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New Jersey Courts Tie Employers’ Hands Regarding Noncompetition Agreements

Summer 2003Cole Schotz DocketAttorney: Randi W. Kochman

Noncompetition agreements (also termed “noncompetes” or “restrictive covenants”) have become an increasingly common tool used by New Jersey employers to protect corporate trade secrets, confidential information and general business know-how. Unfortunately for employers, noncompetition agreements have long been disfavored in New Jersey. Employers seeking to enforce these agreements are often forced to litigate the enforceability of these covenants against former employees. Earlier this year, the Appellate Division further revealed the courts’ disdain for restrictive covenants by holding that an employee who is fired for refusing to sign an unenforceable noncompete may bring an action against an employer for wrongful discharge. Maw v. Advanced Clinical Communication, Inc., 359 N.J. Super. 420 (App. Div. 2003). Maw will make it even more difficult for employers to enforce noncompetes in New Jersey and take action against employees who refuse to sign these agreements.

To enforce a noncompetition agreement in New Jersey, an employer must establish that the noncompete is “reasonable.” To satisfy this requirement, the employer must demonstrate that the noncompete protects the employer’s legitimate business interests, imposes no undue hardship on the employee and is not injurious to the public. Solari Indus., Inc. v. Malady, 55 N.J. 571, 576 (1970).

In Maw, the court analyzed a noncompete presented to a graphic designer. The court found that Ms. Maw, who designed materials for the company’s marketing and education programs, did not have access to highly confidential and proprietary information. The company’s attempt to have her sign the noncompete did not protect any legitimate business interest and, accordingly, the court held it was an unlawful and unreasonable restraint on trade. In so holding, the court stated: “If the employee does not have access to trade secrets or other confidential or proprietary information, then a noncompetition agreement may not be enforced against the employee, regardless of its terms.” Id. The court also found that the noncompete, which extended for two years without a geographic limitation, would impose an undue burden on Maw.

Maw is significant, however, because the court went beyond simply declaring the noncompete to be unenforceable. Instead, the court held that Maw, who was terminated when she refused to sign the noncompete, could proceed with a claim for wrongful discharge in violation of public policy. In New Jersey, an employee has a claim for “wrongful discharge in violation of public policy” where the employee’s discharge is contrary to a “clear mandate of public policy.” Pierce v. Ortho Pharm. Corp., 84 N.J. 58, 72 (1980). A “clear mandate of public policy” must involve a public harm and its sources can be found in statutes, regulations, judicial decisions and codes of ethics, among other places. Given New Jersey’s strong disdain for restraints of trade and its policy against restricting employees from working in their chosen field, the Maw court found, for the first time, that a termination resulting from an employee’s refusal to sign an unenforceable noncompete constitutes a wrongful termination in violation of public policy. An employee who prevails on such a claim may be entitled to compensatory and punitive damages.

Today, employers must be more concerned that a court may find their noncompete agreements unenforceable and must also realize that any employment action taken based on an unenforceable agreement may lead to a claim for damages for wrongful discharge. In short, employers must be more careful than ever in drafting and attempting to enforce noncompetition agreements by analyzing with greater scrutiny the business interest they wish to protect and the employees they intend to subject to the restrictions.

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