NJ Courts Clarify Restrictive Covenant Agreement Limitations

The New Jersey Appellate Division issued an opinion last month that has provided additional clarity to what limitations a company may permissibly impose on its employees pursuant to non-competition clauses with restrictive covenant agreements. The court’s opinion (delivered in an action involving six consolidated appeals) reaffirmed the long-standing principle that employers can impose certain provisions commonly found in restrictive covenant agreements in the interest of fair competition; however, the court also held that certain other common provisions should be struck from restrictive covenant agreements as the court found them to be unduly harmful to employees.

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In ADP, LLC v. Kusins, the court reviewed the restrictive covenant agreements signed by six individual employees of the human resources management software company ADP. The agreements stipulated (in pertinent part) that upon leaving the company, the employees could not compete with ADP by soliciting the ADP clients or potential clients with whom those employees had a previous business relationship with, or whose information they became aware of during their tenure at ADP. This restriction was only applicable within the geographic area specified by the restrictive covenant agreement. This type of restriction, while seemingly onerous, has unfortunately become commonplace in our society. Despite employment attorneys making arguments to the contrary, courts have routinely upheld these types of restrictions on the basis that they do not cause undue harm to the employees. Through the recent opinion in Kusins, the Appellate Division has taken the opposite view and found that these restrictions are too great.

In their opinion, the Appellate Division identified two distinct restrictive covenant agreements signed by the six employees. The first contained traditional provisions, which the court found to be non-controversial and enforceable. In so holding, the court reaffirmed the general vitality of restrictive covenant agreements in New Jersey – coming as little surprise. The second restrictive covenant agreements signed by the employees was the main point of contention. These restrictive covenant agreements were signed via a “clickwrap” agreement by the employees and were provided only to those employees recognized as “top performers.” In exchange for signing these restrictive covenant agreements, the employees would be entitled to stock option rewards. The court acknowledged that ADP had a legitimate need to impose these additional restrictive covenant agreements on their top performers, because those employees had heightened ability to harm ADP through competition, due to their proven capacity in this industry. Nonetheless, the court soundly rejected the provisions as they were written and “blue-penciled” or edited the restrictive covenant agreements to lessen the restrictions, remove the undue harm to the employees, and render the restrictive covenant agreements enforceable.

The court found that a standard geographic restriction only imposed mild harm to an employee and was therefore enforceable, and likewise that restricting an employee from soliciting ADP clients with whom the employee had previous relationships with was not unduly harmful and thus enforceable. However, the restrictive covenant agreements went further and provided that the employees were barred from soliciting business from any and all current or potential clients of ADP for one year. The Appellate Division held that this went too far, finding the provisions to be anti-competition, vastly overbroad, and overreaching.

The court found that applying the restrictive covenant agreements to all 620,000 ADP clients, in addition to all potential clients of ADP, througout the world was unjustified. It was ludicrous to suggest that any one employee had knowledge of the entire ADP client base, let alone and all potential clients. As a result of these findings, the court modified the restrictive covenant agreements so that it would apply only to ADP clients that the former employees worked with or became aware of while at ADP. In the same opinion, the Appellate Division also rejected the lower court’s further restriction, narrowing the restrictive covenant agreements’ application to the employee’s market segment, finding this to be unduly harmful to the company.

The Appellate Division’s opinion provides some much-needed clarification as to the permissible scope of restrictive covenant agreements. The opinion upheld the long-standing principle that employers have to be able to protect their legitimate business interests which are threatened by departing employees who have learned valuable and sensitive information about their employer’s business. The opinion also reaffirmed the importance of an employee’s ability to work in their field and earn a living. Balancing these competing interests, as the Appellate Division did here, is the only way to fairly resolve a dispute over an restrictive covenant agreement.

In recent years, restrictive covenant agreements have become more and more prevalent, and employees have been subjected to greater and greater restrictions on post-employment activities. Often, as was the case in Kunis, large corporations impose overly broad restrictions on their employees, knowing that those employees don’t have equal bargaining power and have no choice but to consent. This opinion will serve as a repudiation of some of those overreaching employer tactics and provide ammunition for employment lawyers to attack overly burdensome restrictions.