It’s 5:00 p.m. on a Friday. You’re at your desk, finishing off some phone calls, wrapping up your work and looking forward to your Saturday morning tee time. That is, until one of your top employees struts into your office, tenders his immediate resignation and indicates he’s taking all of his clients and customers with him… all of which your employee established under your tutelage while employed by your firm. What can you do?
An employee owes a duty of loyalty to its employer and must not, while employed, act contrary to the employer’s interests. See Auxton Computer Enterprises, Inc. v. Parker, 174 N.J. Super. 418, 423-24 (App. Div. 1980) (an employee may not solicit his employer’s customers for his own benefit or otherwise compete with his employer’s business interests before the termination of his employment). Upon the termination of the employment relationship, however, the former employee may immediately compete with the former employer by accepting employment with a rival firm or by undertaking his or her own competing business. This includes the solicitation of the former employer’s customers. See Subcarrier Communications, Inc. v. Day, 299 N.J. Super. 634, 644-45 (App. Div. 1997) (“[t]hat sort of harm is not actionable; it is called free enterprise”). That is, unless the former employee is restrained by an enforceable covenant not to compete.
Post-employment agreements, including restrictive covenants and non-compete agreements, are vital to the protection of an employer’s intellectual property, proprietary information and customer relationships from misappropriation or unfair competition by departing employees and competitors. With increasing frequency, written employment contracts are drafted by employers (and their lawyers) to contain post-employment “restrictive covenants,” provisions designed to limit an employee’s ability to compete after the employment terminates. Employers use these restrictive covenants to protect their investment in the employee, safeguard trade secrets and confidential information, and discourage employees from moving to a competitor. These post-employment agreements generally survive the termination of an employee’s employment for a reasonable period of time to protect the employer’s goodwill, preserve customer relationships and prevent the unlawful use of an employer’s proprietary information.
Employers regularly turn to the courts to enforce restrictive covenants. While employers may have legitimate reasons for imposing restrictive covenants, these covenants are disfavored by the courts because they inhibit competition in the marketplace and restrict an employee’s ability to secure gainful employment in his or her field of expertise. Accordingly, for a restrictive covenant to be enforceable, it must be narrowly tailored and reasonably necessary to protect the legitimate business interests of the employer.
In New Jersey, restrictive covenants are valid only in appropriate circumstances. Generally, a restrictive covenant will be upheld and enforced so long as (1) it is necessary to protect the legitimate interests of the employer, (2) imposes no undue hardship on the employee, and (3) is not injurious to the public. Solari Indus., Inc. v. Malady, 55 N.J. 571, 585 (1970); Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25, 35 (1971); Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 628 (1988). The courts generally consider three additional factors in evaluating whether the restrictive covenant is overbroad: its duration, geographic limits, and the scope of the activities it seeks to prohibit. Each of those factors must be narrowly tailored to ensure the covenant is no broader than necessary to protect the employer’s interests. The Community Hosp. Group,Inc. v. More, 183 N.J. 36 (2005) (a reasonable duration would be the time for the employer to cultivate the relationships between its clients and its new employee).
The first two parts of the Solari/Whitmyer test are a balancing act, pitting the competing interests of protecting the employer’s interests with the hardship imposed upon the former employee. In cases where the employer’s interests are strong, such as cases involving trade secrets or the conversion of client information, the courts are more likely to enforce these post-employment restrictions. Conversely, in cases where the employer’s interests are not deserving of judicial protection or the restrictive covenants are overly broad to serve their purposes, the courts will invalidate the restrictions and relieve the employees of their post-employment obligations.
While restrictive covenants have become common in employment contracts, they are not “one-size-fits-all” provisions that can be transposed from one agreement to the next. Whether a restrictive covenant will be enforced depends on a number of factors including, most notably, the industry and the nature of the employment. Depending on the industry, there may be other limitations impacting the use of restrictive covenants. For example, The Financial Industry Regulatory Authority (“FINRA”) rules limit the ability of financial industry employers to prohibit their clients from transferring accounts to different firms. Special care and attention must be given to applicable industry standards and regulations when drafting post-employment agreements.
Summing up, when drafting these post-employment covenants, careful consideration must be given to the nature of the covenant (i.e. non-compete, non-solicitation or other confidentiality agreement), the duration and geographic scope of any restrictions, and the actual need for those restrictions to protect the employer’s interests. Then, employers must make sure the language of the covenants is narrowly tailored to protect the company’s legitimate interests with respect to the specific employees or independent contractors who are signing the agreement. If drafted and implemented appropriately, an employer can better ensure that its business interests will be protected when an employee walks out the door… and can enjoy that round of golf rather than scramble to save the company.