To:      Our Clients and Friends

From:     MaryJane Dobbs

Date:     March  2010

Re:    Employment Agreements Containing Covenants Not To Compete: Corporate Officers Can Be Sued Individually For Retaliating Against Employees Who Refuse To Sign Them

    On April 16, 2003, the New Jersey Appellate Division in Maw v. Advanced Clinical Communications, Inc., 359 N.J. Super. 420 (App. Div. 2003) gave us new wrinkle on the enforceability of covenants not to compete found in many employment agreements.  In that decision, the court held that depending on the circumstances, an employer could be found liable for wrongful termination if it fires an employee who refuses to sign a non-compete agreement. The court also ruled that corporate officers could be sued individually under the New Jersey Whistleblower Statute, i.e., CEPA, for retaliating against an employee who refuses to sign a non-compete agreement.  In light of this decision, we strongly recommend that you contact our office to have your employment agreements reviewed, reevaluate your company policies regarding which employees you ask to sign non-compete covenants, and to review these covenants to ensure they are appropriate for the employees being asked to sign them under New Jersey law.

    In Maw, plaintiff worked as a graphic designer until she was fired for refusing to sign an employment agreement that contained a covenant not to compete.  The agreement, among other things, precluded the employee from working for any competitor or customer of her employer for a two-year period following her termination of employment.  The employee was not to be paid any severance in consideration for the two-year covenant not to compete.  Following her termination, the employee filed suit for wrongful discharge and for a violation of CEPA alleging that the restrictive covenant violated public policy because her employer had no legitimate business reason to ask her to sign it.  Plaintiff claimed that the employment agreement with the restrictive covenant was intended solely to restrict competition in the industry and that it improperly limited her employment opportunities.  She further maintained that although she may have had access to confidential information while she was employed, it was the same access that any administrative or clerical staff person had at the company who were not asked to sign employment agreements.

    The court recognized that although non-competition agreements are disfavored, they are not per se invalid.  To be enforceable, the agreement must be reasonable under the circumstances.  To determine if an agreement is reasonable, an employer should consider the following:

1.  An analysis of the employee’s job to determine whether the employee has access to information that needs protection (is the employee involved with highly confidential and proprietary business information, trade secrets or customer relations?);

2. The nature of the business;

3. Duration of the restriction; and

4. The geographic area of the restriction and the type of the restriction.

In this case, the court noted that the non-compete agreement, which extended two years, could be considered burdensome in terms of duration.  It also noted that there was no geographic limitation with respect to the restriction.  The court observed that a two-year period of time was lengthy and that an employer should have a strong legitimate business reason to request such a long period of time.  At the end of its opinion, the court stated that it saw no reason why an employee should wait until they are discharged to determine whether or not a restrictive covenant is enforceable. 

    In light of this decision, we caution our clients to contact our office before asking any employee to sign a covenant not to compete.  Based on this opinion, you may need to consider whether you should customize your covenants not to compete for different employees, whether different categories of employees should sign different agreements, and whether employees should be required to sign covenants not to compete at the time they are hired.  Because CEPA allows an employee to personally sue the officers of a company, we also urge you to contact our office in the event any employee raises a whistle blower complaint.

    Please feel free to contact me or any other lawyer to whom you relate to discuss this article or to schedule a meeting.

Contact: MaryJane Dobbs