All About Non-Compete Agreements in New Jersey: A Comprehensive Overview

What is a Non-Compete?

Non-compete (covenant not to compete) agreements are common contractual provisions in New Jersey and many states across the country. In general, a non-compete provision provides a business with a means of protecting its trade secrets, confidential information, customer lists and/or good will by preventing employees, upon their termination of employment or sale of a business, from competing with the former owner by setting up a similar business nearby. Non-compete agreements are often part of a package of documents which include a severance agreement for employees, or a sale agreement for business owners.
Companies usually require new hires to sign non-compete agreements, and during the course of employment companies often ask for existing employees to sign new or revised non-compete agreements. Similarly, a company selling its business may require the buyer to sign a non-compete agreement if the buyer would otherwise be a nearby rival.
The enforceability of non-compete agreements in New Jersey has been the subject of ongoing litigation, in the state and around the country . For example, in the case of Mall Brats, Inc. v. Shkolnik, NJ Super. App. Div., A-4171-05T2 (Sept. 21, 2007), an employee was allowed to compete upon her termination of employment, because the Court concluded that enforcement of the non-compete clause would create too harsh a result (for example, the employee would have to relocate far away from her friends and family). In contrast, where a non-compete agreement is narrowly tailored (for example, limited in time and geographic scope), the New Jersey Courts have upheld the enforcement of such an agreement.
In addition, in the granting of injunctive relief (i.e., a party cannot do something which is prohibited/excluded by Court Order), Courts look at the following criteria: a clear legal right of the moving party (party moving for injunctive relief), an engaged threatened irreparable harm to the moving party, the harm to the moving party outweighs the harm to the non-moving party if the injunction is granted, and the granting of an injunction is in the public interest.

New Jersey Non-Compete Agreements 101

As previously mentioned, non-compete agreements aren’t exclusive to any one industry; and neither are the laws that govern them. Since the 1800s, courts in New Jersey have enforced non-competes. However, because non-competes can be difficult to enforce, various court rulings in New Jersey have introduced or solidified legal concepts essential to making sense of these restrictions.
In New Jersey, the legality of non-competes is rooted within the doctrine of restrictive covenant law. Under the New Jersey rule, to be enforceable, a non-compete agreement must protect a legitimate business interest, be reasonable as to all respects —including time, subject matter and geographic scope—and not be unduly burdensome on the employee. Different standards exist for executives (C-level and directors) and lower-level employees, which will affect the likelihood of a ruling in the employer’s favor. While courts exercise wide discretion in interpreting non-competes, they generally follow:
The first major development in the modern iteration of restrictive covenant law actually predates the popularization of non-compete agreements, but was nevertheless a critical point for the evolution of the legal concept. In 1918, the New Jersey state supreme court established in Fogg v. Blair the rule that, "The right of an employer to protection from appropriation of his trade secrets or confidential information is recognized in this state, independently of agreements that he may obtain from his employees, by virtue of the common law."
Eventually, the protection laid out in Fogg v. Blair was granted legislative approval in 1971 by the New Jersey Trade Secrets Act (NJTSA); however, the act does not explicitly say that non-compete agreements are valid.
There’s also never been any legislature that’s exclusively covered the enforcement of non-competes. Though the Murphy administration continues to maintain a list of topics it hopes to discuss and meet on with the Republican minority, the probability of a comprehensive non-compete agreement reform law being enacted within the next year is slim-to-none.
In fact, many other states have also failed to pass laws that establish explicit regulations for non-compete agreements. Although there’s a small chance that the new administration might make a strong enough push to have the issue voted on, there hasn’t been enough interest shown by legislators for a bill concerning non-compete reform to gain any amount of traction, as is evidenced by the fact that there are only two legislators sponsoring potential non-compete reform bills in New Jersey as of August 2018.
Nevertheless, in the absence of a bill that redefines what non-compete agreements can and can’t do specifically, New Jersey’s courts continue to be the most important source of law on the subject. For instance, regardless of whether a given non-compete agreement is ruled against, if it "requires an employee to pay for vocational training costs, an employer must weigh that cost against its potential gains," per Giannamore v. Massachusetts Mut. Life Ins., 386 N.J. Super. 280 (App. Div. 2006). Alsentaser v. MPNN, Inc., 382 N.J. Super. 108 (App. Div. 2005), meanwhile, says that, "It is not sufficient for an employer merely to produce a list of several businesses competing with its own," when attempting to prove a legitimate business interest in defending a non-compete agreement.

Are Non-Compete Agreements Enforceable in NJ?

