How Enforceable is Your Covenant Not to Compete in New Jersey?
You may wonder whether a written covenant not to compete or a non-competition agreement is enforceable under NJ law. It’s a fair question, and the answer is often not a straight “yes” or “no”; sometimes, it is “it depends”. Sorry, but that’s the truth. Enforceable covenants are often fact-specific and dependent.
Many employment contracts provide that an employee cannot establish a new business or work for a competitor within NJ and/or the surrounding states for a specified period of time and in a specified geographic area after the employment relationship ends. These covenants may also include various other restrictions, such as non-disclosure of confidential information, trade secrets, non-solicitation of employees and/or customers, or an agreement not to use existing customer lists.
When evaluating the legality of such employment-related covenants, the courts in New Jersey will likely consider the economic consideration given to the employee in exchange for the post-employment restriction(s) and the claimed necessary interest of the employer seeking protection. If the covenant is demanded after your employment has started, namely, the continued right to remain employed by the employer, additional consideration should generally be given to the employee to support the restraint(s).
The length of time that a restrictive covenant is claimed to be enforceable should also be closely evaluated. Restrictions that impose unreasonable time and geography prohibitions are at risk of being nullified or significantly curtailed if contested in the courts of New Jersey. Geographical limitations on competition apply only to the territory or competitive marketplace where an employee’s skill and/or knowledge pose a direct and provable threat to the employer. A general prohibition against all employment and competition against a former employer will not be enforced under NJ law.
There are, however, legitimate employer interests that are recognized in NJ as protectable. They include:
1) trade secrets to which an employee has access;
2) confidential non-public information to which an employee has access, or close relationships with customers; or
3) an employee’s services that are special, extraordinary, or unique. The scope of the restraint sought to be imposed on the employee must be reasonable and based upon an employer’s protectable interests.
ENFORCEABILITY OF A RESTRICTIVE COVENANT AND NON-COMPETITION AGREEMENT IN NEW JERSEY
The law in NJ on the enforceability of a covenant not to compete and non-competition agreement is evolving even as you read this page. Each case is highly fact-sensitive. Covenants that are overly broad and/or punitive are not generally enforceable. Although New Jersey subscribes to the “blue pencil doctrine” (further discussed below and on our previous page entitled “Competing Against Your Employer: Is It Allowed?”), A court will rewrite or reform a restrictive covenant and, in its place, insert a covenant with a lesser restrictive impact on the employee. Covenants that are overly broad or punitive are at risk of being nullified.
A restrictive covenant can be considered reasonable by the courts in NJ if:
a) the employer’s interest deserves real protection;
b) the time and geographic area of the restriction does not impose an undue hardship on the employee; and
c) the restriction is not injurious to the public. All three components must be satisfied for the restriction to be enforced.
Is the Reason for Imposing a Restriction on Competition and Employment Defensible?
New Jersey has long held that an employer cannot prevent competition. For an employer to establish that his or her interest is protectable, he or she must establish a commercially important interest, such as private customer contacts, trade secrets, or other confidential information that requires protection.
Is the Length of Time You are Seeking to Impose the Restriction on Competition in New Jersey Reasonable?
Time restrictions will often be upheld if they are limited to no longer than necessary to prevent an employee from using bona fide trade secrets or insider information in a manner that is commercially detrimental to the former employer. In addition, these restrictions can be upheld when the employee is the employer’s primary and direct contact with its customers. Factors to be considered include the employee’s position, the duration, frequency, and consistency of contact with customers, and how long it will take the employer to replace the employee. A court will consider whether the restriction is necessary to protect the employer’s legitimate business interest and whether the durational restrictions are broader than necessary to that end.
NJ courts will also consider the employee’s interests, including the hardship he would face if he were unable to work in his field.
Is There a Public Interest to Be Protected?
A Competing Public Interest Will Always Trump a Covenant Not to Compete
New Jersey courts will balance the employer’s, the employee’s, and the public’s interests. Depending on the analysis, the public interest cannot be materially and adversely impacted if a covenant is to be enforced. “Public interest” considerations are a big deal to the courts. Of course, what constitutes a bona fide public interest can often be legitimately debated. That said, beware of the “public interest” defense or its use as a weapon in your case.
PARTIAL ENFORCEABILITY OF A COVENANT NOT TO COMPETE
New Jersey’s Blue Pencil Doctrine
The blue pencil doctrine, as adopted by the courts in New Jersey, permits a judge to limit the scope of a covenant by striking out offending sections of the covenant. Under this doctrine, a court will effectively “rewrite” an otherwise unenforceable or overly-broad covenant if the restriction is physically capable of being amended by striking out the offensive text while still leaving in place a reasonable and limited restrictive covenant instead. The blue pencil doctrine requires legal counsel to closely evaluate all the facts and competing interests implicated by the covenant’s language.
Restrictive Covenants in the Sale of Business
Litigation over restrictive covenants in a business sale usually addresses a prohibition on a seller from starting a competing business for a certain period of time and in a specified geographic area following the sale. While New Jersey courts follow the general rule that a restrictive covenant and a non-compete agreement between an employer and an employee must be reasonable, this rule is applied differently to non-compete agreements between a business seller and a business buyer. The rationale is that covenants between businesses do not impact an individual’s livelihood, as they were paid for their business at closing, and businesses, unlike employees, have equal bargaining power. These restrictive non-competition covenants also allow the purchaser to protect the goodwill of the business he/she purchased, including the company’s reputation and customer contacts.
Whether a business non-compete is reasonable and therefore enforceable (or not) is a fact-specific analysis of the business sold. A new start-up business can be a ‘competitor’ if it competes materially with the company that was sold. The law does not require an identical product line. In several notable cases, the court held that restrictions on competition, preventing the seller from “directly or indirectly” engaging in a host of competing commercial activities, were reasonable. For example, even though there was a geographic restriction covering the entire United States, the buyer persuaded the court to take a “closer look,” and the covenant not to compete was upheld to protect the buyer, since the seller manufactured and distributed goods throughout the country.
As of now, there is no legislative attempt to alter the way New Jersey courts view restrictive covenants in the context of a business sale between the former owner and the new purchaser.
An experienced NJ business law attorney who understands covenants not to compete is essential to any contested covenant not to compete case. Contact Fredrick P. Niemann at the Hanlon Niemann & Wright law firm at (732)-863-9900 or email him at fniemann@hnlawfirm.com to discuss your matter. It bears repeating that a legal review and analysis of a proposed or threatened covenant not to compete should be undertaken by a qualified NJ covenant not to compete law attorney.
Fredrick P. Niemann Esq.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Covenant Not to Compete Attorney