Employee Won't Sign a Non-Compete: Grounds for Dismissal?

In January 2001, ACCI decided to require all employees at the level of “coordinator” and above to sign an agreement that contained, among other restrictive covenants, a non-compete provision prohibiting such employees from working for any competitors or customers of the company during and for a period of 2 years following their separation from employment with ACCI. The company did not differentiate among the employees in the “coordinator” category based on their job duties. Nor did ACCI specify the legitimate business interests it was seeking to protect through the agreement.

As recommended by ACCI to all of its employees, Maw consulted an attorney, who proposed revisions to the agreement, including limiting the duration of the non-compete provision. ACCI told Maw, however, no changes would be made to the agreement. Ultimately, ACCI terminated Maw because she refused to sign.

Maw claimed that in her position as a graphics artist, she had no interaction with ACCI's customers. Additionally, although Maw admitted she might have had access to confidential information in designing materials, she asserted that she had the same access to such information that other administrative and clerical staff had who were not asked to sign the agreement. Furthermore, she contended that a majority of the information in the literature she produced was publicly available.

The Trial Court Decision

Maw filed suit against ACCI, alleging that her termination constituted a wrongful discharge in violation of public policy under Pierce v. Ortho Pharmaceutical Corporation, 84 N.J. 58 (1980), and a violation of New Jersey's whistle-blower statute, the New Jersey Conscientious Employee Protection Act (CEPA). (In Pierce, the New Jersey Supreme Court recognized a cause of action for wrongful discharge if the discharge is contrary to a clear mandate of public policy.) Specifically, Maw alleged that the non-compete provision violated public policy since it would not have protected any of ACCI's legitimate business interests, but rather was intended to stifle competition. Further, Maw asserted that the provision was unduly burdensome because it would have substantially limited her employment opportunities if she left ACCI.

The trial court dismissed Maw's CEPA claim, finding that Maw, as an at-will employee, had “no right to dictate terms and conditions of her employment to the extent that she claimed that a particular restrictive covenant was a violation of public policy.” In any event, the trial court also was not convinced that the non-compete clause violated public policy. Rather, the trial court believed that the reasonableness of the non-compete provision could only be determined within an actual factual framework, ie, once Maw had signed the agreement, left ACCI, and attempted to work for some other entity.

The Appellate Division Reverses

Contrary to the trial court, the Appellate Division concluded that if Maw's allegations are proven true, ACCI's termination of her employment for refusing to sign the agreement might constitute a wrongful discharge and CEPA violation.

(To establish a wrongful discharge or CEPA claim, a plaintiff must first show the existence of a clear mandate of public policy that the employer's conduct would violate if the allegations against the employer were true.) The court analyzed Maw's claims under the Solari/Whitmyer test used to determine the enforceability of a restrictive covenant, ie, whether the covenant protects a legitimate employer interest, imposes no undue hardship on the employer, and is not injurious to the public. First, while acknowledging that non-compete agreements are not per se invalid, the court explained that a particular non-compete provision may be injurious to the public interest if it is unreasonable.

Second, the court reasoned that ACCI did not have a proprietary interest worthy of judicial protection vis-'-vis Plaintiff in the enforcement of the non-compete clause. In particular, the facts and inferences show that Maw had no meaningful access to trade secrets or other proprietary information and, to the extent she had any access to confidential information, she did not understand it and her access was no different from those employees who were not required to sign the agreement.

Third, even if ACCI could identify a legitimate business interest, the court determined that the non-compete provision might be unduly burdensome to Maw since it extended for 2 years after she left employment with ACCI without any explanation as to why such a lengthy period of time was necessary. Further, the non-compete provision lacked any geographic limitation, thereby theoretically preventing Maw from engaging in similar employment anywhere in the world. Under these factual circumstances, the court noted the hardship to Maw may, on balance, outweigh ACCI's competing business interest.

Coming full circle, the court concluded for the first time 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” establishes the public policy necessary to support Maw's CEPA or wrongful discharge claims. Finally, the court disagreed with the trial court regarding the ripeness of Maw's action since it found no reason to require an employee to sign what may be reasonably considered a legally unenforceable non-compete clause, under threat of discharge, and then wait to litigate the agreement at a later date should her employer seek to enforce the same. After all, the court noted from the date of execution, the employee is burdened with the agreement's restrictions in deciding whether to leave her employment and in her job search.

Conclusion

Given the potential causes of action that now appear available to employees under the Appellate Division's decision in Maw, in addition to continuing concerns regarding New Jersey courts' increasing reluctance to enforce non-compete agreements, employers must be careful in drafting restrictive covenants that protect legitimate business interests while not unduly burdening employees in their ability to seek future employment. The following discussion points highlight some of the major issues employers should consider when drafting restrictive covenants:

A restrictive covenant should set forth the legitimate business interest it is necessary to protect. Generally, employers have legitimate business interests in protecting their trade secrets, confidential business information and ongoing customer relationships. By contrast, matters of general knowledge within an industry, the skills or experience employees learn or develop during their tenure with employers, or the knowledge, skills or abilities employees bring with them to employers are not capable of protection through a non-compete agreement.