The enforceability of non-compete agreements in NJ will hinge on the existence of a legitimate business interest requiring protection from the post-employment competition as well as the reasonableness of the restrictions imposed upon the restraint of trade. Whether a business has a legitimate interest in restricting a particular employee from competing in the open market after his or her employment ends will depend on the nature and degree of access that an employee has had to the employer’s confidential information, trade secrets or customer relations that is unique to the employer at the time of hiring or learned through the course of employment.
Generally, non-compete agreements in NJ have been held to be enforceable where the employer can demonstrate that it has a legitimate business interest (i.e., protectable interest) that requires protection from the employee’s competition with his or her former employer either during the term of a non-compete agreement or after the termination of employment. Employers have a legitimate business interest justifying protective competition restraints where, for example, the company has made a substantial investment in research and development for a product that is in its initial production stages, has financed extensive training and development of an employee with specialized skills that is not generally known within the industry, or has provided an employee with specialized information concerning its customers or confidential information that is unique to developing its products. There must be some degree of support that the individual performing the labor or service is essential to the accomplishment of work utilizing the trade secret skills or knowledge. Accordingly, non-compete provisions protecting customer lists or similar information will typically be vulnerable to an argument that the restrictions are overly broad where the restrictions rely merely upon the goodwill between an employee and a prospective employer, absent more.
Where the employee is terminated without cause and is unemployed for an extended period, the restrictive covenant may nonetheless be considered reasonable and enforceable because of the time that the employee has had the benefit of the former employer’s protection, investment, and expenditures in developing information and relationships, if applicable. However, increased levels of time in between the end of employment and the enforcement of a non-compete clause will place greater scrutiny upon the reasonableness of the time, geographic area and duration of the restrictions imposed upon the employee.
The reasonableness of the particular restraint will be determined by weighing the hardship placed upon the employee by enforcing the non-compete clause against the employer’s need to protect itself and its investment in training the employee or providing confidential information. Non-compete clauses deemed unreasonable in their scope because the restrictions are so broad that they are not tailored to the trade secrets, confidential information or relationships developed during the employee’s employment.
The factors considered by a court in determining the enforceability of non-compete agreements in NJ include:

Employees’ Rights and Non-Competes in NJ

One of the things we do here at our law firm is to determine whether the restrictions found in a particular employee non-compete agreement are "reasonable". First, that depends on the type of restriction (for example, how long are you prevented from working for one of their competitors in your field, how far away from the previous work site are you prohibited from going to for an employment opportunity?)
The 2d would be – are there any written agreements in place – or even emails from your employer assuring you that you are not bound to any restrictions or that they are void and unenforceable?
If there are written assurances, that can really save lots of time and money. Either way, it’s our job to determine what rights you have in defeating the non-compete agreement. There are lots of cases out there in which employees were successful in defeating these non-compete agreements when we first thought they had no chance of being successful. That’s where skilled attorneys with experience in this area of employee restrictions come in.

Creating a Reasonable Non-Compete in NJ

Employers can best protect themselves by creating enforceable covenants not to compete. This requires compliance with New Jersey law, which balances an employer’s interest in protecting its client base and securing its confidential information with the public’s interest in limiting the restrictions placed on an individual’s ability to practice his or her trade. A non-compete agreement is enforceable when it is reasonable in terms of geographic scope and duration of the restriction. It should be tailored to protect the employer’s legitimate business interests such as customer contacts, trade secrets, confidential business information or the sale of goodwill.
Frequently, an enforceable non-compete agreement will run for about one to two years following an employee’s termination of employment. In determining the period of restriction, an employer must consider the time it will take him/herself to replace the employee or allow for the possibility that a business may no longer be around and that the possibility that an employee may challenge the agreement.
The geographic scope of a non-compete must also be reasonable. New Jersey courts have enforced restrictions ranging from a user-friendly 10 miles in Field v. Thompson Appliance Co., Inc. to a more challenging 40 mile radius in the Star-Ledger newspaper case. A restriction against competing within 10 miles has proven to be an enforceable covenant against competition. Anything more than that distance may prove difficult to enforce when for example, the restriction seeks to restrict a former employee from competing for customers located in the southern part of the state when he lives and resides in the northern part of the state, and the facts do not support the employer’s interest in restricting the former employee from competing there.
Employers may be tempted to seek even broader geographic and periodic restraints so that their former employees can be held to a very restricted compaction period and limited geographic region under the guise of protecting its interest . This is not a novel concept and was aptly discussed by the New Jersey Supreme Court in the Solar v. Miller case where the Court was presented with such questions. There, a physician’s non-compete stated that the doctor was prohibited from practicing medicine or soliciting his patients in "a 5 mile radius around the HSC [Huntington Springs Center] facility" or in the area where the named partners in HSC were practicing. Even though the physician in this case practiced in a defined 3 mile radius, neither his right to practice medicine nor his right to solicit his patients, even those located within the defined 5 mile radius, were protected by the non-compete. Furthermore, the named partners in this case had long since parted company with HSC and opened their practices in other towns, which expired the purpose of the non-compete even more. The Solar Court rejected the argument that it was proper to restrict a doctor’s medical practice near a center where he had never treated patients, but only used as a place of employment which performed services unrelated to the doctor’s practice, by observing that "Because this purpose was lacking at the time the parties signed the noncompete agreement, the provision cannot, as a matter of law, be enforced." The Court also rejected the argument that the non-compete could be enforced to the extent that it protected the defendants’ (the physician’s former employers) investment in facilities, equipment, and training, stating that these were only incidental purposes to the physician’s employment.
As in any contract that is drafted, review and revision is essential to determining the validity and effectiveness of each provision contained in a restrictive covenant agreement. An employer should explain to its employee’s the purpose of each of the restrictive provisions, including the duration and the geographic restrictions, and the legitimate business interests that these are intended to further. It is important, however, that the agreement is not more restrictive than is reasonably necessary to protect the employer’s legitimate business interests.

