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DOH CLINICAL GUIDELINES FOR OFFICE-BASED SURGERY INVALIDATED

    A New York State Supreme Court Judge recently held that the Department of Health (“DOH”) lacks the authority to issue and enforce its clinical guidelines for office-based surgery.  The guidelines, published by DOH in December 2000, among other things, limit the administration of anesthesia in office-based surgeries.

    The DOH had anticipated that the guidelines would set the standards of care in physician disciplinary proceedings and medical malpractice actions. 

    In holding that the guidelines are null and void, the Court relies on the Education Law Section 6532, which provides that the [DOH] Commissioner is not authorized to promulgate any rule or regulation concerning professional misconduct by a physician.  The court also relies on a New York Court of Appeals opinion, Boreali v. Axelrod, in which the high court states that, administrative “agencies, as creatures of the Legislature, act pursuant to specific grants of authority conferred by their creator.”  As such, “an administrative officer has no power to declare through administrative fiat that which was never contemplated or delegated by the Legislature.  An agency cannot by its regulations affect its vision of societal policy choices.”  While the State Legislature has considered legislation that would authorize DOH to set standards regulating office-based surgery, no such law has been enacted as of the date of this Newsletter.  

   


         

COURT FINDS RESTRICTIVE COVENANT UNENFORCEABLE
AGAINST FOUR GEORGIA PHYSICIANS

            Recently, a Georgia Court ruled that a non-competition provision allowing a Georgia medical group to alter the geographic restriction is unenforceable against four of the practice’s former shareholders employees.

            Drs. Sanjay Bhansali, Andrew Golde, Deborah Burton and Burke Robinson had entered into employment and shareholder agreements with New Atlanta Ear, Nose & Throat Associates, P.C.  The restrictive covenant in each of the physician employment agreements prohibited the doctors from competing with the practice within eight miles of any New Atlanta office where they may have worked for 18 months prior to leaving the medical practice. Each of the four covenants listed two or three of the neighborhoods in which the group’s offices were located. The court found that since the addresses and number of offices associated with each location were not specified, the covenant was unenforceable because the prohibited locations were not fixed or established.

The New Atlanta shareholders agreement also barred the physicians from practicing medicine with any other physician that had previously worked for the group for a period of 36 months after leaving the practice.  As it did not contain an geographic restriction, the Court concluded that the covenant was unenforceable in Georgia.

However, the restrictive covenant applicable to a fifth shareholder –employee was held to be enforceable because he signed an amended agreement specifying the number of offices and their locations.

Although vague and ambiguous restrictive covenants run the risk of being held completely unenforceable, in New York State the courts have the authority to revise the covenant as appropriate to create an enforceable time and/or geographic restriction.

To view the full text of the case, go to New Atlanta Ear, Nose & Throat, P.C. v. Pratt.

 

 

FDA AMENDS PRESCRIPTION DRUG LABELING REGULATIONS

            The U.S. Food and Drug Administration (“FDA”) issued its final rule on February 1, 2002, amending the regulations that require drug manufacturers to include certain warning statements on the labels of prescription drugs. The final rule becomes effective April 1, 2002. Under the revised regulations, the statement “Caution: Federal Law Prohibits Dispensing Without A Prescription” is no longer required, but is replaced by the statement “Rx Only.”  In addition, the FDA will no longer require the statement “WarningMay Be Habit Forming” on the labels of certain habit forming drugs.  In this instance, no replacement statement is provided. 

            To review the FDA’s final rule, go to http://www.access.gpo.gov/su_docs/fedreg/a020201c.html

EMPLOYMENT LAW ALERT!

GRANTING COBRA EXTENSIONS

            Under the federal Consolidated Omnibus Reconciliation Act of 1985, as amended (“COBRA”), employees and their dependents (“Qualified Beneficiaries”) may be entitled to continue health insurance benefits for up to eighteen months under an employer’s group health insurance plan.  By statute, a Qualified Beneficiary may also be entitled to an extension of his or her COBRA benefits provided, (1) the Qualified Beneficiary is deemed disabled under Title II or Title XVI of the Social Security Act (“SSA”) during the first 60 days of continuation coverage and, (2) the Qualified Beneficiary properly notifies the employer of the favorable SSA disability determination before the expiration of the eighteen-month COBRA coverage period.  If these requirements are met, COBRA benefits are extended for an additional eleven months.

