request to the extent the covenant applies to new patients. We hold that it did not.

The defendant, H. James Forbes, M.D., and the plaintiff, COPA, executed an employment agreement containing a covenant not to compete. In consideration for COPA's obligation to pay Forbes deferred compensation, Forbes agreed not to practice orthopaedic medicine within a twenty-five mile radius of any COPA office for two years following his termination. The pertinent section of the covenant reads:

[I]t is specifically agreed that when the Doctor's employment by the Association is terminated for whatever reason, the Doctor shall not practice orthopaedic medicine within a twenty-five (25) mile radius of any office out of which the Association is conducting a practice at the date of termination ... for a period of twenty-four (24) months.

In 1995, COPA's board of directors voted to change the deferred compensation formula applicable to all physician-shareholders. Consequently, Forbes resigned, embarked on the establishment of a medical office in Concord, and sought declaration from the superior court that the covenant not to compete was unenforceable. COPA commenced a separate action seeking injunctive enforcement of the covenant. The superior court temporarily restrained Forbes from practicing orthopaedic medicine within twenty-five miles of COPA's offices in Concord, Peterborough, and New London. The superior court later partially enforced the covenant by issuing a preliminary injunction. That order restrained Forbes from treating existing COPA patients within a twenty-five mile radius of Concord for two years with an exception for emergency surgery. The superior court declined to enforce the covenant as to new patients, reasoning that COPA lacked a legitimate interest in preventing Forbes from competing for new patients.

Before proceeding, we note that the covenant's term expired on July 31, 1997. Thus, the matter is technically moot. We recognize, however, valid exceptions to the mootness doctrine where the case concerns important matters of public policy and is "capable of repetition, yet evading review." Royer v. State Dept. of Employment Security, 118 N.H. 673, 675, 394 A.2d 828, 829 (1978) (quotation and citation omitted); see also Weinstein v. Bradford, 423 U.S. 147, 148, 96 S.Ct. 347, 348, 46 L.Ed.2d 350 (1975). Covenants not to compete run for various durations. Given that restraints on competition must be narrowly tailored as to duration, see Technical Aid Corp. v. Allen, 134 N.H. 1, 8, 591 A.2d 262, 266 (1991), it is likely that the issues raised here will recur but continue to evade review. Further, the particular questions here warrant attention because the issue of access to physicians greatly affects the public at large.

With respect to the first transferred question, Forbes urges us to declare covenants not to compete involving physicians to be against public policy and per se unenforceable. We decline Forbes' invitation.

Forbes argues that such covenants impermissibly burden the physician-patient relationship. The weight of authority, however, supports enforcement of reasonable covenants not to compete involving physicians. See, e.g ., Jewett Orthopaedic Clinic, P.A. v. White, 629 So.2d 922, 925 (Fla.Dist.Ct.App.1993) ; Pittman v. Harbin Clinic, 210 Ga.App. 767, 437 S.E.2d 619, 621 (1993) ; Gillespie v. Carbondale & Marion Eye Ctrs., 251 Ill.App.3d 625, 190 Ill.Dec. 950, 953, 622 N.E.2d 1267, 1270 (1993) ; Raymundo v. Hammond Clinic Ass'n, 449 N.E.2d 276, 281 (Ind.1983) ; Ohio Urology, Inc. v. Poll, 72 Ohio App.3d 446, 594 N.E.2d 1027, 1031 (1991) ; see also 54A Am.Jur.2d Monopolies, Restraints of Trade, and Unfair Trade Practices § 939 (1996).

