New Jersey Appellate Division Rules on Enforceability of Non-Competition, Non-Solicitation Agreements

Employers often include restrictive covenants (RCs) in employment contracts. As the name suggests, these are contractual provisions that restrict employees from taking certain actions, both during and after employment. In order for provisions like these to be enforceable, they must balance the employer’s interests with the employee’s rights. The New Jersey Superior Court, Appellate Division ruled this summer in a consolidated group of cases in which an employer alleged RC violations by former employees. It addressed the “inconsistent” handling of the lawsuit by lower courts, and sought “to bring some clarity and uniformity” to how courts deal with RCs in New Jersey employment contracts.

Two common RCs are:
– Non-competition or non-compete agreements, which restrict employees from working for another company that competes with their employer; and
– Non-solicitation agreements, which restrict employees from soliciting clients or customers of their employer to do business with someone else.

In 1970, the New Jersey Supreme Court established three principles for non-competition agreements. In order to be enforceable, the court held that a non-competition agreement (1) must protect no more than an employer’s “legitimate interests”, (2) must “impose[] no undue hardship on the employee”, and (3) must not be “injurious to the public.” The court further ruled that New Jersey non-competition agreements must have reasonable limits on both duration and geographic scope. The court later held that the employer has the burden of demonstrating enforceability. A non-competition agreement that restricts a former employee’s ability to work indefinitely, or which prohibits working for a competitor anywhere in the United States would likely be deemed unreasonable and unenforceable in New Jersey.

According to the Appellate Division, the employer in the appeal described earlier has a “two-tiered system” of RCs for its sales representatives. New sales representatives sign an agreement with “general non-compete and non-solicitation provisions” that only apply to the geographic areas in which an employee worked and the specific clients with which the employee had contact. The restrictions apply for twelve months after the employment relationship ends.

The higher tier applies to high-performing sales representatives who are invited to participate in a stock option program. They are required to sign a “click-wrap” agreement, meaning that they check a box on an online form rather than signing a document. Since 2013, the agreement attached to this form has included non-competition and non-solicitation clauses that, for twelve months, bar solicitation of “any actual or prospective…client, regardless of the employee’s geographical location or personal contact with the client.” It also provides that violations by the former employee will “toll[] the time period that the covenants remain[] in effect.”

The employer sued several former sales representatives who had quit to work for a competitor, alleging violations of the higher-tier RCs. It appealed the lower court decisions, and the Appellate Division consolidated all of them into a single case. The court reaffirmed the general enforceability of non-competition and non-solicitation agreements, and found that the employer two-tiered system was reasonable.

The court ruled against the employer on the specific terms of the higher-tier RCs. It modified the agreements, finding that the restriction on soliciting any and all actual or potential clients was unreasonable. Any individual employee, the court held, “could not possibly know all of [the employer’s] actual clients.” The rewritten clause only bars solicitation of clients with whom the former employer actually worked, or who they learned was a client while employed by the employer.

If you have questions about an employment contract dispute with an employer in New Jersey or New York, please contact the Resnick Law Group’s skilled and experienced employment lawyers today at 973-781-1204, at 646-867-7997, or online.

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