On February 7, 2017, the United States Court of Appeals for the
Third Circuit affirmed a decision of the United States District
Court for the District of New Jersey finding that employers may use
electronic signatures in certain circumstances to bind employees to
restrictive covenants, such as non-competition and non-solicitation
agreements. The decision also shows that courts are more
likely to enforce non-solicitation agreements tied to current
customers and goodwill and, practically speaking, require a greater
showing before enforcing an agreement that prohibits former
employees from any and all competition with their former
The decision from the Third Circuit arose from two companion
cases, ADP v. Halpin and ADP v. Lynch. The
central controversy arose when two employees from payroll processor
ADP checked a box on the company website indicating that they had
"read all associated documents" – including a
non-compete agreement – in order to accept an award of stock
in ADP. The stock award's acceptance was expressly
conditioned upon the employees' checking this box and the
non-compete agreement was accessible by clicking on a separate link
next to the checkbox. According to the allegations in the
complaint, the employees later resigned from ADP to join a direct
competitor and began soliciting former ADP clients.
ADP thereafter brought an application for a preliminary
injunction against both former employees. The trial court found
that the employees were in fact bound by the non-compete agreement
but granted ADP's application for a preliminary injunction only
in part, enjoining the employees from soliciting current ADP
customers and restricting solicitation of prospective customers
only to the extent that the employees had knowledge of them while
working for ADP. However, the Court permitted the employees
to continue working for the competitor while the matter was fully
On appeal, the former employees argued principally that mutual
assent for the agreements was lacking because they were not
required to specifically acknowledge that they had agreed to the
restrictive covenants at issue. The Third Circuit rejected
this rationale, and concluded that the trial court had
appropriately found a sufficient showing of assent because the
employees checked the box indicating that they had "read"
the terms and conditions of the stock award and the documents
explicitly advised that the non-compete agreement was a condition
of accepting the stock award.
The Third Circuit also affirmed the trial court's ruling on
the scope of the preliminary injunction, finding that the trial
court did not abuse its discretion when it found that the
injunction was "reasonably tailored" to protect
ADP's legitimate business interests in that it permitted the
employees to work for their new employer and solicit prospective
customers about whom they had no knowledge while employed at
Moving forward, several lessons ring true. The first is that, as
a general matter and under many circumstances, employers may use
electronic click-wrap agreements to bind employees to restrictive
covenants, although the better practice would be to specifically
include language in electronic signatures stating that the employee
has both read and agreed to the restrictive covenant.
However, employers should be careful about the manner in
which restrictive covenants, including non-compete and
non-solicitation agreements, are presented to prospective
employees, which can raise legal obstacles to the covenant's
enforceability that are particularly apt in circumstances involving
click-through agreements and electronic signatures. The
second point may be less obvious, but equally important. That
is, even in situations where, as here, there appears to be little
doubt that former employees are violating the express terms of
their restrictive covenants, courts may not enforce the
agreement in its entirety absent a strong showing of specific,
identifiable harm. Remember, the trial court did not prevent
the former employees from continuing their employment with the
competing business. Additionally, they were not restrained from
soliciting ADP prospective customers of whom they had no knowledge
while employed at ADP. Finally, the trial court limited its
injunction to one year, the time period identified in the
agreement. Thus, this case confirms the very fact-specific
nature of cases of this nature and illustrates a general reluctance
of some courts to prohibit employees from working for a competitor
altogether absent a compelling reason.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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