Restrictive Covenants / Non-Compete Agreements

Many times employees are required to sign a restrictive covenant or non-compete agreement as a condition of their employment. Other times, a Contract of Employment may contain a restrictive covenant or non-compete agreement among other provisions contained within the Agreement. Often these agreements are the subject of negotiation at the time of hire while, other times, employees do not even realize that their Employment Agreement contained a restrictive covenant or non-compete agreement until after they have been terminated.

In New Jersey, there are many different considerations that effect whether, and to what extent, a restrictive covenant or non-compete agreement will be legally enforceable. Generally, employers do not have the right to require employees to sign a non-compete or restrictive covenant agreement where the purpose is to simply prevent the employee from engaging in competition.

However, restrictive covenants will be enforced to the extent that they are reasonable and to the extent that they attempt to prevent the employer from engaging in unfair competition. Considerations that affect whether or not the non-compete agreement or restrictive covenant will be enforceable include the amount of time that it is in effect, the geographic scope of the agreement and the type of information and activities that the agreement seeks the employee from engaging in.

It is well established under New Jersey law that restrictive covenants cannot be used to extinguish ordinary competition. Ingersoll-Rand Co. , 110 N.J. at 635. Moreover, New Jersey courts view covenants restricting an individual’s ability to practice his or her profession with considerable skepticism as potentially unlawful restraints on competition. The Community Hosp. Group. Inc. v. More , 183 N.J. 36, 57-58 (2005) (“restrictive covenant[s] may be disregarded or given complete or partial enforcement to the extent reasonable under the circumstances”).

On various occasions, the New Jersey Supreme Court has emphasized that “an employee’s covenant not to compete after the termination of his employment is not as freely enforceable [as other types of restrictive covenants] because of well recognized countervailing policy considerations”. Whitmyer Bros., Inc. v. Doyle , 58 N.J. 25, 33 (1971) (citing Solari Industries, Inc. v. Malady , 55 N.J. 571, 576 (1970)).

Rather, such an agreement will be enforced only to the extent an employer can show: (1) the agreement is necessary to protect a legitimate interest of the employer; (2) the agreement does not impose undue hardship on the employee; and (3) the agreement does not impair the public interest. Given that agreements restraining trade contradict the public policy of this State, an employer seeking to enforce a non-competition agreement must bear the burden of proving the agreement's enforceability. See Ingersoll-Rand Co. v. Ciavatta , 110 N.J. 609, 640 (1988).

Although an employer has a legitimate interest in protecting his trade secrets as well as his confidential business information and customer relationships, an employer “has no legitimate interest in preventing competition as such. . . .” See Whitmyer Bros. , 58 N.J. at 33. "[I]n cases where the employer’s interests do not rise to the level of a proprietary interest deserving of judicial protection, a court will conclude that a restrictive covenant merely stifles competition and therefore is unenforceable." See Ingersoll-Rand Company v. Ciavatta , 110 N.J. 609, 635 (1988) (citing Whitmyer, 58 N.J. at 35). See also Mailman, Ross, Toyes and Shapiro v. Edelson , 183 N.J. Super 434 (Ch. Div. 1982) (denying plaintiff accounting firm’s request for a preliminary injunction seeking enforcement of a restrictive covenant against its former employee, in the absence of some showing either that defendant engaged in unfair competition amounting to tortious conduct).

The courts have held that restrictive covenants seeking to impose limitations on the ability to contact prospective customers are inherently overbroad and unenforceable. See Platinum Management, Inc. v. Dahms , 285 N.J. Super. 274, 298 (Law Div. 1995).

Furthermore, while an employer may have an interest in protecting customer or client relationships developed by an employee during the course of their employment, an employer cannot have any legally protected interest in client or customer relationships or contacts that the employee had prior to their employment or that the employee did not obtain during their employment. See Coskey’s Television & Radio Sales and Service, Inc. v. Foti , 253 N.J. Super. 636, 637-38 (App. Div. 1992).

It is well established under New Jersey law that restrictive covenants cannot be used to extinguish ordinary competition. Ingersoll-Rand Co. , 110 N.J. at 635. Moreover, New Jersey courts view covenants restricting an individual’s ability to practice his or her profession with considerable skepticism as potentially unlawful restraints on competition. The Community Hosp. Group. Inc. v. More , 183 N.J. 36, 57-58 (2005) (“restrictive covenant[s] may be disregarded or given complete or partial enforcement to the extent reasonable under the circumstances”).

On various occasions, the New Jersey Supreme Court has emphasized that “an employee’s covenant not to compete after the termination of his employment is not as freely enforceable [as other types of restrictive covenants] because of well recognized countervailing policy considerations”. Whitmyer Bros., Inc. v. Doyle , 58 N.J. 25, 33 (1971) (citing Solari Industries, Inc. v. Malady , 55 N.J. 571, 576 (1970)).

Rather, such an agreement will be enforced only to the extent an employer can show: (1) the agreement is necessary to protect a legitimate interest of the employer; (2) the agreement does not impose undue hardship on the employee; and (3) the agreement does not impair the public interest. Given that agreements restraining trade contradict the public policy of this State, an employer seeking to enforce a non-competition agreement must bear the burden of proving the agreement's enforceability. See Ingersoll-Rand Co. v. Ciavatta , 110 N.J. 609, 640 (1988).

Although an employer has a legitimate interest in protecting his trade secrets as well as his confidential business information and customer relationships, an employer “has no legitimate interest in preventing competition as such. . . .” See Whitmyer Bros. , 58 N.J. at 33. "[I]n cases where the employer’s interests do not rise to the level of a proprietary interest deserving of judicial protection, a court will conclude that a restrictive covenant merely stifles competition and therefore is unenforceable." See Ingersoll-Rand Company v. Ciavatta , 110 N.J. 609, 635 (1988) (citing Whitmyer , 58 N.J. at 35). See also Mailman, Ross, Toyes and Shapiro v. Edelson , 183 N.J. Super 434 (Ch. Div. 1982) (denying plaintiff accounting firm’s request for a preliminary injunction seeking enforcement of a restrictive covenant against its former employee, in the absence of some showing either that defendant engaged in unfair competition amounting to tortious conduct).

Due to the complex legal rules and principles that exists and apply in determining whether and to what such agreement or restrictions are legally permissible, it may be important to seek the advice of a New Jersey attorney or lawyer with experience in handling issues relating to Restrictive Covenants, Non-Compete Agreements or Non-Solicitation Agreements before signing such an agreement, after having signed an agreement or when being threatened with legal action such as a Cease and Desist letter, or facing legal action by a former employer.

To speak with an experienced New Jersey Employment Law Attorney, contact the Law Offices of Gregory S. Schaer, LLC, conveniently located in Monmouth County, New Jersey.