A restrictive covenant should not be one-size-fits-all. As demonstrated above, courts will scrutinize whether a restrictive covenant is necessaryto protect a legitimate business interest as it applies to each and every employee in terms of each employee's particular access to the employer's trade secrets, confidential information and customer relationships. Accordingly, employers are well advised to tailor restrictive covenants to particular levels of employees, based on their access to and understanding of trade secrets, confidential information and customer relationships.

A restrictive covenant must be reasonable in scope and duration so as not to pose an undue hardship on employees. Restrictive covenants that place substantial limitations on where employees may work or that prevent employees from engaging in their livelihood are unduly burdensome. Courts will consider the nature of the profession, the duration of the restriction, the geographic area of the restriction and the type of restriction imposed by the covenants in determining their reasonableness as to each employee.

A restrictive covenant, as with any agreement, requires consideration. One that is executed at the inception of employment is generally considered supported by adequate consideration. Even if a restrictive covenant is not signed at the inception of employment but at a later date by an at-will employee, continued employment will provide sufficient consideration to support its enforcement. However, if the employee has signed an employment contract guaranteeing a certain period of employment, without a restrictive covenant, further consideration will be necessary to require the employee to sign a restrictive covenant.

Employers should offer employees the opportunity to review restrictive covenants for a reasonable period of time and to consult with advisors of their choosing before execution to prevent any argument that the covenants were signed under duress or without a full understanding of their import.

Employees' obligations under restrictive covenants should be clearly disclosed and their acceptance should be clear and unmistakable. For instance, the New Jersey Supreme Court recently refused to enforce an arbitration clause that was buried in an employment handbook along with other work policies because the employee had not signed or otherwise explicitly indicated his agreement to it.

Finally, it is important to evaluate periodically restrictive covenants against developing case law not only to ensure that they remain enforceable, but also given that the Appellate Division's decision in Maw has created potential liability for employers who require employees to execute what the employees reasonably believe to be unenforceable covenants upon threat of termination.

A former employee may proceed with whistle-blowing and claims of wrongful discharge against an employer who fired her for refusing to sign a non-compete agreement. On April 16, 2003, the New Jersey Appellate Division (the Court) so ruled in Maw v. Advanced Clinical Communications, Inc. (ACCI) , 359 N.J. Super. 420 (App. Div. 2003). In so holding, the Court concluded that terminating Karol Maw for failing to sign an agreement that prohibited her from working for any client or competitor of ACCI during and for 2 years following her separation from employment may well have violated New Jersey's strong public policy against unduly burdening employees by restricting their right to engage in their chosen field of employment.

The Facts

Maw began working for ACCI as a graphics designer in early November 1997. Her job was to design written materials to be used by ACCI in its marketing and educational programs for clients in the health care and pharmaceutical industries. In that capacity, she created design concepts for written and graphic materials; prepared the design and layout of technical charts, graphs, and reports; and coordinated with ACCI's vendors. ACCI did not require her to have any knowledge of, or experience in, the pharmaceutical or health care industries. Indeed, Maw had no training or education in any medical or pharmaceutical science, and alleged she understood little about the substantive content of the materials she produced.

In January 2001, ACCI decided to require all employees at the level of “coordinator” and above to sign an agreement that contained, among other restrictive covenants, a non-compete provision prohibiting such employees from working for any competitors or customers of the company during and for a period of 2 years following their separation from employment with ACCI. The company did not differentiate among the employees in the “coordinator” category based on their job duties. Nor did ACCI specify the legitimate business interests it was seeking to protect through the agreement.

As recommended by ACCI to all of its employees, Maw consulted an attorney, who proposed revisions to the agreement, including limiting the duration of the non-compete provision. ACCI told Maw, however, no changes would be made to the agreement. Ultimately, ACCI terminated Maw because she refused to sign.

Maw claimed that in her position as a graphics artist, she had no interaction with ACCI's customers. Additionally, although Maw admitted she might have had access to confidential information in designing materials, she asserted that she had the same access to such information that other administrative and clerical staff had who were not asked to sign the agreement. Furthermore, she contended that a majority of the information in the literature she produced was publicly available.

The Trial Court Decision

Maw filed suit against ACCI, alleging that her termination constituted a wrongful discharge in violation of public policy under Pierce v. Ortho Pharmaceutical Corporation , 84 N.J. 58 (1980), and a violation of New Jersey's whistle-blower statute, the New Jersey Conscientious Employee Protection Act (CEPA). (In Pierce , the New Jersey Supreme Court recognized a cause of action for wrongful discharge if the discharge is contrary to a clear mandate of public policy.) Specifically, Maw alleged that the non-compete provision violated public policy since it would not have protected any of ACCI's legitimate business interests, but rather was intended to stifle competition. Further, Maw asserted that the provision was unduly burdensome because it would have substantially limited her employment opportunities if she left ACCI.

