Restrictive Covenants

March 2, 2021

Restrictive Covenant Legislation Limits Enforceability of Agreements

Restrictive covenants that limit the ability of former employees to compete have been the subject of legislative limits in a number of states, including Maine, Maryland, Massachusetts, New Hampshire, Rode Island, Virginia and Washington.
Bills that would limit the enforceability of restrictive covenants in New Jersey have been introduced into the legislature since 2017 but have failed to be adopted.
Legislative restrictions on agreements not to compete may require minimum compensation, restrict the geographic scope and time frame of the agreement and prohibit courts from “blue penciling” unreasonable restrictive covenants rather than refusing to enforce them entirely.

Restrictive covenants continue to be disfavored or limited by legislatures in a number of states. New Jersey is among the states in which no legislative action has been taken to limit the types of employees that may be subject to restrictive covenants or the scope agreements not to compete. Bills that would limit the enforceability of restrictive covenants have been introduced in the New Jersey legislature since at least 2017 without gaining adoption. (See Assembly Bill 1650) time-731110_1920

The Illinois legislature this week advanced legislation that will limit the enforceability of restrictive covenants against many former employees earning $75,000 or less and set limits for enforceability. These statutory limitations on the enforceability of restrictive covenants are becoming more widespread. Continue reading

February 12, 2021

District Court Enjoins Former Executive from Competition

by Jay R. McDaniel, Esq.

An executive with national responsibilities may be subjected to a broad geographic restriction in an employment restrictive covenant.
Courts can and will enjoin a former executive from working for a competitor to prevent irreparable harm to the executive’s former employer when the restriction is reasonable.
Misappropriation and use of a company’s trade secrets by a former employee may also prevent an employee who has copied information from working for a competitor

A federal district court judge in New Jersey imposed a preliminary injunction that will prohibit a former executive from working for a competitor for at least a year. The decision was based on both the existence of a restrictive covenant and the departing executive’s having copied data from his prior employer at the time of his departure. sunbelt

Resignation by Executive to Work for Competitor

The case, Sunbelt Rentals, Inc. v. Love (opinion here) is particularly notable as a lesson in how not to resign a high-level position. Because even if the trial judge had not enforced the restrictive covenant in the executive’s employment contract, the fact that he copied proprietary information by emailing customer lists and other data to his brother before his resignation doomed any defense to the preliminary injunction. Continue reading

February 11, 2021

Restrictive Covenants May Be Enforceable Against Physician

by Jay R. McDaniel, Esq.

Physicians are subject to reasonable restrictions on post-employment activities that will limit their competition with a previous employer.
A restrictive covenant that prohibits competition must protect a legitimate interest, impose not undue hardship on the former employee and not injury the public interest.
Restrictive covenants must be narrowly tailored so as to only restrict activities in which the employer has a legitimate interest. Courts consider the geographic scope, duration and activities limited.
Enforcement of a restrictive covenant may also turn on such circumstances as how the covenant was agreed to and the circumstances of the separation of the physician.

Restrictive covenants limiting the activities of a physician may be disfavored, but they are not per se unenforceable. As with other restrictive covenants, the issue is whether the agreement not to compete is reasonable in scope and protects a legitimate interest of the beneficiary of the agreement not to compete. Cases-of-Note-Professionals-1024x536

The issue was last before the New Jersey Supreme Court in The Community Hospital Group v. More (full opinion here), a 2005 opinion in which the court was asked to overrule its existing precedent that permitted enforcement of restrictive covenants against physicians. The Supreme Court decided the issue just months after the appellate division had held that a restrictive covenant was unenforceable against a psychiatrist. (See Psychologists, Like Lawyers, Not Subject to Restrictive Covenants) Continue reading

Restrictive covenants that limit the ability of former employees to compete have been the subject of legislative limits in a number of states, including Maine, Maryland, Massachusetts, New Hampshire, Rode Island, Virginia and Washington.

Bills that would limit the enforceability of restrictive covenants in New Jersey have been introduced into the legislature since 2017 but have failed to be adopted.

Legislative restrictions on agreements not to compete may require minimum compensation, restrict the geographic scope and time frame of the agreement and prohibit courts from “blue penciling” unreasonable restrictive covenants rather than refusing to enforce them entirely.

An executive with national responsibilities may be subjected to a broad geographic restriction in an employment restrictive covenant.

Courts can and will enjoin a former executive from working for a competitor to prevent irreparable harm to the executive’s former employer when the restriction is reasonable.

Misappropriation and use of a company’s trade secrets by a former employee may also prevent an employee who has copied information from working for a competitor

Resignation by Executive to Work for Competitor

Physicians are subject to reasonable restrictions on post-employment activities that will limit their competition with a previous employer.

A restrictive covenant that prohibits competition must protect a legitimate interest, impose not undue hardship on the former employee and not injury the public interest.

Restrictive covenants must be narrowly tailored so as to only restrict activities in which the employer has a legitimate interest. Courts consider the geographic scope, duration and activities limited.

Enforcement of a restrictive covenant may also turn on such circumstances as how the covenant was agreed to and the circumstances of the separation of the physician.