X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
In a ruling with broad ramifications for employers, the Appellate Division recently held that public policy prevents an employer from terminating an employee based solely on that employee’s refusal to sign a noncompete agreement. Aside from having to deal with the challenge of crafting restrictive covenants that will survive judicial scrutiny, as a result of Maw v. Advanced Clinical Communications, Inc., et al., 359 N.J. Super. 420 (App. Div. 2003), employers now may expose themselves to liability for insisting on such clauses. However, while New Jersey law protects employees who address “public harm,” disputes over noncompete clauses between employers and employees previously were considered private in nature. ‘MAW’ Plaintiff Karol Maw was employed by defendant Advanced Clinical Communications, Inc. as a graphic designer from Nov. 1, 1997 until her termination in March 2001. Maw’s job required her to have knowledge and experience in graphic design and its related technologies. Knowledge and experience in pharmaceutical or health-care industries were beneficial but not required for ACCI graphic designers. In January 2001, ACCI decided to require all employees at the level of “Coordinator” or above to sign an employment agreement that contained a restrictive covenant. By way of letter dated March 15, 2001, ACCI terminated Maw for her refusal to sign said agreement. WRONGFUL DISCHARGE LAW At common law, pursuant to Pierce v. Ortho Pharm. Corp., 84 N.J. 58 (1980), “an employee has a cause of action for wrongful discharge when the discharge is contrary to a clear mandate of public policy.” Later, the Conscientious Employee Protection Act, N.J.S.A. 34:19-1, was adopted as the statutory equivalent to Pierce. It provides, in pertinent part: An employer shall not take any retaliatory action against an employee because the employee does any of the following: Discloses, or threatens to disclose to a supervisor or to a public body any activity, policy or practice of the employer or another employer, with whom there is a business relationship, that the employee reasonably believes is in violation of a law, or rule or regulation promulgated pursuant to law, … Provides information to, testifies before, any public body conducting an investigation, hearing or inquiry into any violation of law, or a rule or regulation promulgated pursuant to law by the employer or another employer with whom there is a business relationship, … or Objects to, or refuses to participate in any activity, policy or practice which the employee reasonably believes: is in violation of a law, or a rule or regulation promulgated pursuant to law or, if the employee is a licensed or certified health care professional, constitutes improper quality of patient care; is fraudulent or criminal; or is incompatible with a clear mandate of public policy concerning the public health, safety or welfare or protection of the environment. CEPA protects employees who “‘blow the whistle’ on organizations engaged in illegal or harmful activity.” See Young v. Schering Corp., et al., 141 N.J. 16 (1995). To maintain a cause of action under subsections a. or c. of CEPA, a plaintiff must demonstrate: “(1) that he or she reasonably believed that his or her employer’s conduct was violating either a law or rule or regulation promulgated pursuant to law; (2) that he or she performed whistle-blowing activity described in N.J.S.A. 34:19-3a, c(1) or c(2); (3) an adverse employment action was taken against him or her; and (4) a causal connection exists between the whistleblowing activity and the adverse employment action.” See Kolb v. Burns, 320 N.J. Super. 467 (App. Div. 1999). To maintain a cause of action under Pierce or under subsection c(3), the plaintiff must first articulate the existence of a clear mandate of public policy that the employer’s conduct violates and the court must make a threshold determination as to whether a clear mandate of public policy has been violated. Sources of public policy include legislation; administrative rules, regulations and decisions; judicial decisions; and professional codes of ethics. “The object of CEPA is not to make lawyers out of conscientious employees but rather to prevent retaliation against those employees who object to … conduct that they reasonably believe to be unlawful or indisputably dangerous to the public health, safety and welfare.” See Mehlman v. Mobil Oil Corp., 153 N.J. 163 (1998). RESTRICTIVE COVENANT LAW Traditionally, restrictive covenants are not looked upon favorably by New Jersey courts. However, a restrictive covenant is “reasonable where it simply protects the legitimate interests of the employer, imposes no undue hardship on the employee and is not injurious to the public.” Karlin v. Weinberg, 77 N.J. 408 (1978). In Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609 (1988), the New Jersey Supreme Court recognized that “employers have a right to protect their trade secrets and other confidential information.” The court noted the “business reality that modern day employers are in need of some protection against the use or disclosure of valuable information regarding the employer’s business, which information is passed on to certain employees confidentially by virtue of the positions those employees hold in the employer’s enterprise.” Under New Jersey law, restrictive covenants will be enforced to the extent that they are reasonable as to time, area and scope of activity. See Raven v. A. Klein & Co., Inc., 195 N.J. Super. 