July 2024 Legal Intelligencer/Law.com article by Lamb McErlane attorneys Vasilios J. Kalogredis, Esq. and Sonal Parekh, Esq.

On April 16, 2024, the Supreme Court of New Jersey resolved a longstanding open issue as to whether a hospital’s bylaws or course of conduct created a contract between the hospital and its medical staff, which in turn would give rise to an implied duty of good faith and fair dealing, and a right to monetary damages for breach of contract.

In Comprehensive Neurosurgical, P.C. v. Valley Hospital[1], a group of neurosurgeons with longstanding privileges at Valley Hospital sued the hospital after it granted certain exclusive privileges to a competing neurosurgery practice, the Columbia Group, which adversely affected the plaintiff neurosurgeon’s ability to practice at the hospital. The plaintiffs brought two claims that were tried in front of the jury: (1) a breach-of-contract claim resulting from the hospital’s alleged failure to follow its medical staff bylaws and give the plaintiffs a hearing before granting the exclusive privileges, and (2) a claim for breach of the implied covenant of good faith and fair dealing. The jury found in favor of the implied-covenant claim, and the Appellate Division affirmed on appeal by the hospital. The Supreme Court then held: (i) the hospital’s medical staff bylaws were not an underlying contract that could support a claim that the hospital breached the implied covenant of good faith and fair dealing; (ii) the hospital’s administrative healthcare decision to award exclusive privileges to the other group of neurosurgeons could not, on its own, support a claim that the hospital breached the implied covenant of good faith and fair dealing; (iii) there was a genuine issue of material fact as to whether there was an implied-in-fact contract; (iv) there was a genuine issue of material fact as to whether the hospital’s alleged bad-faith conduct precluded summary judgment; (v) the jury instructions did not support verdict that hospital breached the implied covenant of good faith and fair dealing; (vi) the jury could have reached a different result if it had been correctly instructed on the claim; and (vii) the hospital did not waive attorney-client privileges as to certain e-mails that were inadvertently produced during discovery.

The Supreme Court focused its analysis on whether a contract existed between the hospital and plaintiffs that supported an implied duty of good faith and fair dealing, explaining that without a contract, there could be no implied duty on the hospital. The Supreme Court reasoned that there were three potential avenues to find an implied duty: (i) a finding that the bylaws constituted a contract; (ii) a finding that the hospital engaged in an invalid exercise of its discretionary healthcare powers (the “Berman Claim”); and (iii) a finding that there was an implied-in-fact contract between the parties.

First, the Supreme Court ruled that medical staff bylaws cannot serve as an underlying contract to support an alleged breach of an implied covenant of good faith and fair dealing claim, nor could a violation of the bylaws support an independent claim for money damages. The Court explained that the fundamental elements of contract formation (i.e., offer, acceptance, and consideration) are missing in the context of medical staff bylaws. There was no evidence that the parties negotiated or engaged in the “bargained-for exchange” of promises or performance that may consist of or an act or creation of a legal relation in the adoption of the bylaws. Furthermore, the bylaws existed long before the plaintiffs joined the medical staff. The Court reasoned that while bylaws do impose certain binding obligations, these obligations do not give rise to a traditional contract, to a claim for the traditional contract remedy of damages, or to a separate breach of the implied covenant claim.

Second, it is well-known that hospitals maintain broad discretionary powers in making administrative decisions related to healthcare. Such administrative decisions will be upheld only if it: (i) genuinely services a public healthcare objective; (ii) is reached in the normal and regular course of conducting the affairs of the hospital; and (iii) is based on adequate information regardless of form, origin, or authorship, that is generally considered reasonable and reliable by professional persons responsibly involved in the healthcare field. Accordingly, a hospital healthcare policy made in bad faith under the guise of a genuine public healthcare objective would not withstand judicial scrutiny. Here, the Supreme Court found that the hospital’s administrative healthcare decision to award exclusive privileges to the Columbia Group could not independently give rise to a claim for breach of the implied covenant of good faith and fair dealing, even if equitable relief may be available under certain circumstances.

Last, the Supreme Court found that there was sufficient evidence in the summary judgment record to support the notion that the parties had a special relationship, rooted in part in their course of dealings for more than a decade, that gave plaintiffs specific rights and obligations beyond the bylaws. An implied-in-fact contract may form based on the parties’ actions, course of conduct, and/or oral expressions. In the case at hand, the bylaws and other communications between the parties referenced the possibility of a medical staff member having a contractual relationship with the hospital in addition to the bylaws. Significantly, the Court found the record to show that the plaintiffs relied on the hospital’s offer (for a contractual relationship), joined the medical staff, and then for several years invested resources in building up their practice, reputation and patient base, all while helping to transform the hospital into a “Neuroscience Center of Excellence.” The Court stated that the parties’ historical course of dealing supports an implied contract that, in exchange for stopping the outflow of patients to other hospitals and by devoting substantial time and resources to “modernizing [the hospital’s] neurosurgical department through establishing cutting-edge [technologies],” the hospital agreed that plaintiffs could continue to build their medical practice at the hospital without any restrictions on treating “unassigned” emergency room patients (i.e., the same group of patients to which the Columbia Group was granted exclusive privileges to treat). The Court viewed that this arrangement, derived from an alleged implied-in-fact contract oral contract, or otherwise, went beyond the bylaws because the bylaws did not expressly give the plaintiffs those rights in exchange for modernizing the hospital’s neurosurgical center.

Separately, the Court also found that the plaintiffs adduced sufficient evidence to raise a genuine question about whether the hospital acted in bad faith by entering into the exclusive agreement “based upon animus towards plaintiffs rather than valid healthcare concerns.” For these reasons, in addition to concerns about the ambiguities in the jury instructions and verdict, the Supreme Court reversed the appellate court’s judgment, vacated part of the verdict on the implied covenant claim and remanded for further proceedings. The Court ruled that the jury should decide whether the hospital breached an implied covenant of good faith and fair dealing premised on an underlying contract beyond the rights and obligations afforded by the bylaws. This case presented a significant resolution into remedies and cause for equitable relief that may be awarded pursuant to a violation of a hospital’s medical staff bylaws.

Read the article on Law.com/Legal Intelligencer.

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq., who contributed to this article, is a practicing attorney at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a pharmacist by education and training.

[1] See Comprehensive Neurosurgical, P.C. v. Valley Hosp., 257 N.J. 33 (2024).