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Non-compete Agreements: A Move Away from Undue Burdens

HR Photo.jpgNew Jersey law on non-compete agreements is changing, especially lately. In the past, New Jersey courts have allowed non-compete agreements to control a former employee's activities after termination or resignation, if it is "reasonable under all circumstances of his particular case," meaning that agreements that "simply protect[s] the legitimate interests of the employer, impose[] no undue hardship on the employee and is not injurious to the public." This was established in a 1970 New Jersey Supreme Court case. 

This rule generally created an environment where New Jersey Courts upheld the agreements, but sometimes they would "blue penciled," or edited, where necessary. Many states, including New Jersey, have proposed legislation that would significantly modify the standard for non-compete covenants. Judicial opinions on the topic can help illustrate the upcoming trend. 

In a case decided last month, ADP v. Rafferty, a Federal Appeals Court moved in the direction of imposing less restrictive covenants on former employees.

ADP is a human capital management company that sells products and services related to human resources (many companies utilize its payroll software). ADP has two "layers" of contractual restrictions on its employees. The first layer is imposed on all employees and is comprised of a Sales Representative Agreement (SRA) and a Non-Disclosure Agreement (NDA). Both the SRA and NDA are signed at the time of hire and are conditions of employment. The second layer is a Restrictive Covenant Agreement (RCA). The RCA is a voluntary, stock-option award program, available to successful employees. Both layers impose restrictions, but the RCA is far more restrictive than the SRA and NDA. 

The RCA has two main restrictive covenants: 1) former employees cannot solicit current and prospective clients of ADP and 2) for a period of one year after termination of employment, former employees cannot participate in "any manner with a Competing Business anywhere in the Territory where doing so will require [them] to [either] provide the same or substantially similar services to a Competing Business" or "use or disclose ADP's Confidential Information or trade secrets." 

Nicole Rafferty and Kristi Mork are former employees of ADP who after resigning from ADP, began employment at Ultimate Software Group, a competitor of ADP. Each signed the SRA, NDA and RCA. 

In assessing non-compete agreements, New Jersey courts try to balance the legitimate business interests intended by the agreements with the undue hardship on the individual forced to abide by the agreements and the greater public interest. The courts who heard this case found that ADP has a legitimate business interest in trying to preserve its client relationships and the goodwill they have generated with potential clients. They also found that the higher restriction imposed by the RCA was appropriate, given that only successful salespersons would have the option to enter into it (higher restrictions on those who have better access and relationships with clients and potential clients).  

However, the Federal Appeals Court found, and ADP conceded, that the size of the  geographical area may be too broad, even for the "successful employees" given the territorial limits of smaller competing companies. ADP defined the "Territory" to anywhere that a salesperson had previously done business with a client in the last two years prior to termination. The RCA's restriction on working for a Competing Business in the Territory was too burdensome and the Court sent the case back to a lower court, so the scope could of the territorial restriction could be modified. The Court also found that this case had no major public component and therefore an assessment of public interest was unwarranted. 

While the court found that ADP does have a legitimate business interest in imposing its restrictions, there were 2 restrictive and imposed an undue hardship on the individual employees. The lower court will now "blue pencil" the restrictions. We'll see how much, especially with the overall move toward imposing less and less restrictions.   

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