Restrictive covenants, including non-competition and non-solicitation agreements, are private contracts that restrict an individual’s business activities within a specific geographic area for a period of time, in return for wages, access to information, or some other type of tangible benefit. This article discusses four popular professions and industries in New Jersey, and highlights the critical importance of knowing the legal landscape in these specific industries in order to fully assess the enforceability of a restrictive covenant.
Physicians are no strangers to non-compete disputes in New Jersey. Ever since the Supreme Court of New Jersey’s decision almost 40 years ago in Karlin v. Weinberg (1978), which held by a 4-3 vote that post-employment restrictive covenants ancillary to an employment contract between physicians were not per se unreasonable, doctors and other medical professionals have been fighting to enforce non-competes to protect their practices and legitimate business interests. These legitimate business interests might include training, referral sources or business plans. Almost three decades later, the court reaffirmed this general holding in two companion cases: Community Hospital Group v. More (2005), and Pierson v. Medical Health Centers (2005).
However, despite the general rule that reasonable restrictive covenants are enforceable between physicians, in 2005, a New Jersey appellate court, in Comprehensive Psychology System v. Prince, held that a post-employment non-compete ancillary to an employment contract for a licensed psychologist, Dr. Brett Prince, was not enforceable. This ruling was based on a specific regulation, N.J.A.C. §13:42–10.16, adopted by the State Board of Psychological Examiners, which prohibits licensed psychologists from entering into non-competes. Interestingly, if the State Board had not adopted this regulation, a New Jersey court might have enforced some or all (New Jersey is a “blue-pencil” state) of Dr. Prince’s restrictions if they were otherwise found reasonable to protect a legitimate business interest of his employer, were not injurious to the public, and did not impose an undue hardship on him.
Barbers and Cosmetologists
Barbers and cosmetologists are also prone to non-compete disputes. The New Jersey State Board of Cosmetology and Hairstyling licenses and regulates tens of thousands of barbers, beauticians, cosmetology-hairstylists, manicurists and skin-care specialists. As in many other industries, employers in the cosmetology industry want to protect their legitimate business interests, including long-standing customer relationships, which New Jersey courts have recognized as a legitimate business interest to support the enforcement of reasonable post-employment restrictive covenants.
Not only is the court’s decision in Dellacorte v. Gentile (1925) an interesting case about the history of barbers and barbering, it also highlights the searching view that some courts will undertake into the nuances of a specific industry. Courts will look behind the “labels” and examine the person’s actual job functions in his or her specific industry to determine whether a business is truly engaged in unlawful competition. The judge in Dellacorte, for example, did not take Mr. Gentile’s representation at face value that “bobbing ladies’ and children’s hair” was not “a branch of the barber business.” Instead, the judge reviewed extraneous sources regarding the meaning of “barbers,” relied on his own experience and observations at barbershops, and looked at the parties’ conduct before and after the sale of the barbershop. Did the seller, Dellacorte, get the benefit of the bargain on the non-compete? The judge did not think so. Could the purchaser, Gentile, earn a living in his trade outside of the restricted territory? The judge thought he could. The balancing of the equities, which is an unpredictable and nebulous concept of “fairness,” favored Dellacorte.
Chefs and Culinarians
Although trade secret and non-compete laws are state-by-state specific, there are some recurring themes and common ingredients found in food recipe restrictive covenant cases (and many non-foodie non-compete cases). First, unique recipes that derive independent value can constitute trade secrets and are protectable from unauthorized use and disclosure. Second, the holder of the recipe is expected to take reasonable steps to keep it secret and out of the public domain. And third, bad actors get punished when their hands are caught in the proverbial cookie jar.
The Third Circuit’s decision in Bimbo Bakeries USA v. Botticella is an interesting case involving the intersection between food recipes, trade secrets, restrictive covenants and injunctive relief. There, the lower court granted Bimbo’s motion to enjoin one of his former senior executives, who had defected and joined a direct competitor, Hostess, from divulging to Hostess any confidential or proprietary information belonging to Bimbo. This case highlights that even without an express written post-employment non-competition agreement, the court can impose restrictions, under the appropriate circumstances, to prevent a former employee from engaging in unfair competition and irreparably harming the former employer.
