Thank you for sharing!

Your article was successfully shared with the contacts you provided.
A restrictive covenant agreement typically prohibits an employee, for a certain period of time, from competing with his or her employer. Such an agreement, for example, may forbid a departing employee from soliciting or servicing the employer’s customers. A standard restrictive covenant will also permit the employer to seek equitable relief from a court to enforce the terms of the agreement. However, given the many hurdles an employer faces in obtaining such relief, a restrictive covenant should also contain a clause entitling the employer to request appropriate compensation in the event of a breach. Particularly in situations where an employee’s departure is not likely to cause irreparable harm, such a provision may afford the employer adequate relief. A party seeking to enforce a restrictive covenant must demonstrate that the agreement “protects the legitimate interests of the employer, imposes no undue hardship on the employee and is not injurious to the public.” Maw v. Advanced Clinical Communs., Inc., 179 N.J. 439, 447 (2004) (quoting Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 628 (1988) (quoting Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25, 32-33 (1971)). An employer’s legitimate interest includes customer contacts, trade secrets or other confidential information requiring protection. Rowe, N.J. Business Litigation, � 6:5-1, at 134 (2000); see also A.T. Hudson & Co., Inc. v. Donovan, 216 N.J. Super. 426, 429, 433 (App. Div. 1987) (holding that employer has legitimate interest in protecting ongoing client relationships). Moreover, in determining whether the restrictive covenant is overbroad, three additional factors that are considered are its duration, the geographic limits and the scope of activities prohibited. Community Hosp. Group, Inc. v. More, A-75/76, 2005 N.J. LEXIS 299, at *44 (Apr. 5, 2005). Finally, where a party seeks temporary injunctive relief, a party must demonstrate, in addition to a reasonable probability of success on the merits, that such relief is necessary to prevent irreparable harm, that the relative hardships weigh in its favor, and that the public interest favors granting the relief. Crowe v. DeGioia, 90 N.J. 126, 134 (1982). Of the above-cited factors, two often stymie or limit the enforcement of restrictive covenants. The first is the “injury to the public” prong. For example, the New Jersey Supreme Court recently held that restricting a physician from practicing within a thirty-mile radius of his former employer would harm the public due to that area’s shortage of neurosurgeons. Community Hosp. Group, Inc., 2005 N.J. LEXIS 299, at *47, *51 (determining that restrictive covenant could not exceed a thirteen mile radius or include defendant’s new employer). Similarly, in another case, involving a two-year restrictive covenant, a court declined to issue a preliminary injunction because the agreement would limit the pool of accountants available to the public . Mailman, Ross, Toyes & Shapiro v. Edelson, 183 N.J. Super. 434, 442-44 (Ch. Div. 1982). The second prong that may cause a court to modify or decline to enforce a restrictive covenant is the undue hardship it can have on the departing employee. For example, in substantially vacating a lower court order that granted a preliminary injunction enforcing a three-year restrictive covenant, the Appellate Division noted the “devastating effects” the injunction had upon plaintiff’s former employee, and concluded that the continued maintenance of the injunction would require him “to uproot his family and move elsewhere to continue his employment, giving up the contacts that he had personally developed over 31 years � [and] mak[ing] [him] little more than a highly-paid indentured servant.” Coskey s Television & Radio Sales and Service, Inc. v. Foti, 253 N.J. Super. 626, 636-39 (App. Div. 1992). See also Morgan Stanley DW, Inc. v. Frisby, 163 F.Supp.2d 1371, 1381-82 (N.D. Ga. 2001) (in restrictive covenant case that pitted plaintiff, a large corporate entity with hundreds of offices, against individual stock brokers, court agreed that balance of equities favored defendants). However, where a restrictive covenant provides that a breach will give rise to a monetary remedy, and where that remedy is restricted to situations involving a party’s existing clients, the injury to the public and undue hardship prongs are neutralized. Similarly, a court is more likely to find that such an agreement is narrowly tailored to protect a legitimate interest. For example, in one case, two principals of an accounting firm executed a dissolution agreement dividing the firm’s client base but further providing that, in the event that one party serviced the clients of the other party, the latter could request a sum equivalent to that party’s billings to that client for the previous year. Schuhalter v. Salerno, 279 N.J. Super. 504, 507-08 (App. Div. 1995), certif. denied, 142 N.J. 454 (1995). In holding that this agreement was enforceable, the Appellate Division noted that the public was not “deprived” of one of the accountants’ services; rather “[it] face[d] only the possibility that [one of the accountants] w[ould] elect — for two years — not to service them rather than pay the client-acquisition cost fixed in the dissolution agreement.” Schuhalter, 279 N.J. Super. at 513-14. 6 Similarly, other cases outside New Jersey have upheld similar clauses requiring a party to pay for the right to service his or her former employer’s clients. See Holloway v. Faw, Casson & Co., 572 A.2d 510, 513 (Md. 1990) (agreement requiring withdrawing partner who serviced client of partnership to pay latter an amount equal to one year of firm’s billings to that client upheld) (cited by Schuhalter, supra); Perry v. Moran, 748 P.2d 224, 230 (Wash. 1987) (upholding clause that restricted departing employee from servicing employer’s clients but provided employer alternative remedy of requiring payment of 50 percent of the fees employee earned for first three years) (cited by Schuhalter, supra), modified, 766 P.2d 1096 (1989), cert. denied sub. nom., Moran v. Perry, 492 U.S. 911, 109 S.Ct. 3228 (1989); Rhoads v. Clifton, Gunderson & Co., 411 N.E.2d 1380, 1383 (Ill. App. 1980) (determining that clause requiring departing partner who serviced firm’s clients to pay firm the lesser of the partnership’s fees for the previous two years or the fees that the terminated partner earned during the subsequent two years was valid) (cited by Schuhalter, supra). In so holding, these courts have noted that, in contrast to strict restrictive covenants, “[t]he noncompete clause, when combined with the fee equivalent remedy, is transformed. No longer is there a complete prohibition against competition. � [rather,] [the departing partner] is obliged, in effect, to purchase the account from his former firm. � the general public, outside of [the former firm's] client base, [is granted] the benefit of unfettered competition.” Holloway, 572 A.2d at 519, 520. Clearly, an employer will not want to elect a monetary remedy where its departing employee is poised to reveal its trade secrets or to eviscerate its customer base. However, by including a clause in a restrictive covenant granting an employer the option of electing a monetary remedy in the event of a breach, practitioners will afford their clients greater flexibility and increase the likelihood that the covenant will be enforced. Andrew M. Moskowitz is a solo in Millburn, N.J.. His practice involves a wide range of employment and labor-related matters.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

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 © 2021 ALM Media Properties, LLC. All Rights Reserved.