Search form

New Jersey Court Brings ‘Clarity and Uniformity’ to Analysis of Restrictive Covenants

By Erik J. Winton, James M. McDonnell, Joshua D. Allen and Carlyle W. Edwards-Balfour
  • August 2, 2019

The New Jersey Appellate Division has clarified the analysis required to determine the effect of restrictive covenant agreements (RCAs) and offered guidance to practitioners drafting RCAs under New Jersey law in a decision on six consolidated actions. ADP, LLC v. Kusins, No. A-4664-16T1 (N.J. Super. Ct. App. Div. July 26, 2019).

Background

The employer had a two-tiered system of restrictive covenants. In the first-tier, each sales representative, upon hire, executed agreements containing general non-compete and non-solicitation provisions limited to the geographic regions in which the representative worked and tailored to the clients the representative contacted while employed.

In the second-tier, however, each representative executed “click-wrap” agreements that, in exchange for participation in a stock award incentive program, included restrictions on soliciting any actual or prospective client without regard to the representative’s geographic location or personal contact with the client or prospective client.

Generally, representatives worked for the company in specific geographic territories and markets, received extensive training, maintained lists of clients and prospects, and received access to the company’s pricing information.

The defendants voluntarily resigned their respective employments with the company to accept positions with a competitor. Thereafter, the defendants allegedly engaged in activities that violated the terms of their RCAs to varying degrees and the company sued to enforce the agreements.

Appellate Court Decision

The appeals court first reaffirmed New Jersey’s recognition of the enforceability of RCAs designed to protect the legitimate interests of an employer, as long as the restrictions “impose[] no undue hardship on the employee, and [are] not injurious to the public.” The Court noted that any such restrictions must be reasonable in “duration, area, and scope of activity.” It also noted that a company may properly protect its trade secrets, proprietary information, and customer relationships through RCAs.

The Court approved the company’s two-tiered system, which utilized heightened restrictions for upper-level employees. It said such an approach reflected “the greater damage those employees could inflict” on the company upon departure. The Court noted the additional training provided to such employees, the investment in such employees, and their access to proprietary information justified the heightened restrictions. Indeed, the Court said these factors made the representatives attractive to competitors.

The Court, however, found the non-compete and non-solicitation clauses in the second-tier RCAs unreasonable as written. It therefore modified (or “blue-penciled”) those provisions to make them enforceable.

First, the clauses applied to any and all company clients, not just the existing clients the representative actively worked on or whose identity the representative learned of while employed by the company. The Court found this restriction unreasonable, explaining that where a representative could not possibly know all of a company’s actual clients, such a broad restriction is unenforceable. Therefore, the Court upheld the modification of the provision to the extent it is limited to clients the former employees worked on or whose identity the employee learned of while employed by the company.

Second, the non-solicitation clause applied to any prospective client. The Court likewise held this restriction to be unreasonable, explaining that, to be enforceable, a non-solicitation clause as to prospective clients must be limited to prospective clients the representative gained knowledge of while employed by the company. The Court upheld the modification to that provision, as well, to reflect its limitations as to prospective clients the former employee gained knowledge about during employment.

Third, the Court upheld the non-competition restriction and its geographic limitation, but rejected the lower court’s further narrowing of the restriction to the former employee’s specific market segment. 

***

Appellate decisions concerning restrictive covenant matters are rare, as most of these cases are resolved before reaching the appellate level. Therefore, when an appellate decision is issued, it should be reviewed carefully to determine what can be learned from the holdings. In Kusins, the New Jersey Appellate Division clarified that, notwithstanding news reports and legislation aimed at limiting the use and enforceability of non-competition agreements, such restrictive covenants remain enforceable in New Jersey.

New Jersey companies or companies with a New Jersey choice-of-law provision in their RCAs should review existing non-competition and non-solicitation agreements to determine compliance with Kusins. Moreover, with the Court’s express approval of a two-tiered restrictive covenant system, companies may want to explore implementing a similar protocol to ensure that the level of limitations reflects an employee’s position with the company.

Please contact a Jackson Lewis attorney for assistance with any needs your company may have regarding such restrictive covenant agreements.

©2019 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

Reproduction of this material in whole or in part is prohibited without the express prior written consent of Jackson Lewis P.C., a law firm that built its reputation on providing workplace law representation to management. Founded in 1958, the firm has grown to more than 900 attorneys in major cities nationwide serving clients across a wide range of practices and industries including government relations, healthcare and sports law. More information about Jackson Lewis can be found at www.jacksonlewis.com.

See AllRelated Articles You May Like

May 17, 2019

The EPL Insurance Advisor – May 2019

May 17, 2019

To assist underwriters and claims professionals in assessing emerging employment risks, we are pleased to provide the first issue of our newsletter. The EPL Insurance Advisor highlights topical issues in claims, defenses, and liability risk management developments. 2019 EPLI Trends Report – What Analysts and Underwriters Should... Read More

May 15, 2019

Does Massachusetts Non-Compete Law Restrict Access to Federal Court or Arbitration?

May 15, 2019

The Massachusetts Noncompetition Agreement Act (Non-Compete Act) has yet to be tested, but its venue provision likely will come under special scrutiny. The venue provision governs the geographical location and forum in which a non-compete lawsuit may be maintained. Due to its apparent conflicts with federal law, the venue provision will... Read More

January 7, 2019

2019: The Year Ahead for Employers

January 7, 2019

Over the past year, state and local governments responded in a variety of ways to national policy, and the midterm elections painted a picture of what’s in store for employers in 2019 and beyond. Jackson Lewis’ annual report outlines upcoming issues, trends, legislation and regulations employers need to be aware of in the coming year... Read More