The Basics of Non-Competes in New Jersey
What is a Non-Compete?
What exactly is a non-compete agreement?
A non-compete agreement, also called a non-competition agreement, is used to prevent former employees from competing with former employers for a specified period of time after employment. Non-competition agreements are designed to protect a legitimate business interests of a company. A non-compete prohibits a former employee from engaging in any activity that would compete with the employer’s business or that would harm the business of the employer post-employment. For example , an employer who terminates a sales employee may use a non-compete to prohibit the former employee from soliciting its customers after termination. Non-competes in New Jersey are enforceable based on whether it meets six factors. Those factors are:
The purpose of a non-compete agreement is to prevent former employees from jeopardizing the financial and/or the good will of the former employer’s business.
Essential Components of NJ Non-Compete Agreements
It is essential to analyze the critical components that form the foundation of a valid and enforceable non-compete agreement. That means examining the limitations imposed on the employee and the employer’s purported business interest that the agreement aims to protect.
The Employee’s Restrictions. The restrictions imposed by a non-compete agreement on an employee are typically listed in a numbered format, such as the following:
First, the employer needs to show that the limitations on the employee (1) are reasonable in scope, (2) have a legitimate or valid purpose, and (3) are necessary to protect the employer’s legitimate business interests. Second, the employer needs to be able to justify the limitations as not being unduly burdensome or over-restrictive.* We now discuss these criteria.
Reasonable Scope. Reasonableness of the agreement’s scope requires that the restrictions on the former employee be: (a) sufficiently limited geographically, (b) limited as to time, and (c) directed toward a clearly-established competitive business as not to unnecessarily restrict the employee’s efforts to find work.
A geographic restriction is reasonable if it is limited to a defined region where the former employee had worked. The geographic scope must be a reasonable area where the former employee had, in fact, established a trade or company contact. While broad geographic restrictions have been upheld, the State Courts frown upon them because they deprive former employees and job seekers the ability to seek work in a reasonable manner.
The same criticism applies to an overly expansive time period. A former employee who is restricted from taking a job for ten years cannot say with any degree of reliability what that job market will offer.
The defined scope of a non-compete agreement must be itself specifically directed toward the identified business interest(s) sought to be shielded from competition. For obvious reasons, a non-compete agreement that prohibits an employee from working in the entire county that has 170,000 employees, many of whom are not involved in the former employee’s business line, is too broad and burdensome. Furthermore, the geographic area of the former employee’s contacts must be limited to the location in which the former employee had actually established the company or trade connections that are sought to be protected from competition.
Legitimate Business Interest. A legitimate business interest is one that the courts consider to be valid or worthy of protection. The business must be one that "gives an employer a positional advantage over his competitors." For example, a higher specialized training program that provides a competitive advantage may be a valid business interest. Typically, an employer can show that its business interest is legitimate by establishing that it has made specific investments in time or money in building its business. This protects the employer from the "free-rider" problem that occurs if an employer cannot establish that its business interests are legitimate or worthy of protection. A free-rider is someone who does not take the time or effort to acquire or build something new, but instead enjoys the benefit of "riding" on the efforts and struggles of others. Such a person would be able to competitively undercut the employer’s price by offering a similar service or product.
When a NJ Non-Compete Agreement is Enforceable and When it is Not
In New Jersey, the enforceability of a non-compete agreement is generally based on a consideration of whether the restriction is no greater than required to protect the employer’s legitimate interests, whether the restriction imposes undue hardship on the employee, and whether the restriction denies the public appropriate access to the employee’s services. Golden v. Golden, 382 N.J. Super. 428 (App. Div. 2005). In embarking on this analysis, New Jersey courts have embraced the "rule of reason." This rule of reason thereby requires the employer to establish that it has a legitimate interest in enforcing a non-compete when so doing would not cause undue hardship for the employee, nor injure the public.
In dual employment cases, the issue is further complicated because it has long been held that employees may not incur a hardship because of contract terms that arise out of their employment. However, such hardship is also not said to affect the employer and, thus, "multiple employers whose separate claims, in the aggregate, exceed what the employee might otherwise suffer in a single employment." Golden v. Golden, 382 N.J. Super. 428, 443 (App. Div. 2005). Other factors to be considered for the balancing test include whether the non-compete agreement seeks to remedy economic or competitive injury to the employer, as well as whether the terms of the restrictive covenant are reasonable in geographic and temporal scope. Importantly, when different agreements have different terms, New Jersey courts "routinely enjoin the employee based on the more restrictive covenant." Id. at 444. In weighing the employer’s burden in agreeing to refrain from its otherwise legally cognizable interests, New Jersey courts have held that an employee’s mobility is generally afforded not much more protection than its trade secrets. Employers who can establish a legitimate business interest will generally succeed in having the non-compete upheld.
Common Challenges to Non-Competes and Related Legal Issues
Employees and employers in New Jersey may both face common legal challenges pertaining to non-compete agreements. For example, because covenants not to compete may seem particularly harsh to current or former workers, many employees may attempt to contest the non-compete they signed when their employment began or ended. While courts generally won’t allow employees to invalidate the agreements for reasons that they could have easily known or challenged sooner, an unfairly broad restriction can lead to litigation.
