X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Employers, particularly those that use restrictive covenant agreements to protect their confidential information and business relationships, are breathing a sigh of relief in the wake of the recent New Jersey Supreme Court decision in Maw v. Advanced Clinical Communications Inc., 2004 N.J. LEXIS 461 (May 4, 2004). The court reversed the Appellate Division’s expansion of New Jersey’s common law and statutory whistleblowing claims, and reaffirmed the enforceability of reasonable restrictive covenants. The New Jersey Supreme Court’s unwillingness to create a new whistleblowing cause of action for employees fired for refusing to sign restrictive covenant agreements, however, does not mean that New Jersey courts are becoming more tolerant of such agreements. To the contrary, the Appellate Division’s decision, the fact that the Supreme Court only reversed by a 4-2 vote (Justice Albin did not participate), and the language of the Supreme Court’s decision itself suggest that courts will continue to scrutinize restrictive covenants closely, which employers and their counsel must bear in mind when requiring their workforce to sign restrictive covenant agreements. THE MAW DECISION Advanced Clinical Communications Inc. (ACCI), a company providing educational and marketing services to the pharmaceutical and healthcare industries, employed Karol Maw as a graphic designer. During Maw’s employment, ACCI decided to require all of its employees above a certain level to execute agreements containing noncompete, nondisclosure and nonsolicitation provisions. The noncompete provision barred each employee from competing against ACCI anywhere, for two years after leaving the company. Maw requested revisions to the noncompete provision, but ACCI refused. Maw then refused to sign the agreement, and ACCI discharged her. Maw filed a complaint asserting whistleblowing claims under common law and the New Jersey Conscientious Employee Protection Act (CEPA). She alleged that the noncompete clause violated public policy because ACCI had no legitimate business reason for requiring her to sign it, and firing her for refusing to sign was unlawful retaliation. The trial court dismissed the complaint, concluding that her discharge was a private dispute that did not implicate any public policy concerns and, therefore, could not support a whistleblowing claim. On appeal, the Appellate Division reversed the trial court’s decision. The Appellate Division explained that noncompete provisions may be necessary for employees who have contact with clients or access to trade secrets or other confidential information. However, the court then determined that if, as Maw alleged, the restrictive covenant agreement that ACCI had required her to sign was not intended to protect the company’s legitimate interests but merely to reduce competition, then discharging her for refusing to sign it may have violated public policy and support a whistleblowing claim. Although not immediately apparent on its face, the practical effect of the Appellate Division’s decision was to jeopardize virtually all restrictive covenant agreements. For instance, if an employer decided to require all new and existing employees to execute agreements and an existing employee refused, the employer could not terminate his or her employment without risking a potential whistleblowing claim under the Appellate Division’s Maw decision. But, if the employer permitted the existing employee to continue working without signing an agreement, the employer’s restrictive covenant agreements with all of its other employees would be in jeopardy — including agreements employees signed at the outset of their employment. Specifically, the signing employees would point to their nonsigning co-worker as proof that the required restrictions were not truly necessary to protect the employer’s legitimate business interests and, therefore, are not enforceable. In short, the Appellate Division’s decision risked effectively abolishing restrictive covenants. THE SUPREME COURT’S DECISION The Supreme Court concluded that ACCI’s requirement that Maw execute a restrictive covenant agreement was not incompatible with a “clear mandate of public policy.” As a result, Maw’s refusal to comply with the requirement was not protected by CEPA, and ACCI was free to retaliate against her for doing so. In deciding Maw, the Supreme Court focused on the language of CEPA, which prohibits an employer from, inter alia, retaliating against an employee who “[o]bjects to, or refuses to participate in any activity, policy or practice which the employee reasonably believes … is incompatible with a clear mandate of public policy concerning public health, safety or welfare or protection of the environment.” N.J.S.A. 34:19-3(c)(3). The Supreme Court reasoned that the phrase, “clear mandate of public policy,” requires that “the complained of activity must have public ramifications,” and that the private dispute between employer and employee over the terms of a noncompete agreement “does not implicate violation of a clear mandate of public policy as contemplated by Section 3c(3) of CEPA.” IMPLICATIONS OF MAW It remains to be seen what implications the Supreme Court’s Maw decision will have for whistleblowing claims generally. Employers will argue that the Supreme Court intended to rein in such claims, and plaintiffs must demonstrate that their cases involve a “clear mandate of public policy,” not just a private employment dispute, in order to maintain a cause of action. On the other hand, an argument can be made that the Supreme Court merely recognized that restrictive covenant cases are unlike other types of employment cases because they are typically, at their core, commercial disputes between two companies — the former employer and the current employer — both of which have adequate resources and both of which base their actions on business interests. Maw‘s implications for restrictive covenant cases are clearer: New Jersey courts will continue to enforce reasonable restrictions that are narrowly tailored to protect an employer’s legitimate business interests. As the Supreme Court expressly stated in Maw, its decisions in Solari Indus. Inc. v. Malady, 55 N.J. 571 (1970), and Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971), have “now become an accepted part of the common law.” The Supreme Court reiterated, “our current caselaw … allows enforcement of reasonable non-compete agreements.” While Maw did not signal the demise of noncompete agreements, it re-emphasized the need for employers to continue to use restrictive covenant agreements only as part of a rational plan for protecting their legitimate business interests. When employers do not follow a rational plan, problems inevitably arise. For instance, problems arise when employers use restrictive covenants with unnecessarily broad restraints or arbitrarily require them of one employee, but not another. To avoid such pitfalls, there are certain minimal guidelines that a company should follow when using restrictive covenants: 1. Identify employees with access to confidential information and protectible business relationships, and limit restrictive covenants with noncompete provisions to these employees. 2. Be sure that the agreements clearly define the protectible business interests at issue. 3. The agreements must identify the consideration being given to the employee in exchange for the restrictions. Offers of employment and promotion should also state that they are contingent on the candidate’s acceptance of the terms of an applicable restrictive covenant agreement. 4. Restrictions must only be of a duration and geographic scope that the company can justify as necessary. Employers must understand that the “deterrent” effect of an overbroad covenant must be weighed against the probability that all similar covenants will be invalidated if challenged. 5. Companies should adopt and enforce protocols to protect their confidential information and business relationships that are consistent with the stated goals of their restrictive covenant agreements. It is clear that Maw reaffirms the continued viability of reasonable restrictive covenants, but the decision should not be mistaken for a signal that courts are eager to enforce such restrictions. To the contrary, Maw should serve as a reminder that restrictive covenant agreements will be closely scrutinized and will be enforced only if reasonable and necessary. Lynne Anne Anderson is a member and William R. Horwitz is a senior associate of the employment and labor practice group of Sills Cummis Epstein & Gross P.C. (www.sillscummis.com) 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.