The trial court dismissed Maw's CEPA claim, finding that Maw, as an at-will employee, had “no right to dictate terms and conditions of her employment to the extent that she claimed that a particular restrictive covenant was a violation of public policy.” In any event, the trial court also was not convinced that the non-compete clause violated public policy. Rather, the trial court believed that the reasonableness of the non-compete provision could only be determined within an actual factual framework, ie, once Maw had signed the agreement, left ACCI, and attempted to work for some other entity.

The Appellate Division Reverses

Contrary to the trial court, the Appellate Division concluded that if Maw's allegations are proven true, ACCI's termination of her employment for refusing to sign the agreement might constitute a wrongful discharge and CEPA violation.

(To establish a wrongful discharge or CEPA claim, a plaintiff must first show the existence of a clear mandate of public policy that the employer's conduct would violate if the allegations against the employer were true.) The court analyzed Maw's claims under the Solari/Whitmyer test used to determine the enforceability of a restrictive covenant, ie, whether the covenant protects a legitimate employer interest, imposes no undue hardship on the employer, and is not injurious to the public. First, while acknowledging that non-compete agreements are not per se invalid, the court explained that a particular non-compete provision may be injurious to the public interest if it is unreasonable.

Second, the court reasoned that ACCI did not have a proprietary interest worthy of judicial protection vis-'-vis Plaintiff in the enforcement of the non-compete clause. In particular, the facts and inferences show that Maw had no meaningful access to trade secrets or other proprietary information and, to the extent she had any access to confidential information, she did not understand it and her access was no different from those employees who were not required to sign the agreement.

Third, even if ACCI could identify a legitimate business interest, the court determined that the non-compete provision might be unduly burdensome to Maw since it extended for 2 years after she left employment with ACCI without any explanation as to why such a lengthy period of time was necessary. Further, the non-compete provision lacked any geographic limitation, thereby theoretically preventing Maw from engaging in similar employment anywhere in the world. Under these factual circumstances, the court noted the hardship to Maw may, on balance, outweigh ACCI's competing business interest.

Coming full circle, the court concluded for the first time 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” establishes the public policy necessary to support Maw's CEPA or wrongful discharge claims. Finally, the court disagreed with the trial court regarding the ripeness of Maw's action since it found no reason to require an employee to sign what may be reasonably considered a legally unenforceable non-compete clause, under threat of discharge, and then wait to litigate the agreement at a later date should her employer seek to enforce the same. After all, the court noted from the date of execution, the employee is burdened with the agreement's restrictions in deciding whether to leave her employment and in her job search.

Conclusion

Given the potential causes of action that now appear available to employees under the Appellate Division's decision in Maw, in addition to continuing concerns regarding New Jersey courts' increasing reluctance to enforce non-compete agreements, employers must be careful in drafting restrictive covenants that protect legitimate business interests while not unduly burdening employees in their ability to seek future employment. The following discussion points highlight some of the major issues employers should consider when drafting restrictive covenants:

A restrictive covenant should set forth the legitimate business interest it is necessary to protect. Generally, employers have legitimate business interests in protecting their trade secrets, confidential business information and ongoing customer relationships. By contrast, matters of general knowledge within an industry, the skills or experience employees learn or develop during their tenure with employers, or the knowledge, skills or abilities employees bring with them to employers are not capable of protection through a non-compete agreement.

A restrictive covenant should not be one-size-fits-all. As demonstrated above, courts will scrutinize whether a restrictive covenant is necessaryto protect a legitimate business interest as it applies to each and every employee in terms of each employee's particular access to the employer's trade secrets, confidential information and customer relationships. Accordingly, employers are well advised to tailor restrictive covenants to particular levels of employees, based on their access to and understanding of trade secrets, confidential information and customer relationships.

A restrictive covenant must be reasonable in scope and duration so as not to pose an undue hardship on employees. Restrictive covenants that place substantial limitations on where employees may work or that prevent employees from engaging in their livelihood are unduly burdensome. Courts will consider the nature of the profession, the duration of the restriction, the geographic area of the restriction and the type of restriction imposed by the covenants in determining their reasonableness as to each employee.

A restrictive covenant, as with any agreement, requires consideration. One that is executed at the inception of employment is generally considered supported by adequate consideration. Even if a restrictive covenant is not signed at the inception of employment but at a later date by an at-will employee, continued employment will provide sufficient consideration to support its enforcement. However, if the employee has signed an employment contract guaranteeing a certain period of employment, without a restrictive covenant, further consideration will be necessary to require the employee to sign a restrictive covenant.

Employers should offer employees the opportunity to review restrictive covenants for a reasonable period of time and to consult with advisors of their choosing before execution to prevent any argument that the covenants were signed under duress or without a full understanding of their import.

Employees' obligations under restrictive covenants should be clearly disclosed and their acceptance should be clear and unmistakable. For instance, the New Jersey Supreme Court recently refused to enforce an arbitration clause that was buried in an employment handbook along with other work policies because the employee had not signed or otherwise explicitly indicated his agreement to it.

Finally, it is important to evaluate periodically restrictive covenants against developing case law not only to ensure that they remain enforceable, but also given that the Appellate Division's decision in Maw has created potential liability for employers who require employees to execute what the employees reasonably believe to be unenforceable covenants upon threat of termination.