Another legal challenge employees may raise is the claim that they were coerced into signing the agreement without really understanding the terms. They may claim that they were not presented with a copy until after they signed it, for instance or any negotiations which led to the agreement were not done in good faith. Some employees may even argue that they only signed the agreement under duress, for instance when they were trying to retain a job they believed they needed. In some cases, where the agreement is overly restrictive or if the company could not show that it was necessary for some other specific interest, the agreement may be ruled unenforceable.
Recent Developments in NJ Non-Compete Law
Potential Future Developments
At least one case is pending in which employees challenge in the New Jersey Supreme Court a lower court’s determination that a non-compete agreement is enforceable. Specifically, although the Appellate Division affirmed a motion judge’s conclusion that the non-compete was enforceable, it remanded the case to the same motion judge for a determination whether or not the employee had violated the covenant. The facts of the case show that the employee was not acting in breach while the dispute proceeded in the courts, and the resolution of this case may shed light on the court’s potential willingness to extend the reasoning of the recent decision in Natural Resource. Further guidance on the modification issue may come from appeals in some of the cases that have been remanded for a determination as to whether the employee violated a non-compete that also remains in effect.
It is safe to assume that non-compete attorneys will focus on issues surrounding the validity and enforceability of existing non-compete agreements , and those challenging non-compete agreements should consider exploring whether the agreements can be modified, even if only partially.
Any potential developments, particularly a Supreme Court ruling, could serve to further clarify the enforceability of long-existing non-compete agreements. Developers should keep in mind that they cannot simply avoid such restrictions in their employment practices and risk costly litigation. Identifying and addressing the existence of these restrictions is important to mitigate the risk of a lawsuit or at least limit the potential damages in the event of a challenge brought against a developer’s business.
Best Practices for Drafting a Non-Compete
1. Be Reasonable in Scope and Duration
Run the agreement by a knowledgeable employment attorney before expecting its enforceability. Given that non-compete covenants have been invalidated when they are considered too long in duration or impose too broad a restriction upon the ex-employee in remaining in competition with the company, it is now essential to be able to show by documentary evidence such as a specific time and place study, or the impact of the covenant upon the employee and the industry, that this protection is needed.
2. Use Plain Language
Employers do not need to write the agreement in totally legalistic language. The non-compete should be drafted in clear and easy to understand language. Otherwise, the courts may not obligate employees to abide by covenants which they do not understand, particularly when an employee is not represented by counsel and may not fully appreciate what he or she has signed. Seek to make the covenant as clear and unambiguous as possible so that it cannot be misconstrued.
3. Get It In Writing Before Employment Commences
The covenant should be in writing and signed by the parties before employment commences. A second best alternative is to have the parties sign shortly after employment begins. Otherwise, New Jersey courts may not enforce the covenant if challenged in court, on the grounds that the ex-employee signed it under duress.
4. Good Faith Consideration
At a minimum, even with the signing of a later agreement, the employer must provide the ex-employee with a fair and meaningful compensation in order for the covenant to be valid and enforced. Such compensation could be new or even additional consideration, such as a bonus or raise in salary.
Alternatives to a Non-Compete
Although New Jersey courts generally enjoin employees from competing with their employers through the use of non-compete agreements, the limitations placed by the court on these agreements may result in limited protection to the employer. RE/MAX International, Inc. v. Realty One, 271 N.J. Super. 115 (App. Div. 1994). There are several measures that an employer can take other than or in addition to non-compete agreements to protect its legitimate business interest.
The first protective measure that employers can use is a non-disclosure of confidential information agreement. Usually, the existence of a non-disclosure agreement coupled with a general employee handbook policy of confidentiality is sufficient in the Commercial Division of the Superior Court in the State of New Jersey. S&S Steel Contractors, Inc. v. Accuwright. Inc., 307 N.J. Super 241 (App. Div. 1997). A non-disclosure agreement is an express promise not to disclose any confidential information during or after the employment. This agreement, however, does not prohibit the employee’s use of the confidential information to compete with his/her employer.
A second means of protecting the employer’s business interest is a proprietary information clause or a confidential information clause. These clauses are usually found in non-compete agreements but can also be incorporated into an employee handbook. A proprietary information clause prevents an employee from wrongfully divulging confidential information that is useful to the employer’s competitors , and which is acquired in confidence. A non-compete agreement will not be enforced if it lacks a proprietary information clause preventing the employee from using confidential information to compete with the employer. Moreover, the clause must be reasonable in scope and duration, or else it may be unenforceable.
Finally, employers can enter into non-solicitation agreements with employees. In the Commercial Division of the Superior Court in the State of New Jersey, restraining orders will be granted only where the evidence unequivocally shows an intention of the employee to solicit the employer’s business, which would justify interfering with the employee’s right to work. See S&S Steel Contractors, Inc. v. Accuwright, Inc., 307 N.J. Super 241 (App. Div. 1997). An employer can enjoin a former employee from soliciting its existing clients if it can show a high probability of potential loss to its business with those clients. Unfortunately, this prohibition may be difficult to enforce after the employment has terminated because of the concern that the particular clients may have been obtained through efforts outside of the employment relationship. See Donaldson Lufkin & Jenrette Securities Corp v. Florance, 29 F.Supp. 2d 136, 165 (D.N.J. 1999).