New Jersey Decision Highlights Potential Pitfalls of Requiring Employees to Sign Non-Compete Agreements

The law regarding restrictive covenants such as non-competition and non-solicitation provisions is highly complex, state-specific and ever evolving. As a result, employers find it difficult to achieve any level of comfort that such covenants will be uniformly enforceable in each state in which they employ individuals. In addition to concerns about enforceability, employers should be aware that some courts have exacted harsh consequences on companies that are found to have inappropriately utilized these covenants.

For instance, California has a longstanding statute that generally prohibits any contract restraining a person from engaging in a business. In keeping with that statute, California courts routinely refuse to enforce non-competition covenants in the employment context. Moreover, California courts have relied upon that statutory prohibition to recognize a cause of action for wrongful termination in violation of public policy and violation of the state’s unfair practices act, based on an employer’s decision not to hire, or to terminate, an individual who refuses to sign an agreement containing a non-competition covenant.

Although New Jersey does not statutorily invalidate non-compete clauses, a recent New Jersey Superior Court decision nonetheless followed California’s logic in recognizing a common law claim for violation of public policy and a statutory claim under the New Jersey Conscientious Employee Protection Act, which protects whistleblowers. That Court overturned the dismissal of an action against an employer who terminated an employee for refusing to sign an employment agreement containing a non-compete clause.

In that case, Maw v. Advanced Clinical Comm., the plaintiff, Carol Maw, had been employed by Advanced Clinical Communications as a graphic designer for approximately four years. A few months prior to her termination, Advanced Clinical decided to require that all employees above a certain level sign employment agreements. The agreements contained restrictive covenants that prohibited employees, for a period of two (2) years after the termination of their employment, from working for a competitor, without any geographic restriction. After reviewing the agreement with an attorney at the Company’s suggestion, Ms. Maw suggested certain revisions such as limiting the duration, but was told that the Company would not consider any changes. When Ms. Maw refused to sign the agreement, her employment was terminated. The Company informed Ms. Maw that the reason for her termination was her noncompliance with Company policy.

Ms. Maw later filed an action against the Company, claiming that the non-compete clause violated public policy, because the Company had no protectable interest that justified the restriction. Instead, Ms. Maw asserted, Advanced Clinical was attempting to restrict her from engaging in lawful competition and using her general knowledge and skills as a graphic designer after she left her employment.

There was no question that, as a result of her employment, Ms. Maw had access to some confidential information. She argued, however, that the Company did not have a protectable interest in the information to which she had access, and that the agreement was intended to restrict lawful competition and would unduly limit her ability to earn a living.

After the Law Division of the Court initially dismissed her claims, the Appellate Division of the Court re-examined the public policy claim to determine whether the employer’s action posed a threat of public harm. The Court noted that an employer’s attempt to impose a restrictive covenant absent an underlying justifiable proprietary interest stifles ordinary competition, and recognized that effect as a public harm sufficiently severe such that it constituted a basis of public policy.

In light of New Jersey’s generally unfavorable view of non-competition agreements, the employer’s inability to demonstrate that the non-competition clause was necessary to protect a legitimate business interest, and the potential hardship placed on the employee, the Court found that Ms. Maw had established a public policy necessary to support both common law and statutory wrongful termination claims. In reversing the Law Division’s finding and allowing Ms. Maw to proceed on her wrongful termination claims, the Court noted that an employee such as Ms. Maw should not be burdened with restrictions or forced to wait until she left her employment for a Court to determine whether such an agreement is enforceable.

Advanced Clinical has appealed the ruling, which has not yet been decided. Accordingly, it remains to be seen whether the New Jersey Supreme Court will embrace the Superior Court’s rationale. Nonetheless, in the meantime, employers should be aware of the Maw opinion and its implications.

In short, this decision highlights the importance of examining the suitability of a restrictive covenant on a case-by-case basis. As each state’s laws differ in this area, employers should carefully consider whether to require that employees sign restrictive covenant agreements and should consult with counsel to address specific circumstances.