The public policy of New Hampshire encourages free trade and discourages covenants not to compete. See Laconia Clinic, Inc. v. Cullen, 119 N.H. 804, 807, 408 A.2d 412, 414 (1979). Nevertheless, our courts uphold a limited restraint if reasonable as applied to the particular circumstances of the parties. Dunfey Realty Co. v. Enwright, 101 N.H. 195, 198, 138 A.2d 80, 82 (1957). "A restraint on employment is reasonable only if it is no greater than necessary for the protection of the employer's legitimate interest, does not impose undue hardship on the employee, and is not injurious to the public interest." Moore v. Dover Veterinary Hosp., Inc., 116 N.H. 680, 684, 367 A.2d 1044, 1047 (1976) (per curiam). If the covenant fails one prong, the covenant is unenforceable. Technical Aid Corp., 134 N.H. at 8, 591 A.2d at 266. Our traditional test of reasonableness, outlined in Moore , to determine whether a covenant is enforceable applies to covenants between physicians and their employers. The Moore test sufficiently protects the public interest; therefore, there is no reason to declare such covenants void per se or enunciate a new test applicable to physicians.

The second transferred question is whether the trial court abused its discretion by only partially enforcing the covenant when it issued its preliminary injunction. We first consider the validity of the covenant not to compete by determining its reasonableness under the Moore test.

A covenant's reasonableness is a matter of law for this court to decide. Id. at 8, 591 A.2d at 265. We review the trial court's factual findings for clear error. See Ferrofluidics v. Advanced Vacuum Components, 968 F.2d 1463, 1469 (1st Cir.1992).

Covenants are valid only to the extent that they prevent employees from appropriating assets that are legitimately the employer's. See 6A A. Corbin, Corbin on Contracts § 1391B, at 34 (Supp.1997). COPA has a legitimate interest in preventing Forbes from appropriating the goodwill of its business, developed in part by Forbes' contact with patients in his capacity as a COPA physician. See Technical Aid Corp., 134 N.H. at 9, 591 A.2d at 266 (stating that covenants must focus on protectable interests and must be narrowly tailored to those interests); 6A Corbin, supra § 1394, at 99–100 (1962). We agree with the superior court that as applied to new patients the provision was overbroad. See Technical Aid Corp., 134 N.H. at 9, 591 A.2d at 266. While COPA possesses a legitimate business interest in prohibiting Forbes from competing for existing patients, no such legitimate interest exists as to new patients. The legitimate interests of the employer generally extend only to those areas in which the employee had actual client contact. Cf . Blake, Employee Agreements Not to Compete , 73 Harv. L.Rev. 625, 677 (1960). By definition, Forbes could not have had actual contact with new patients. Thus, COPA lacks any legitimate interest in trying to prevent Forbes from competing for new patients.

COPA would have us consider new patients a subset of referring physicians. COPA apparently argues that because Forbes had actual contact with referring physicians, and those physicians generate new patients, COPA has a legitimate interest in all new patients. We find unpersuasive language from other jurisdictions that groups referring physicians with "actual clients." See, e.g., Fields Foundation, Ltd. v. Christensen, 103 Wis.2d 465, 309 N.W.2d 125, 130 (Ct.App.1981). This reasoning contravenes the principle of narrowly tailoring covenants not to compete to encompass only legitimate interests of the employer. See Technical Aid Corp. , 134 N.H. at 9, 591 A.2d at 266. New patients encompass far more than referring physicians. Such an expansive interpretation of legitimate interests does not foster the public good. Thus, we do not adopt this line of reasoning.

A restraint on competition must be narrowly tailored in both geography and duration to protect COPA's legitimate interest in its goodwill. See id. at 10–11, 14, 591 A.2d at 266–67, 269. Here, the covenant prohibited Forbes from practicing medicine within twenty-five miles of COPA's offices in Concord, Peterborough, and New London. The geographic limits imposed on an employee by a covenant not to compete "generally must be limited to that area in which the employee had client contact, as that is usually the extent of the area in which the employer's goodwill is subject to appropriation by the employee." Id. at 10, 591 A.2d at 266. During oral argument, COPA waived enforcement of the covenant's geographical limitations concerning COPA's two satellite offices (Peterborough and New London). Accordingly, we do not address the validity of the geographic limits concerning the satellite offices. We do hold, however, that the limitation of a twenty-five mile radius of the Concord office is reasonable because it includes COPA's...

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