            In theory, the rule for granting COBRA extensions appears very clear.  In practice, however, employers and employees alike frequently are unhappy with a rigid interpretation of the Rule.  A 2000 Eighth Circuit Court of Appeals case, Marsh v. Omaha Printing Co., 218 F.3d 854 (8th Cir. 2000), provides a perfect illustration of the difficulties presented to an employee who technically fails to comply with the Rule, through no fault of their own.  In that case, the employer denied the employee’s request for an extension in accordance with COBRA and its office COBRA policy because the employee failed to provide evidence of a favorable SSA disability determination before the expiration of the eighteen month COBRA coverage period. It is suggested by the court that the employee timely filed a SSA application for a determination, but that a resolution of the SSA application was delayed by the Social Security Administration.  While the court expressed sympathy and concern for the employee, it held that it is bound by the statutory requirements and denied the extension.  As a result, the employee is personally responsible for more than $80,000 in medical bills.

            TIP:  Employers may provide greater benefits than permitted under COBRA, but only if the employer’s COBRA policy permits the extension without an SSA determination.  When adopting such policies it is always advisable to consult with an employment law attorney.  For more information about COBRA and other employee benefits, contact Ann E. Evanko or Anne M. Peterson at 716-849-8900. 

 


 

NEW ATLANTA EAR, NOSE & THROAT ASSOCIATES, P. C. v. PRATT et al.

A01A2321.

COURT OF APPEALS OF GEORGIA, SECOND DIVISION

2002 Ga. App. LEXIS 104


January 25, 2002, Decided
NOTICE: [*1] THIS OPINION IS UNCORRECTED AND SUBJECT TO REVISION BY THE COURT.

DISPOSITION: Judgment affirmed in part and reversed in part.

 

CASE SUMMARY
PROCEDURAL POSTURE: Appellant medical group sued appellee former employees/shareholders in the Georgia trial court to enforce restrictive covenants in employment and shareholder agreements. The trial court found the covenants unenforceable, and the group appealed.

OVERVIEW: The employees/shareholders announced their intentions to violate the restrictive covenants in their employment and shareholder agreements. The appellate court held the covenants in the employment agreements were subject to strict scrutiny and those in the shareholder agreements were subject to more liberal scrutiny. The employment agreements specified a maximum number of locations to which the territorial limitations of the restrictive covenant applied. The fact that these locations could be narrowed during the course of the agreement did not render the covenant unenforceable. However, the fact that the addresses and number of offices associated with each location were not specified rendered the covenant unenforceable because the prohibited locations were subject to shifting and expanding. One employee/shareholder who renegotiated his contracts to specify both addresses and number of offices could not take advantage of this flaw in the other contracts. The failure of the shareholder agreements to specify any prohibited territory rendered the restrictive covenants in those agreements unenforceable, even under more liberal scrutiny.

OUTCOME: The trial court's judgment was reversed as to one employee/shareholder and otherwise affirmed.

JUDGES: MILLER, Judge. Andrews, P. J., and Eldridge, J., concur.

INION BY: MILLER

OPINION: MILLER, Judge.

This case involves the enforceability of restrictive covenants found in employment and shareholder agreements of five physicians who left a medical group and announced they intended to violate the covenants. The trial court deemed all of the covenants unenforceable. We hold that with the exception of one physician (Dr. Pratt), the employment restrictive covenants allow the medical group to shift and expand the proscribed territory during the term of the agreements and are therefore unenforceable. We also hold that the shareholder restrictive covenant, which contains no territorial restriction, cannot be blue-penciled and is therefore unenforceable. Accordingly, we affirm the trial court's judgment declaring all of the covenants unenforceable, with the exception of Dr. Pratt's employment restrictive covenant, which is enforceable.

Atlanta Ear, Nose & Throat, P. C. (the "former medical group") operated a medical clinic at which numerous physicians worked, including the five who are defendants here. In November 1996 the former [*2] medical group and its owners (who did not include defendants) agreed to sell, at a later date, the group's assets to PSC Management Corporation. Three months later in February 1997, the five defendants entered into employment agreements with New Atlanta Ear, Nose & Throat, P. C. (the "new medical group"), which had been formed to operate the assets of the former medical group once the asset sale closed. The closing took place two months later, in which the new medical group contracted with PSC to use those assets and to have PSC manage the new medical group's operations. The five defendants and other physicians received stock in PSC's parent corporation and in the new medical group and apparently entered into a shareholder agreement with the new medical group, although in the record we only have a copy of a restated shareholder agreement executed two years later in August 1999. Based on the parties' representations, we assume for purposes of this opinion that the original shareholder agreement contained the same restrictive covenant found in the restated agreement.

