Employers enjoy tremendous freedom to impose restrictions on their employees. Employment contracts, company handbooks, company policies, and even oral communications, are all mechanisms an employer may use to restrict the actions of their employees. This control may extend even after an employee leaves a company through the employer’s use of restrictive covenants. Merriam-Webster defines a “covenant” to mean a contract or agreement entered by two or more parties. A “restrictive covenant” in the employment context refers to an agreement between an employer and an employee under which the employee agrees not to engage in certain specified activities deemed competitive with the employer after the employment relationship has ended. The most common, and commonly problematic restrictive covenants, are those that impose non-compete, non-solicitation, and non-disclosure of trade secrets or proprietary information restrictions on the employee. A restrictive covenant will typically specify the duration and geographic limits of the restrictions imposed, as well as the scope of the activities prohibited by the agreement.
Although disfavored in the law, post-employment restrictive covenants may be enforceable. Strong public policy interests in fostering competition, creativity, and ingenuity, as well as the importance of not inhibiting employee mobility or consumer freedom, are the chief reasons that restrictive covenants are disfavored by the courts. Maw v. Advanced Clinical Communications, Inc., 197 N.J. 439, 447 (2004). However, the courts will consider a restrictive covenant to be reasonable and enforceable when it, “simply [1.] protects the legitimate interests of the employer, [2.] imposes no undue hardship on the employee, and [3.] is not injurious to the public.” Solari Industries, Inc. v. Malady, 55 N.J. 571, 576 (170).
In addressing the validity of a post-employment restriction preventing an employee from competing against his former employer for a period of 5 years and covering a geographic area encompassing every state “east of the Mississippi”, the New Jersey Supreme Court in Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971), declared that although, “The employer has no legitimate interest in preventing competition as such … the employer has a patently legitimate interest in protecting his trade secrets as well as his confidential business information and he has an equally legitimate interest in protecting his customer relationships.” 58 N.J. at 33. In reversing the trial court’s imposition of preliminary restraints on the employee, the Court found the employer, Whitmyer Bros., had failed to show the extensive restraints it sought to impose on employee Doyle were, “necessary to protect its legitimate interests and that it would not impose undue hardship on the employee or injure the public.” Id. at 37.
The lesson to be drawn from Whitmyer is that a post-employment restrictive covenant should be deemed unreasonable if the stifling effects of the restriction evidence were imposed in bad faith, or, if the restrictions were made in good faith, but are overly broad. Solari, 55 N.J. at 576. On this latter point, if a reviewing court finds the restriction was made in good faith, it will then look to whether the employee has or will suffer undue hardship if enforced. A court may find the restrictive covenant wholly unenforceable, or it may strike or amend parts of the covenant found to be unreasonable because it is overly broad in time, distance, or scope, thereby creating an undue hardship on the employee. Solari, 55 N.J. at 587. If the court decides that the hardship placed on the employee outweighs the legitimate interests of the employer, the court likely will deem the covenant invalid and unenforceable. The third prong of this balancing test looks at whether enforcement of the covenant would be contrary to public policy, that is, it restricts competition in the marketplace. If the court decides the interests of the public at large outweigh that of the employer’s legitimate business interest, the covenant will likewise be deemed invalid.
If you have signed a restrictive covenant and feel burdened by limitations on your ability to find employment in your field, call the attorneys at Mashel Law (732) 536-6161 or fill out the contact form on this page for immediate help. Mashel Law, located in Morganville, New Jersey, is dedicated to protecting the rights of employees.