On a somewhat foodie-related restrictive covenant note, there has been a recent uptick in enforcement efforts by certain states related to non-competes, particularly for low-wage workers in the fast-food industry. The trend is based on the ability of non-executive and non-supervisory employees to earn a living as long as they do not steal and use trade secrets. For example, in June 2016, the Illinois Attorney General’s office filed a lawsuit against Jimmy John’s franchises “for imposing highly restrictive non-compete agreements on its employees, including low-wage sandwich shop employees and delivery drivers whose primary job tasks are to take food orders and make and deliver sandwiches.” The agreements barred departing employees from taking jobs with competitors for two years and from working within two miles of any Jimmy John’s store. In December 2016, Jimmy John’s reached a settlement, agreeing to pay $100,000 and to remove non-compete clauses from its new-hire agreements. This deal was reached after Jimmy John’s had settled with the New York Attorney General’s office and agreed not to use non-compete agreements for most of its workers in New York.
In general, post-employment non-compete agreements that directly restrict an attorney’s ability to practice law are not enforceable in private law firms in New Jersey. American Bar Association (ABA) Model Rule of Professional Conduct (RPC) 5.6 (Restrictions on Right to Practice) prohibits a lawyer from making “a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement.” The comments to this rule reflect the ABA’s view that the prohibition on lawyer non-competes is intended to protect attorneys’ “professional autonomy” and to ensure “the freedom of clients” to select counsel of their choice. Almost every state has adopted the same or a similar version of the ABA’s RPC 5.6 in their local rules of professional conduct for attorneys-at-law. However, does this non-competition prohibition apply to an in-house attorney asked to sign a restrictive covenant by a private employer?
New Jersey was one of the first states to address the applicability of RPC 5.6 to practicing in-house lawyers at private companies (as opposed to a businessperson who happens to hold a law degree but does not engage in the practice of law). In 2006, the New Jersey Supreme Court Advisory Committee on Professional Ethics, Opinion 708, addressed a situation that involved an in-house attorney who was asked by a private company to sign an employment agreement containing four distinct restrictive covenants: (1) a one-year post-employment non-compete preventing him from working with a competitor; (2) a non-disclosure of trade secrets, proprietary and confidential information restriction; (3) an assignment of inventions provision; and (4) a restriction that required non-solicitation of the employer’s employees. The committee determined that the lawyer’s one-year non-compete and non-solicitation restrictions were not enforceable, notwithstanding the general permissibility and enforceability of restrictive covenants under New Jersey law in commercial contexts. Because the assignment-of-inventions clause did not relate to legal advice or the practice of law, the committee concluded that no ethical considerations were implicated. Finally, with respect to the non-disclosure restriction, the committee concluded that because not all the duties of an in-house lawyer involve the practice of law, “it may be reasonable for a corporation to request its lawyers to sign a non-disclosure or confidentiality agreement, provided that it does not restrict in any way the lawyer’s ability to practice law or seek to expand the confidential nature of information obtained by the in-house lawyer in the course of performing legal functions beyond the scope of the RPCs.”
The cases discussed above highlight the fact that the enforceability of restrictive covenants in New Jersey might vary from industry to industry, or even within particular industries. Some industries ban them altogether and some welcome them with open arms. Some industries have specific rules and practices that dictate the parties’ course of dealing and determine the “reasonableness” of the restrictions. There might be some quirky or arcane rules or regulations tailored to specific occupations or industries. Therefore, it is important to know the legal landscape in the specific industry in order to fully assess the enforceability of a restrictive covenant.
Del Rossi is a partner at Drinker Biddle & Reath in Florham Park. He defends and counsels clients on a variety of civil complex business disputes and on a full spectrum of employment matters.