Four sets of restrictive covenants are found in the various agreements. The November 1996 asset acquisition agreement [*3] has a broad five-year post-closing covenant preventing the old medical group from competing, soliciting, and hiring; the February 1997 employment agreements prohibit the defendants from post-termination competition for 18 months; the March 1997 management agreement precludes the new medical group from engaging in various competitive activities with PSC for 18 months after termination; and the August 1999 restated shareholder agreement prevents each shareholder from practicing medicine with other new-medical-group physicians for three years after termination.

Four years into their employment contracts, the five defendants (Drs. Pratt, Bhansali, Golde, Burton, and Robinson) terminated their employment and announced they intended to disregard the restrictive covenants contained in the employment and restated shareholder agreements. The new medical group sued to enforce the employment and shareholder restrictive covenants but moved for an interlocutory injunction on the employment restrictive covenants only. The defendants moved to enjoin enforcement of both the employment and shareholder restrictive covenants. The court ruled that both sets of covenants were unenforceable and enjoined [*4] their enforcement. The new medical group appeals.

1. The Employment Restrictive Covenants. The employment restrictive covenants all provide:

Physician agrees that during Physician's employment by Medical Group and for a period of eighteen (18) months following the effective date of any termination of the Employment Term, . . . Physician will not, directly or indirectly, alone on in conjunction with any other Person:

i. open or join a medical office within an eight (8) mile radius of a "Prohibited Office" and practice medicine at that office or practice medicine at any other medical clinic, ambulatory service center or hospital located within such eight (8) mile radius of a Prohibited Office in any of the Practice Specialties; and ii. see "Patients" for consultation or treatment within any of the Practice Specialties at any medical office located within an eight (8) mile radius of a Prohibited Office.

For purposes hereof a "Prohibited Office" is one or more of the offices listed in Part Two of Exhibit A, in which Physician saw Patients for Medical Group during the eighteen (18) months preceding the effective date of termination of the Employment Term, and "Patient" means [*5] any individual to whom services were provided by Physician at a Prohibited Office during the eighteen (18) month period prior to Physician's date of termination.

Part Two of Exhibit A has the heading "Medical Group Office Locations to Which Physician is Assigned," which is then followed by a list of two or three locations. For Dr. Robinson the list is "Medical Quarters/Northside, Roswell, Snellville"; for Dr. Burton "Medical Quarters/Northside, Marietta, Austell"; for Dr. Bhansali "Marietta, Medical Quarters/Northside"; and for Dr. Golde "Marietta, Austell, Medical Quarters/Northside." Although Dr. Pratt's list originally read "Medical Quarters/Northside, Marietta, Austell," in December 1998 he executed and delivered an amendment to change that list to read:

Austell - Cobb Medico, 1680 Mulkey Road, Suite E, Austell, Georgia 30106 and 1790 Mulkey Road, Suite 7, Austell, Georgia 30106

Marietta - 833 Campbell Hill Street, Marietta, Georgia 30060 and 790 Church Street, Suite 140, Marietta, Georgia 30060

Medical Quarters/Northside - 5555 Peachtree Dunwoody Road, Suite 235, Atlanta, Georgia 30342

Woodstock - 120 North Medical Parkway, Suite 102, Woodstock, Georgia 30189

(a) [*6] Level of Scrutiny. In determining the enforceability of restrictive covenants, we first determine what level of scrutiny to apply. There are three levels: strict scrutiny, which applies to employment contracts; middle or lesser scrutiny, which applies to professional partnership agreements; and much less scrutiny, which applies to sale-of-business agreements. n1

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n1 Habif, Arogeti & Wynne v. Baggett, 231 Ga. App. 289, 289-291 (1) (498 S.E.2d 346) (1998).

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The answer here is quite clear, as there were restrictive covenants contained in both the employment and shareholder agreements executed by the defendants. Independent of the relative bargaining power of the parties, Russell Daniel Irrigation Co. v. Coram n2 held that where a party, in conjunction with the same transaction, has signed an employment and a partnership agreement with his employer, both of which contain restrictive covenants, then the restrictive covenant in the employment agreement is subject to strict scrutiny. Coram [*7] explained:

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n2 237 Ga. App. 758, 759 (1) (516 S.E.2d 804) (1999).

