Restrictive covenant agreements can be troublesome for both sides. The laws regarding their enforcement can also vary from state to state. Accordingly, it is imperative that your contracts include reasonable restrictions and clearly define which state’s laws apply.
Restrictive Covenant 101
In basic terms, restrictive covenant agreements restrict what one or more of the parties can do. In the business context, such provisions are often used to limit what employees can do once they depart. For instance, non-competition provisions prohibit former employees from competing against their former employers within a specified geographic area for a certain period of time. Meanwhile, non-solicitation provisions prohibit former employees from soliciting their former employers’ current, prior, or prospective customers for a designated period of time. Confidentiality agreements prevent former employees from disclosing or using their former employers’ proprietary or confidential information.
Restrictive Covenants under New York Law
Generally, restrictive covenants are enforceable only to the extent that they satisfy the overriding requirement of reasonableness. The standard of reasonableness, however, may vary in accordance with the context and type of restriction imposed.
New York statutory law does not address restrictive covenants in employment agreements. To fill the void, the state has adopted the prevailing common-law standard of reasonableness in determining their validity. The Second Circuit Court of Appeals has described the approach of New York courts as follows:
New York courts adhere to a strict approach to enforcement of restrictive covenants because their enforcement conflicts with the general public policy favoring robust and uninhibited competition, and powerful considerations of public policy which militate against sanctioning the loss of a man’s livelihood. Thus, a restrictive covenant will be rigorously examined, and enforced only to the extent necessary to protect the employer from unfair competition . . .
Under the test set forth in BDO Seidman v. Hirshberg, 712 N.E.2d 1220 (N.Y. 1999), a restrictive covenant will be found reasonable if the restraint (1) “is no greater than is required for the protection of a legitimate interest of the employer,” (2) “does not impose undue hardship on the employee,” and (3) does not injure the public. The court further added that a restrictive covenant will only be subject to specific enforcement to the extent that it is “reasonable in time and area, necessary to protect the employer's legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee."
New York courts have specifically recognized the legitimate interest an employer has in safeguarding “that which has made his business successful and to protect himself against deliberate surreptitious commercial piracy” Reed, Roberts Assocs. v. Strauman, 40 N.Y.2d 303 (1976). Accordingly, restrictive covenants are enforceable to the extent necessary to prevent the disclosure or use of trade secrets or confidential customer information. However, in order for a confidentiality provision to be enforceable, the data or information the former employer seeks to protect must be confidential and unavailable through public sources.
Restrictive Covenants under New Jersey Law
New Jersey also does not have a statute governing restrictive covenants. As such, the analysis of non-competes and other restrictive covenant agreements is set forth in court precedent.
In Solaris Industries, Inc. v. Malady, 264 A.2d 53 (N.J. 1970), the New Jersey Supreme Court held that while an employer that “extracts a deliberately unreasonable and oppressive noncompetitive covenant” should receive no benefit, courts should partially enforce an overbroad covenant as long as it is “ reasonably necessary to protect [an employer’s] legitimate interests,  will cause no undue hardship on the defendant, and  will not impair the public interest.”
New Jersey courts also hold that courts must balance the employer's need to protect its legitimate interests against the hardship placed on the employee by the agreement. Like New York, an employer's legitimate interests include the protection of trade secrets or proprietary information, as well as customer relationships. As set forth in Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 638 (1988), it also includes the protection of information that, while not a trade secret or proprietary, is nonetheless "highly specialized, current information not generally known in the industry, created and stimulated by the . . . environment furnished by the employer, to which the employee has been 'exposed' and 'enriched' solely due to his employment."
In weighing the hardship placed on an employee by a restrictive covenant agreement, a court must determine "the likelihood of the employee finding other work in his or her field, and the burden the restriction places on the employee." Accordingly, the geographic, temporal, and subject-matter restrictions of an otherwise enforceable restrictive covenant agreement will be enforced only to the extent reasonably necessary to protect the employer's legitimate business interests.
Restrictive Agreement Drafting Considerations
Courts rarely invalidate restrictive covenant agreements in their entirety. However, they will redefine or "blueline" agreements that are not narrowly tailored to protect legitimate business interests. Accordingly, it is important to state in the agreement that if a provision containing a restrictive covenant is found by a court to be inapplicable, or otherwise stricken from the agreement, the remainder of the agreement shall remain in force. While New York and New Jersey apply similar legal standards to restrictive covenant agreements, not all states follow the same approach. In addition, several states, including Massachusetts, Maryland, and Nebraska, have recently adopted laws that restrict their enforceability in certain circumstances. With this in mind, businesses should also consider whether a choice of law and/or forum selection clause should be included in connection with the restrictive covenant. Such provisions can help ensure predictability with regard to enforcement.
If you have questions, please contact us
If you have any questions or if you would like to discuss these issues further,
please contact Dan Brecher or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.