Legal Alternatives to Non-Compete Agreements

Employers often have alternatives to non-compete agreements that still protect their legitimate business interests. Confidentiality Agreements and Non-Solicitation Agreements are examples.
Confidentiality Agreements
A well-drafted confidentiality agreement can prevent a former employee from using confidential information that was obtained during their employment. A confidentiality agreement is typically used when protecting trade secrets is not an issue but maintaining the confidentiality of other confidential information of the business is. For example, a physician may wish to use a confidentiality agreement with an employee in order to keep patient lists confidential.
In order to be enforceable, a confidentiality clause must be reasonable in its scope. The restrictions on its use cannot be broader than is necessary to protect the employer’s legitimate competitive interest. The language must be sufficiently clear and detailed to put the employee on notice of the prohibition. If a confidentiality agreement is found to be overly broad, a court may strike the excessive provisions and enforce only the provisions that are reasonable and compliant with applicable law. New Jersey courts will only enforce a restriction to the extent that it is necessary to protect the legitimate business interests of the employer. Additionally, such interests are narrowly defined. In the absence of a specific, written agreement, employment generally creates no duty of confidentiality – even among co-employees. A confidentiality agreement may be entered into at the time of employment, or at any time thereafter. If it is entered into at the time of employment, it must be actually brought to the employee’s attention before employment begins in order to be enforceable. It must also be given to the employee prior to the commencement of employment. A confidentiality agreement that is entered into after employment commences must be signed by the employee voluntarily and knowingly in order to be considered valid and enforceable.
Non-Solicitation Agreements
Restrictive covenants in employment contracts that are reasonable in scope, area, and duration may be enforceable if they protect a legitimate employer interest. Employers frequently protect their business with a restriction on a former employee’s solicitation of their clientele. Non-solicitation clauses are commonly limited to a geographic area where the former employee previously conducted business. A non-solicitation of customers and clients will only be enforced if it is reasonably related to the protection of the employer’s business and, so long as it does not prevent a party from working generally in his or her chosen field, it is not against public policy. Non-solicitation of employees will be enforceable if the restraint is fairly drawn in light of the totality of the circumstances and in weighing the interests of the parties and the public. New Jersey courts will not enforce non-solicitation clauses that are overbroad as to either the territory protected or the time period of restriction. A non-solicitation clause is a covenant in an employment contract that prohibits the former employee from soliciting the employer’s clients. A non-solicitation agreement with clients is enforceable as long as its geographic and temporal scopes are reasonable and must be tailored to the particular circumstances of each case. A temporal restriction of three months may be reasonable but once it exceeds two years, it would no longer be considered reasonable.

Getting Legal Assistance for Non-Competes

Attorneys experienced in representing both employees and employers are well versed on the various components of non-competitions — from the analysis of the particulars of a non-compete to its enforceability, to negotiating its terms and challenging it in litigation. Although a growing number of attorneys focus their practice on this niche, it is always best to deal with an attorney who regularly handles non-competes whether you are an employee or an employer.
The most obvious points for employees to seek counsel are before signing a non-compete, before accepting an offer of employment that includes a non-compete that was not a pre-condition of the discussion, and before taking any job with a competitor after being terminated or resigning. Before signing a non-compete , it is essential to discuss and understand its terms and whether or not you can "live" with those terms if your employer holds you to its full extent. The highest risk situation arises when you begin with an existing non-compete and a new one is presented, typically with a new employer, as is often the case when people get laid off or fired. If you do not explore the consequences of your non-compete in advance, you may be making yourself unemployed and unemployable if your new employer is unwilling to indemnify you.
For employers, the earlier the better for seeking counsel, and it is far easier to draft a non-compete as part of an employment agreement as opposed to trying to amend, replaced or work around an existing agreement. In addition, when an employee initiates a new job with a non-compete, the time to seek counsel is immediately, rather than waiting for the employee to file a lawsuit or your competitor to do so.