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Subjecting two restrictive covenants to different treatment, even though found in agreements executed as part of the same transaction, is consistent with the rationale behind the different levels of scrutiny. When one is selling a business or purchasing partnership interests, more weighty consideration is being offered in exchange for the non-compete covenant. The business seller is receiving substantial consideration for the business he has built up, the value of which would be significantly diminished to the buyer if he were allowed to compete in the same market. The potential partner will receive a share of the profits, which profits are generally protected by non-compete covenants required from the other partners. Thus, non-compete covenants found in sale of business or partnership agreements are generally afforded greater degrees of latitude. If the business seller or potential partner as a part of the transaction also enters into [*8] a separate employment agreement with its own additional non-compete covenant, then the consideration received for that covenant is usually less (generally employment benefits such as salary and insurance coverage), subjecting it to a stricter level of scrutiny. The context and consideration of the two restrictive covenants being different, they are subject to different levels of scrutiny. n3

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n3 Id.; see Johnstone v. Tom's Amusement Co., 228 Ga. App. 296, 298 (2) (491 S.E.2d 394) (1997) (physical precedent only); Arnall Ins. Agency v. Arnall, 196 Ga. App. 414, 419 (2) (396 S.E.2d 257) (1990) (physical precedent only).

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Here there are the following additional factors differentiating the restrictive covenants in the employment contracts from those in the shareholder agreement: (i) at the time they entered into the employment agreements, the defendants were not shareholders of the new or old medical group, as they received no stock until the closing two months later; (ii) the employment [*9] agreements all specified that their restrictive covenants "shall be deemed, and shall be construed as separate and independent agreements"; and (iii) the restrictive covenant in the shareholder agreement indicated that it was in addition to the employment restrictive covenants in that it in no way relieved the shareholders of those separate employment obligations. Accordingly, we review the employment restrictive covenants under strict scrutiny.

(b) Shifting and Expanding Territorial Restrictions. Inasmuch as covenants against competition in employment contracts are in partial restraint of trade, they are only enforceable "if strictly limited in time and territorial effect, and if they are otherwise reasonable considering the business interests of the employer sought to be protected and the effect on the employee." n4 This is a question of law for the court based upon the wording of the covenant. n5

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n4 (Citation and punctuation omitted.) Koger Properties v. Adams-Cates Co., 247 Ga. 68 (1) (274 S.E.2d 329) (1981); see Advance Technology Consultants v. RoadTrac, LLC, 250 Ga. App. 317, 320 (1) (551 S.E.2d 735) (2001). [*10]

n5 Koger Properties, supra, 247 Ga. at 69 (2).

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The defendants do not contend that either the 18-month time limitation or the restricted scope of activity is unreasonable. Rather, the question is whether each physician's respective territorial restriction is unreasonable. In this regard, Koger Properties v. Adams-Cates Co. n6 held that "a territorial restriction which cannot be determined until the date of the employee's termination is too indefinite to be enforced. . . . [The employee must be] able to forecast with certainty the territorial extent of the duty owing." n7 Thus, if the covenant's language allows territories to be added during the course of the agreement, the covenant is unenforceable. n8

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n6 Id. at 68 (1).

n7 (Citations and punctuation omitted.) Id. 247 Ga. 68; see Advance Technology Consultants, supra, 250 Ga. App. at 322 (4); AGA, LLC v. Rubin, 243 Ga. App. 772, 774-775 (533 S.E.2d 804) (2000).

n8 Ceramic & Metal Coatings Corp. v. Hizer, 242 Ga. App. 391, 393 (1) (529 S.E.2d 160) (2000).

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Citing AGA, LLC v. Rubin, n9 the defendants argue that because the list of two or three prohibited locations could be narrowed during the course of the agreement so as to eliminate locations where the physician had not seen patients during the last 18 months of the agreement, the agreement's territory could not be forecast with certainty and therefore was unenforceable. This argument is without merit. Unlike Rubin, the list of two or three locations was the outside limit that circumscribed the reach of the restrictive covenant. The fact that this small list could be narrowed does not diminish the fact that no locations could be added; indeed, the narrowing aspect of the covenant only worked to the physician's advantage, as the maximum number of locations covered by the covenant was set and immovable. n10

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n9 Supra, 243 Ga. App. at 774-775.

n10 Cf. Sysco Food Services of Atlanta v. Chupp, 225 Ga. App. 584, 586-587 (1) (484 S.E.2d 323) (1997) (list of eleven prohibited counties was set by agreement).

