New Jersey Bill Could Put An End To The Use Of Non-Compete Agreements As We Know It

by Pepper Hamilton LLP
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Last month, the New Jersey Legislature introduced a bill that could drastically limit the enforceability of non-compete, non-solicitation, and non-disclosure agreements that New Jersey employers routinely enter into with their employees. Such agreements are typically entered into between an employer and certain executive-level employees and/or employees who have access to confidential/trade secret information or important customer relationships. These agreements protect an employer by preventing the employee from working for the employer’s competitors for a finite period of time after termination of employment, soliciting its employees and/or customers for a finite period of time after termination of employment, and disclosing the employer’s confidential information at any time after the employment relationship ends. Employers consider these agreements to be necessary to protect legitimate business concerns.

Under the current law, a non-compete agreement is generally enforceable in New Jersey so long as it is reasonable in scope, protects the legitimate business interest of the employer in confidential information or customer relationships, does not impose an undue hardship on the employee, and is not injurious to the public. Recently, however, a bill was introduced in the New Jersey State Legislature that would significantly curb an employer’s ability to enforce these types of agreements.

On April 4, 2013, Assemblymen Peter J. Barnes III, Joseph V. Egan, and Wayne DeAngelo introduced a bill (A3970) to the New Jersey Assembly which, if passed, would render non-competition, non-solicitation, and non-disclosure agreements between employers and their employees invalid if the employee qualifies for unemployment compensation. The bill does, however, provide for a grandfather clause, which permits any agreements that were in effect on or before the date of enactment to remain valid. The bill has been referred to the Assembly Labor Committee. The Governor’s Office of New Jersey has not commented on the proposed legislation. The bill can be found at http://www.njleg.state.nj.us/2012/Bills/A4000/3970_I1.PDF.

New Jersey’s proposed legislation is not the only recent bill to curtail the enforceability of restrictive covenants for employees. Minnesota, Massachusetts, and Virginia also have proposed such legislation, albeit less expansive than New Jersey’s. In Minnesota, Bill H.F. No. 506 would void contracts, including employment agreements containing restrictive covenants, that prohibit parties from “exercising a lawful profession, trade, or business” except when a business is sold or a partnership or limited liability is dissolved. Proposed legislation in Virginia (House Bill 1187) would make any contract that serves to restrict an employee or former employee from engaging in a lawful profession, trade, or business of any kind unlawful, except in the following circumstances: persons selling a business, former partners in a partnership, and former members in a limited liability company, who agree to refrain from carrying on a similar business within a specified geographic area in which the original entity carries on business. Finally, Massachusetts House Bill 2293, the least expansive of the proposed legislation, codifies Massachusetts’ common law requiring that non-compete agreements must be necessary to protect one or more of the following legitimate business interests of the employer: (i) trade secrets to which the employee had access while employed; (ii) confidential information that would otherwise not qualify as a trade secret; or (iii) goodwill and/or customer relationships. The most recent draft of the Massachusetts bill limits the duration of non-compete agreements to six months.

All of these bills are currently in the committee stage and have yet to be passed. New Hampshire however, passed a law (RSA 275:70) that went into effect in July 2012 that requires employers to provide a copy of any noncompetition agreement to employees before or contemporaneously with any offer of employment. The failure to abide by this notification requirement renders any such agreement void.

In comparison to other states’ legislation relating to the enforceability of non-compete agreements, New Jersey’s proposed legislation is by far the most far-reaching. If passed, this bill will have a significant effect on employers’ abilities to protect their most valuable business assets. Notably, unlike the other states, New Jersey’s bill covers not only non-compete agreements, but also non-disclosure and non-solicitation agreements. Moreover, tying the agreements’ enforceability to an employee’s eligibility for unemployment compensation is troubling on several levels. An employee whose employment is terminated by the employer is eligible for unemployment benefits unless the employee committed “gross misconduct,” a standard that is very difficult for the employer to establish. Unemployment compensation tribunals generally err on the side of granting benefits. These tribunals decide matters without any significant discovery, and, while they may be adequate to determine whether an ex-employee receives unemployment compensation for a limited period of time, they are not equipped to make decisions that affect very important employer interests, such as the protection of confidential information and/or customer relationships. As a result, tying enforceability of non-competition, non-disclosure, and non-solicitation covenants to unemployment compensation eligibility will very likely result in many agreements being deemed unenforceable.

It remains to be seen whether the bill will pass in its current form, some amended version or at all. In the meantime, employers should monitor New Jersey state legislation and continue to enter into non-compete/non-solicitation/non-disclosure agreements when appropriate.

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