Third Circuit Issues Important Decision on Non-Solicitation and Non-Compete Agreements Under New Jersey Employment Law

 

The United States Third Circuit Court of Appeals (which hears appeals from the federal district courts in New Jersey, Delaware, Pennsylvania and the United States Virgin Islands) recently had the opportunity to address the state of New Jersey employment law on restrictive covenants in the case of ADP, LLC v. Rafferty.

 

Background

In the Rafferty case, two ADP employees, Kristi Mork and Nicole Rafferty, agreed to restrictive covenants in exchange for an award of company stock.  Because they were high performing employees, they agreed to restrictions in exchange for the stock award which were more onerous than lower performing  employees were required to agree to.  The restrictions applied whether they quit or were fired.

The employees agreed to a non-solicitation agreement which for one year prevented them from soliciting any clients for which ADP “provides,” “has provided,” or “reasonably expects” to provide business to within two years.  This restriction applied whether or not the employees had worked with or even been exposed to these clients.

They also agreed to a non-compete agreement which lasted for one year, during which they could not:

‘participate in any manner with a Competing Business anywhere in the Territory where doing so will require [them] to [either] provide the same or substantially similar services to a Competing Business as those which [they] provided to ADP while employed,’ or ‘use or disclose ADP’s Confidential Information or trade secrets.’

This restriction applied to the area where the employee had worked or had contact with ADP’s clients within the last two years.

The employees also signed a non-disclosure agreement.

Shortly after they voluntarily quit working for ADP the employees went to work for a competitor. ADP found out and filed separate suits against each employee in United States District Court in New Jersey, seeking an injunction enforcing the restrictive covenants and preventing the employees from working for the competitor.  Judges in the two employees’ separate cases came to differing conclusions.  The judge in employee Kristi Mork’s case denied the injunction, but in the case of employee Nicole Rafferty the injunction was, in the main part, granted by a different judge.  Both appealed and the cases were consolidated.

 

New Jersey Employment Law on Restrictive Covenants

a.  Blue Penciling

New Jersey courts favor enforcing restrictive covenants, and strive not to wholesale invalidate overly restrictive agreements.  Rather, they reduce their scope to “render them reasonable.”  This is known as “blue penciling.”  The restrictions will be reduced, rather than rejecting the entire agreement, if the restrictive covenant can be blue penciled so that the revised agreement: “(1) protects a legitimate business interest, (2) does not unduly burden an employee, and (3) adheres to the public interest. … by eschewing a dichotomous choice between enforcement and invalidation, New Jersey aims to fulfill a restrictive covenant’s lawful objectives while nevertheless ensuring that such agreements do not unreasonably hinder competition or employee mobility.”

 

b.  Legitimate Business Interest.

Courts will first evaluate whether a restrictive covenant serves a legitimate business interest.  The court found that the restrictions did serve a legitimate business interest because “The preservation of client relationships and the goodwill they generate are among the business interests that New Jersey courts consistently recognize as legitimate and worthy of protection.”

 

c.  Undue Hardship

Even if a restriction serves a legitimate business interest it may be invalidated or reduced because it puts an undue burden on the employee because of

its geographical area, its period of enforceability, and its scope of activity so that those interests are not outweighed by the hardship the covenant inflicts on the employee. To determine whether and to what extent [a restrictive covenant] must be blue penciled, the Court must balance the employer’s need for protection and the hardship on the employee that may result.

The court found that the restriction in the agreements were overbroad – indeed, even ADP admitted they were – but found that they could be saved by blue penciling them to reduce the burden to a level that was not unreasonable.

 

d.  Injury to the Public

Courts need to review restrictive covenants to ensure that “enforcement of the restriction should not cause harm to the public.”  The third circuit found that theses agreements did not injure the public or public interest.

 

e.  Decision

Because the court found that the restrictions served legitimate business interests and did not harm the public interest, the only issue before the court was the hardship they placed on the employees.  The court found that it did, in fact, place an undue hardship on the employees.  However, given that the law favors blue penciling over wholesale invalidation, the Third Circuit sent the case back to the District Court to determine the appropriate balancing of the of the hardship to the employee against the legitimate business interests of the employer and see if it was possible to blue pencil the restrictions to save the agreements.

 

The Takeaways

• Restrictive covenants, including non-compete and non-solicitation agreements, are permissible under New Jersey law.
• If a restrictive covenant serves a legitimate business purpose, does not unduly burden the employee, and is not injurious to the public, it will be enforced.
• Whether a restriction is overly burdensome to an employee will depend on its geographical area, subject matter, breath, and the length of time it is in force.
• Protecting clients and goodwill is a legitimate business purpose.
• New Jersey employment law favors enforcement of these agreements, and courts will therefore blue pencil restrictive covenants to save them when they are overly burdensome, if possible.
• If you are an employer, you should have the agreement drafted, or at least reviewed, by an experienced employment lawyer to make sure it is enforceable.
• If you are an employee, you should have a restrictive covenant reviewed by a compeant employment lawyer because there is a strong chance the restrictions will be enforced in court.

 

Contact Us

Our New Jersey employment lawyers represent employees and employers in all aspects of employment law, including  drafting, reviewing and litigating over restrictive covenants.  Call us at (973) 890-0004 or fill out the contact form.  We can help.