209 (App. Div. 1984). As the court noted in Karlin, when analyzing whether undue hardship is imposed on an employee, a court will review the agreement’s geographic and temporal scope, whether the types of activities restrained are those that would place the employee in actual competition with the former employer and whether the covenant will unduly burden the employee in finding work in his or her field. One of the purposes of the test established by the state Supreme Court is to safeguard the needs of the public interest. The Karlin court noted that this analysis should focus on the demand for the services rendered by the employee and the likelihood that those services could be provided by others practicing in the area. The Ingersoll-Rand court noted that “[T]he public has a clear interest in safeguarding fair commercial practices and in protecting employers from theft or piracy of trade secrets, confidential information or, more generally, knowledge and technique in which the employer may be said to have a proprietary interest.” THE MAJORITY The primary issue before the court was whether Maw’s claim that her termination violated CEPA and Pierce should be dismissed. On appeal, Maw argued that, as a graphic artist, she was a low-level employee, with no knowledge of the content of defendants’ work and that she had no contacts with defendants’ clients or customers. Additionally, she asserted that the noncompetition agreement would serve no lawful purpose and that the clause itself was overbroad, unreasonable and unduly oppressive. The Appellate Division determined that Maw had no significant access to trade secrets or confidential information and, to the extent that she did have such access to trade secrets, she did not understand them. The court determined that ACCI did not have a proprietary interest worthy of judicial protection and therefore, the noncompete covenant did not protect ACCI’s legitimate business interests. Additionally, the Appellate Division found that the clause included provisions that may be unduly burdensome in time and geography since it extends two years, but contains no explanation as to why such a lengthy period is necessary, and contains no geographical limit. Thus, the hardship on Maw outweighed ACCI’s competing business interests. The court held that New Jersey’s strong prohibition against restraint of trade and against unduly burdening employees by restricting their right to engage in their chosen field of employment established the public policy necessary to support a CEPA and Pierce cause of action. FLAWED ANALYSIS The dissent analyzed the purposes behind noncompetition agreements and wrongful discharge law and found that the plaintiff’s complaint should be dismissed for failure to state a claim. The dissent noted that a noncompetition agreement is designed to protect the private interests of the employer, while the core value of CEPA is a legislative determination to protect employees from retaliatory discharge, who, “believing that the public interest overrides the interest of the organization [they] serve, publicly ‘blow the whistle’ [because] the organization is involved in corrupt, illegal, fraudulent or harmful activity.” Since the dispute was a private dispute between the employer and the employee, the dissent reasoned that Maw’s complaint concerns a private, rather than public, harm and thus, there was no basis for a claim of wrongful discharge. The majority opinion fails to instruct employers on how they could avoid wrongful discharge liability while requiring employees to sign noncompete agreements. Certainly, as noted herein, noncompete agreements may, if appropriately drafted, serve important business concerns for the employer. However, this opinion severely undermines such clauses and, in essence, exposes employers to liability for simply insisting on them in their employment agreements. Moreover, wrongful discharge law is simply not a vehicle for discharged employees to bring claims against employers for “private harm.” The dissent crystallizes the major flaw with the majority’s analysis, namely, that there is no basis for CEPA or Pierce liability. Thus, the Supreme Court should reverse this decision. Gagliardi is a principal and chair of the employment law department at Porzio, Bromberg & Newman (www.pbnlaw.com/) of Morristown and Custode is an associate in the department. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.