Galit Kierkut, Martin C. Fojas
Restrictive Covenant, Trade Secret and Unfair Competition
May 06, 2019
On April 26, 2019,
the Third Circuit Court of Appeals reversed two trial court decisions that held
that voluntary restrictive covenant agreements tied to select, high-performing employees’
participation in an incentive stock option program were unenforceable per se.
The Third Circuit held that such restrictive covenants – properly
drafted and narrowly tailored – may be enforceable to the extent that they
protect the employer’s legitimate business interest of safeguarding
confidential and proprietary information and the employer’s customer
New Jersey courts tend
to disfavor employee restrictive covenant agreements – such as non-compete,
non-solicit, and non-disclosure agreements – as restraints on trade. However, they will enforce these agreements
to the extent that they are reasonable in scope and duration under the
circumstances. Broadly speaking, a
restrictive covenant agreement is likely to be deemed reasonable if it protects
an employer’s legitimate interest, does not impose an undue burden on the
employee, and does not offend the public interest. New Jersey courts have recognized as
legitimate employer interests the preservation of client relationships,
safeguarding trade secrets, and protection of confidential business information.
Prior to the Third
Circuit’s recent decision, certain New Jersey federal courts had held that
where restrictive covenants were tied to high-level employees’ stock option
awards – and were not required of all employees as a condition of employment –
the restrictive covenants did not serve the employer’s legitimate interest in
safeguarding confidential business information.
Rather, several decisions had interpreted these types of restrictive
covenant agreements as an attempt to “buy out” employees in order to
“extinguish competition,” and declared such restrictive covenant agreements
unenforceable per se.
The Third Circuit
disagreed and declined to adopt any bright line rules concerning the
enforceability of restrictive covenant agreements tied to equity incentive
programs. The Court of Appeals found
that a two-tiered system of binding only high-performing employees to
restrictive covenant agreements engendered less of a restraint on trade than a
single-tier system in which all employees were bound to a restrictive covenant
Of course, this is
not to say that restrictive covenants tied to equity incentive programs are per se enforceable. The Third Circuit noted that, under New
Jersey law, even enforceable restrictive covenants are routinely found to be
overbroad with respect to the scope, geographical area, and duration of time
covered by the restrictive covenant. In
such cases, New Jersey courts will typically “blue pencil” restrictive
covenants, or modify them so as to be less restrictive, or more limited
geographically and/or temporally. In
this way, New Jersey Courts may enforce even broad restrictive covenant
agreements while balancing the employer’s legitimate interests against any
hardship or burden the covenants may place on the employee.
New Jersey Courts have expressed a willingness to enforce restrictive covenants
tied to employee stock option awards, such agreements must be properly drafted
and narrowly tailored to ensure that the agreements have their desired effect
and are likely to be enforced as anticipated.
Employers should consult legal professionals to determine whether – or
to what extent – their existing restrictive covenants, or any anticipated
agreements, are enforceable and to revise them when necessary to meet the ever
changing enforcement landscape.
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