In Most Cases, Restrictive Covenants Are Only Enforceable By the Entity that Signed the Agreement Granting them
A restrictive covenant is generally defined as an agreement restricting the practice of a person’s profession or business after they leave their current employer. But can it be enforced by an entity that was not the original employer? That issue was addressed by the Appellate Division of the Superior Court of New Jersey in aJune 3, 2010 case called,Woodbridge Medical Associates, P.A. v.Berkley, WL 2195760 (N.J.Super.App.Div. 2010).
The Underlying Facts
In that case, “Richard A. Goldstein, M.D., joined [Woodbridge Internal Medical Associates, P .A.’s] (“WIMA”) medical practice in July 1997 as an employee. Goldstein was required to sign an employment agreement, which barred him, for a two-year period following his departure, from competing with WIMA within ten miles of WIMA’s offices or within five miles of the hospitals where WIMA’s physicians maintained admitting privileges. In 2004, when he became a WIMA shareholder, Goldstein signed ashareholdersagreement, which contained his promise not to compete, for two years following his departure, with WIMA or its successors by engaging in the practice of medicine within five miles of WIMA’s offices or within three miles of the hospitals serviced by WIMA’s physicians.” Id at 1.
Ultimately, there was a business downturn and “the business ended up owing $200,000 in back rent. At that point, the WIMA shareholders formed a new corporate entity to insulate themselves. OnOctober 27, 2004, counsel filed a certificate of incorporation of Woodbridge Medical Associates, P.A. (WMA) … Importantly, “WIMA did not, however … assign its employment agreements or shareholder agreements to WMA.”Id. at 2
Ultimately, “Goldstein [and other’s] left WMA. OnSeptember 29, 2005, WMA filed suit in the Chancery Division against Goldstein [and the others] alleging, among other things, that [they] breached the restrictive covenants contained in their agreements with WIMA.” Id at 2
The Court Rules Against Enforcement of the Restrictive Covenants
“At the conclusion of plaintiff’s case, the judge involuntarily dismissed WMA’s action seeking enforcement of the restrictive covenants” Id at 3. The matter was appealed, and the Appellate Division affirmed this ruling on the basis that “the evidence failed to demonstrate the restrictive covenants WIMA extracted from Goldstein andMurray were actually transferred or assigned to WMA.”
In essence, by forming a new entity for the business, but failing to transfer the restrictive covenants to that new entity, the owners had precluded themselves from enforcing the covenants. In other words, you can’t insulate yourself from the liabilities of your old entity (the $200,000.00 debt for back rent) and at the same time take the position that you are not insulated from your old entity for purposes of enforcing its rights. The two arguments are inconsistent and will preclude enforcement.