Agreements Not to Compete: Look Before You Leap

Many employers are requiring their employees to sign Agreements Not to Compete, or “Restrictive Covenants.” In the past, an employer had little recourse when a high-level, trusted employee “jumped ship” to a competitor, taking with him or her valuable information and/or customers. At one time, restrictive covenants were flatly outlawed. Today, restrictive covenants are a lawful and effective means of controlling post-employment activities of former employees. However, to be effective, restrictive covenants must be “reasonable.” Generally, a restrictive covenant is reasonable if it: (1) simply protects the legitimate interests of the employer; (2) imposes no undue hardship on the employee; and (3) is not injurious to the public.Legitimate Interests of the Employer

The employer’s legitimate interests cannot solely be aimed at preventing competition. However, an employer has a legitimate interest in protecting trade secrets, confidential business information, and protecting customer relationships. By contrast, legitimate interests don’t normally include matters of general knowledge within an industry, trivial differences in methods of operation, and customer lists that are readily accessible or compilable. Similarly, an employer has no proprietary interest in the skills or expertise developed by an employee during the employment relationship.

If this standard sounds vague, it merely reflects the Supreme Court of New Jersey’s recognition that a “protectable interest” depends upon the circumstances of each case. Courts are not limited to recognizing the traditional interests discussed above. Furthermore, to be legitimate, a restrictive covenant must also be reasonable with respect to scope and duration. Scope generally relates to the agreement’s geographic reach and substantive content. Duration refers to the length of time of the restriction. The reasonableness of an agreement’s scope and duration also varies from case to case.

Undue Hardship on the Employee

To establish “undue hardship,” an employee must show more than mere personal inconvenience or financial hardship. The two main factors are (1) the likelihood of the employee finding work elsewhere in the field; and (2) the reason for the termination from employment.

The factor relating to the ability of the employee to find work elsewhere is often linked to the scope and duration of the agreement. The broader and longer the agreement, the less likely an employee will find new work. The second standard, relating to the reason for termination, puts a higher burden on the employer. An employer’s bad motives in terminating an employee can make an otherwise enforceable restrictive covenant, unenforceable.

Injury to the Public

The Courts have recognized that restrictive covenants often impact the public-at-large. If the impact is overly detrimental, the covenant will not be enforced. The identifiable factors that Courts focus on include (1) the effect of enforcement of the agreement on the availability of the goods or services to which it pertains; (2) the effect of non-enforcement of the Agreement on corporate investments in R&D programs; and (3) the effect of enforcement on individual initiative.

Consideration

Like any other contract, an agreement not to compete must involve sufficient “consideration” to be enforceable. Consideration is something of value given in return for the performance of a contract. In the restrictive covenant setting, an employer’s offer of employment, or continued employment, can be sufficient consideration.

Absence of a Written Agreement

The absence of a written restrictive covenant does not allow employees to “steal” information and clients from their former employer. New Jersey has long recognized a common law duty not to disclose confidential information obtained from a former employer, or reveal the former employers trade secrets, even in the absence of a writing. Similarly, an employer has a recognizable interest in protecting its customer relationships, with or without a restrictive covenant. However, a well-prepared agreement not to compete can properly serve to avoid difficulties of definition and proof.

At WJ&L, LLP, we can help our employer-clients in creating a restrictive covenant that addresses legitimate interests. Similarly, we can assist our employee-clients in evaluating agreements that their employers have asked them to execute, both prior to signing, and at the end of the employment relationship, when employees need to know whether their actions will violate the terms of a restrictive covenant.

James M. Maggio is an associate in our Litigation Department. He practices actively in the Employment Law area.

No comments yet.

Leave a Reply

Website Design | Hamshaw Design