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Potentially Invalid Non-Compete Agreement Exposes NJ Employer to Lawsuit for Wrongful Discharge

  • April 25, 2003

New Jersey businesses using non-compete agreements to protect their intellectual property, trade secrets and proprietary information should know about a recent decision of the Superior Court of New Jersey. On April 16, the court held for the first time under New Jersey law that an employee who was terminated for refusing to sign a noncompetition agreement, under certain circumstances, may bring an action for a violation of public policy as well as the Conscientious Employee Protection Act ("CEPA"), New Jersey's whistleblower statute. Maw v. Advanced Clinical Communications, Inc. 2003 N.J. Super. Lexis 139 (April 16, 2003).

Courts in New Jersey and other states have recognized that truly proprietary, confidential or trade secret information may be protected from disclosure by current or former employees. In the case of former employees, the courts have determined that such protection may be accomplished by reasonably limiting an individual's subsequent employment activities through a non-compete agreement or restrictive covenant.

The standards for determining whether a non-compete agreement or restrictive covenant is reasonable under the circumstances are: 1) does it protect the legitimate interests of the employer; 2) is there any undue hardship imposed on the individual; and 3) does it cause injury to the public. If, however, the employee does not have access to trade secrets or other confidential or proprietary information, then the agreement may not be enforced, regardless of its terms. Under those circumstances, the agreement will be viewed as serving no legitimate purpose and as an unlawful and unenforceable restraint on trade.

In the Maw case, the plaintiff was terminated for refusing to sign the non-compete agreement. She subsequently sued her former employer for violation of public policy and under CEPA. She claimed the agreement did not protect the employer's legitimate business interests. Further, it was not limited to a specific geographic area, and it was intended to be effective for two years.

The trial court dismissed the claim. However, the appellate court reinstated the lawsuit, agreeing with the plaintiff that, in her case, the agreement may have been intended solely to stifle competition and would have been unduly burdensome by substantially limiting her employment opportunities and hindering her ability to earn a living.

The plaintiff admitted she "may have had access to certain confidential material in the course of performing her designing duties." However, she claimed she was no different from the administrative and clerical staff who were not asked to sign the agreement. Furthermore, she claimed that much of the information contained in the company literature she had access to was already publicly available. The appellate court's decision allows the plaintiff to proceed with the lawsuit against her former employer.

Prior to this decision, a non-compete agreement that was later determined to be overbroad was subject to being rewritten by the court to bring it into line with the legal standards for protecting the interests of both the individual and the employer. In light of the Maw decision, however, employers may be subject to common law and statutory claims for damages if they take adverse employment action against an employee for either failing to sign or acting contrary to an agreement found to be unenforceable.

Jackson Lewis LLP believes employers greatly benefit from an Employer Asset Protection program, which includes carefully drafted non-compete agreements. When developing such a program, employers must tailor agreements to the particular circumstances of the individual employment relationship. An existing program that includes the use of non-compete agreements should be reviewed in light of this development.

©2003 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.

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