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Court Finds NJ Restrictive Covenant Agreement Enforceable As to Sales Representatives

By on August 2, 2019 in Policy with 0 Comments

In six consolidated cases, six former employee defendants were sued by their former employer ADP, LLC (“ADP”) for violating their respective Restrictive Covenant Agreements with ADP.  Each of the defendants had been a top performing sales representative for ADP and had accepted the Restrictive Covenant in exchange for participating in a stock award incentive program.  The issue decided in the published Appellate Division decision, ADP, LLC v. Kusins, 2019 N.J. Super. LEXIS 121 (App. Div. July 26, 2019) was whether the Restrictive Covenant Agreements were enforceable or whether they were overly broad.

 Each of the defendants had agreed to the Restrictive Covenant Agreement and accepted the stock awards for several years.  The agreement included both non-solicitation and non-compete provisions that restricted an employee from soliciting ADP’s clients and competing with ADP upon leaving the company for one year after termination of employment.  Each of the defendants left at different times and accepted employment with the same direct competitor.  ADP sued each of these defendants to enforce its restrictive covenant.

ADP is a human capital management firm which “provides a range of business outsourcing and software services pertaining to human resources, payroll, taxes and benefits administration to over 620,000 companies worldwide.”  ADP contended that to protect its confidential business interests, it used a two tier system of restrictive covenants.  When an employee was initially hired by ADP, the employee would be required to sign either a Sales Representative Agreement or a Non-Disclosure Agreement or both.  These agreements contained both Non-Compete and Non-Solicitation provisions that were narrowly tailored in scope and geographic region and prevented employees from soliciting any clients the employee had contact with at ADP for twelve months after their employment terminated. 

 For its top employees, ADP offered an annual stock option incentive.  This incentive was conditioned upon the acceptance of a second (broader) Restrictive Covenant Agreement.  The post 2013 Restrictive Covenant Agreements prevented employees from soliciting any actual or prospective ADP client, regardless of the employee’s geographical location or personal contact with a client, for a twelve month period after termination.  Further, any violation of the restrictive covenant tolled the time period that the covenants remained in effect.   Additionally, the later Restrictive Covenant Agreements permitted ADP to recoup all reasonable attorney’s fees incurred in the enforcement of the restrictive covenant.

ADP’s rationale for the more restrictive non-compete for the employees that received the incentive stock options was based upon them being top-performing associates who had the greatest understanding about ADP’s products, about how ADP was unique in the market, about what made ADP more competitive and who had strong relationship with ADP’s clients.  ADP contended that the employees receiving the stock options cultivated insight, information, and relationships that could be very damaging from a brand perspective and a loss of accounts and referrals. 

On the trial court level, these broader Restrictive Covenant Agreements were found to be overly broad and unenforceable. Those orders were appealed to the Appellate Division.

After considering the circumstances of each employee and the language of the restrictive covenant, the Appellate Division found the Restrictive Covenant Agreements were enforceable but had to consider whether they were overly broad.  The non-compete had a one year term, which was not challenged by the defendants.  Hence, the Court merely commented that “other than confirming it as a reasonable term, we need not address it further.”  The Court then went on to consider whether there was an undue hardship on employees in being restricted on their employment when they left ADP.

Under the Restrictive Covenant Agreement, an ADP employee was prevented from soliciting business from all of ADP’s 620,000 existing clients, not just those the employee had substantial dealings with or acquired knowledge about while at ADP.  The Court found this restriction as unreasonable because an ADP employee could not possibly know all of ADP’s actual clients.  The Appellate Division narrowed the non-compete to limit the non-solicitation clause and non-compete clause to “prevent an employee from having any dealings with existing ADP clients that the employee was actively involved with or has names the employee learned during his or her employment.”

The Restrictive Covenant Agreement also prohibited a former employee from soliciting any prospective client that ADP reasonably expected to provide business to within the two year period following the employee’s departure.  This clause would effectively block a former employee from working with a competing business and selling the same services in the geographic area in which they worked while at ADP.

The Appellate Division found this aspect of the restrictive covenant to be overly broad.  The Court found that it should only be enforced as to prospective clients the defendants had knowledge of during their ADP employment.  Because of the breadth of ADP’s worldwide reach, any company defendants approach might be a potential “prospective” ADP client.  The Court stated that it could not envision any practical manner in which defendants could conduct business without offending this provision.  Hence, it found this provision to be an unreasonable burden and undue hardship and, therefore, subject to “blue-penciling.” (“Blue-penciling is a term the courts utilize to edit an agreement to modify it through deletions or revisions.”)

The Court also noted that because defendants all voluntarily left ADP to join a direct competitor, they cannot assert their termination as a hardship for the Court’s consideration. 

With respect to the geographical limitation, the Court noted that the inclusion of a geographic restriction is common and a reasonable component of a Restrictive Covenant Agreement.  As to several of the defendants, the trial court had loosened the covenant’s restriction by blue-penciling the geographic limitation clause to also include a market segment (in this case the size of the prospective customer based upon its numbers of employees).  Thus, under the trial court’s modification, a former employee could only violate the restrictive covenant if he provided similar services for his new employer or solicited ADP clients in both his former ADP geographical territory and in the market segment he serviced while at ADP.

The Appellate Division disagreed with that approach.  It stated that it “cannot discern any rationale in the record to blue-pencil a market segment component into the Restrictive Covenant Agreement.”   The Court specifically stated that “there is no evidence that the specialized training, information, or strategic client skills defendants obtained at ADP differed according to the number of employees in the companies they serviced.”  Hence, the Court did agree to enforce the restrictive covenant with respect to prohibiting the defendants from providing services for a competitor or soliciting ADP’s clients within the same territory they worked in at ADP without any narrowing based upon market segment (i.e., the size of the customer).

The Court also discussed in this case the ability for ADP to obtain attorney’s fees.  The Appellate Division found that, to the extent that the defendants had breached their respective Restrictive Covenant Agreements, ADP could assert a claim for attorney’s fees and costs.  In that respect, the cases were remanded to the trial court for a determination whether ADP had “substantially prevailed” in the litigation and if a counsel fee award was appropriate.

Last, the Court also considered whether the restrictive covenant provision should be equitably tolled.  Some of the defendants were found to have violated the covenant, and the Restrictive Covenant Agreement included a tolling provision, which would extend the restricted time period of the non-competition during the time period that the employee was in violation of the covenant.  Because the restrictive covenant time period had long expired, upon remand, the Appellate Division directed the trial judge to determine the appropriate tolling period for any of the defendants who violated their restrictive covenants.            

The law in New Jersey concerning Non-Compete Agreements has been a rather static area of law.  This published Appellate Division case is the first published decision on Non-Compete Agreements in quite a few years.  The significance of this case is that the Court reaffirmed the enforceability of Non-Compete Agreements in New Jersey.  However, it made clear that they would be overly broad if they sought to enforce the Agreement with respect to prospective customers with whom the employees had no contact or knowledge.  However, the Court did make clear that an attorney’s fees clause for a breach of a Non-Compete Agreement would be enforced.  Last, it endorsed the concept of a tolling provision, which could extend the time period of the non-compete, potentially from the date that the Court enters an Order enforcing the agreement.

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Betsy G. Ramos

About the Author

About the Author:

Ms. Ramos is an Executive Committee Member and Co-Chair of the Litigation Department at Capehart Scatchard, P.A. located in Mount Laurel, New Jersey. She is an experienced litigator with over 25 years experience handling diverse matters. Practice areas include tort defense, business litigation, estate litigation, tort claims and civil rights defense, construction litigation, insurance coverage, employment litigation, shareholder disputes, and general litigation.

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