RESTRICTIVE COVENANTS CAN HELP
EMPLOYERS
By Thomas N. Ryan, Esq.
The business environment today is marked by
tenacious competition, unprecedented low unemployment and
employee mobility. Restrictive covenants are a sound way for
an employer to protect legitimate business interests and
safeguard against unfair competition during this time of
decreased employee loyalty.
A restrictive covenant is an agreement signed
by an employee not to compete against the employer during or
after leaving employment. These agreements are closely
scrutinized by the courts because the courts view them as
the antithesis of pen competition and a free marketplace.
However, when restrictive covenants are properly drafted,
they will be enforced by the courts under appropriate
circumstances if they are "reasonable".
A reasonable covenant was defined by the New
Jersey Supreme Court over 30 years ago in the case Solari
Industries, Inc. v. Malady. The court found that a covenant
is reasonable when: (1) it protects an employer from actual
injury from unfair competition; (2) it imposes no undue
hardship on the employee; and, (3) the covenant must not be
injurious to the public interest. In reviewing covenants,
the burden is on the employer who is moving to enforce the
covenant.
The fundamental rule is an employer cannot
prevent a former employee from competing against it unless
the employee has signed an enforceable written covenant not
to compete. The covenant must be reasonable both in duration
and geographic scope. An employer does have a legitimate
interest in protecting: (1) trade secrets; (2) confidential
customer lists; (3) truly confidential information; (4)
customer good will.
It should be noted that a covenant not to
compete, negotiated in conjunction with the sale of a
business, is more likely to be enforced than one tied to the
termination of employment.
An employer may also have a protectable
interest where the employee has a special skill or special
knowledge that is not easily or promptly replaced. The Court
will generally allow an employer protection for a reasonable
time during which they can replace the employee and allow
the new employee time to become competitive in that niche.
For example, this may be the time period during which the
new employee has the opportunity to acquire technical
knowledge and/or establish a relationship with customers
previously serviced by the departing employee. The employer
must show that in such a circumstance the absence of
protection would result in unfair competition during the
time the employer trains an employee and arms him or her
with customer knowledge.
Although the courts look to the facts to
determine what is reasonable in terms of time, geographic
area and scope of activity in a restrictive covenant, they
also engage in applying a "blue pencil" to such agreements,
meaning that the court may enforce, but modify the terms of
the covenant. In such a case, the court may reduce the
duration of a 2-year non-compete agreement to 1 year or 6
months. It may also limit the geographic scope to the
geographic areas where the sales employee had customers or
actually formulate a list of customers the employee is
restrained from dealing with for a period of time.
In practical terms, where a sales rep working
for an employer has had the training and opportunity to
establish a relationship with certain customers, it is
reasonable, if there is a signed restrictive covenant, to
expect a court to keep that employee, after the termination
of his employment, away from those customers for a
reasonable period of time. This time period allows the new
employee an opportunity to acquire knowledge and establish a
relationship with those customers. In effect, when a court
upholds a covenant, it levels the playing field.
Tom Ryan can be reached at
tryan@lcrlaw.com or by
phone at (973) 729-1880.
--
Thomas N. Ryan is a partner at Laddey, Clark & Ryan and
maintains a specialty in labor and employment law. For more
information on him and his practice, click on the Our
Attorneys section of this website.
Return To Previous Page |