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Nevertheless, as found by the trial court, the listing of the prohibited locations has a fatal flaw: the addresses and the number of offices in each location are not identified, thus allowing (during the course of the agreement) the sixteen-mile circles of prohibited territory within each listed location to shift as offices move and to expand in number as offices are added. Indeed, in its appellate brief, the new medical group conceded that under the wording of the employment restrictive covenants, four defendants "were restricted from practicing medicine within an eight mile radius of 'one or more of' [the new medical group's] Marietta offices at which they had seen 'Patients' during the eighteen months prior to the termination of employment. It was obvious that the territorial limit was based on the location of any [new medical group] office in Marietta." (Emphasis supplied.)

These very circumstances occurred, as the Marietta office moved twice during the course of the agreement, approximately one-half mile each time. Also, a second office was opened in Austell. The new medical group's president testified that the list of prohibited offices moved or expanded to include [*13] the additional locations to accommodate for offices that moved or expanded. Accordingly, the covenants fall squarely within the holding of Koger Properties and its progeny invalidating territorial restrictions that change and expand during the course of the agreement. n11

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n11 See, e.g., Hizer, supra, 242 Ga. App. at 393 (1).

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Dr. Pratt, however, cannot avail himself of this analysis, as he and the new medical group subsequently amended the exhibit setting forth his territorial restriction to specify the precise address and number of the offices that served as the centerpoint of the prohibited circles. Contrary to Dr. Pratt's argument, we do not find the description of the prohibited activities ambiguous. He is prohibited, within the restricted territory, (a) from opening or joining a new office and practicing medicine there, (b) from practicing any of the specified "Practice Specialties" at any other medical clinic, ambulatory service center, or hospital, and (c) from seeing "Patients" at [*14] a medical office. Therefore, as to Dr. Pratt, the trial court erred in holding that his employment restrictive covenant was unenforceable. n12

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n12 See McAlpin v. Coweta Fayette Surgical Assoc., 217 Ga. App. 669, 672-674 (2) (458 S.E.2d 499) (1995).

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2. The Shareholder Restrictive Covenant. The restated shareholder restrictive covenant prohibits each shareholder, for a period of 36 months after terminating employment with the new medical group, from practicing medicine with any other physician who was employed by the new medical group prior to the date of the shareholder's termination. No territory is specified.

Regardless of the level of scrutiny we apply, the lack of a territorial restriction renders this covenant unenforceable. Even under the liberal sale-of-business standard, a reasonable territorial limitation must be specified. n13 Blue-penciling cannot cure the problem, for "the 'blue pencil' marks, but it does not write. It may limit an area, thus making it reasonable, but it may [*15] not rewrite a contract void for vagueness, making it definite by designating a new, clearly demarcated area." n14 Certainly if the blue pencil cannot rewrite a vague territorial limitation, where the parties at least tried to describe a territory, it cannot insert an absent territorial limitation, where the parties consciously chose not to include one. Case-law references to territorial blue-penciling specify that the parties designated an overbroad geography, not that they omitted a geographical restriction altogether. n15 As blue-penciling cannot cure this omission, the shareholder restrictive covenant is unenforceable. Moreover, the employment agreement executed in February 1997 cannot be construed together with the restated shareholder agreement executed two-and-one-half years later in August 1999 (which became effective in July 1999 and expressly superseded the March 1997 shareholder agreement) so as to supply the missing element, as the agreements are not contemporaneous. n16

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n13 See Hudgins v. Amerimax Fabricated Products, 250 Ga. App. 283, 287 (2) (551 S.E.2d 393) (2001). [*16]

n14 Hamrick v. Kelley, 260 Ga. 307, 308 (392 S.E.2d 518) (1990).

n15 See, e.g., Jenkins v. Jenkins Irrigation, Inc., 244 Ga. 95, 100-101 (3) (259 S.E.2d 47) (1979); Hudgins, supra, 250 Ga. App. at 287-288 (2); cf. Drumheller v. Drumheller Bag & Supply, 204 Ga. App. 623, 628 (3) (420 S.E.2d 331) (1992) (trial court may "blue pencil" the covenants so as to include only those activities enumerated in the agreement that are necessary for the protection of legitimate business interests).

n16 Lyle v. Memar, 259 Ga. 209, 210 (378 S.E.2d 465) (1989).

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Accordingly, with the exception of Dr. Pratt's employment restrictive covenant, the restrictive covenants found in the employment and restated shareholder agreements are unenforceable.

Judgment affirmed in part and reversed in part. Andrews, P. J., and Eldridge, J., concur.