Restrictive Covenants: A Competitive Plus For New Jersey

Friday, July 1, 2011 - 01:00

The Editor interviews John Barry, Partner and Co-head of the Non-Compete & Trade Secret Group at Proskauer Rose LLP, resident in the firm's Newark, New Jersey office.

Editor: Please tell us about your background.

Barry: I am a graduate of Harvard University and Boston University School of Law. I have been practicing law for 17 years and joined Proskauer's Newark office six years ago. Over the last decade, I have worked on restrictive covenant matters, which currently account for about 60 percent of my work.

As co-head of our national Non-compete & Trade Secret Practice Group, I litigate cases and provide advice concerning restrictive covenants around the country. That said, most of my litigations take place in New Jersey and New York.

Our Newark office is comprised of 40 lawyers, all of whom practice exclusively labor and employment law, including ERISA benefits, employment litigation, labor, immigration and, of course, restrictive covenants.

Editor: What are restrictive covenants?

Barry: A restrictive covenant is a contract that limits an employee in some way. The most typical forms of restrictive covenants include agreements not to compete, not to solicit customers or employees, and pre-invention assignment agreements.

Editor: I gather that some states have outlawed restrictive covenants. Why have they endured in New Jersey?

Barry: Like the vast majority of states around the country, New Jersey has been very receptive to restrictive covenants. They are perceived as encouraging innovation and the investment of significant resources because companies have some assurance that employees who gain access to such confidential information won't leave and take that information to a competitor.

Editor: What standards do New Jersey courts use in determining whether to enforce a restrictive covenant?

Barry: New Jersey courts will look at whether or not it is reasonable based on a three-part test.

The first part is whether the restrictive covenant protects a legitimate interest of the employer, such as customer contacts, confidential information, trade secrets or the like. Trade secrets can be formulas, practices, processes, designs or compilations of information that are generally not known to the industry and give a company a competitive advantage.

The second part is whether the restriction is reasonable in scope, both geographic and temporal. How large is the geographic area covered, and how long will the restriction last?

The final part is whether the covenant imposes an undue hardship on the employee.

Editor: Is there a fair amount of case law to provide guidance in New Jersey? Tell us about blue-penciling.

Barry: There is a fair amount of case law in New Jersey, although not nearly as much as in New York, which is often looked to for guidance. Further, most courts do not publish their opinions. So, unless you are a seasoned practitioner in the area, you may not know how courts will interpret a particular restrictive covenant or when you should encourage the court to use what is called "blue-penciling" to alter or rewrite a restrictive covenant that might be deemed unreasonable.

While all of these cases are factually driven, there are always pressure points on which a court will focus. A seasoned practitioner in this area will recognize these points immediately and will avoid those details that, while interesting, play no role in what will persuade a judge to enforce a non-compete. This is important because a lawyer will be lucky if he or she has two or three minutes to sum up the reasons why the judge should grant an injunction or other relief in favor of your client.

As to blue-penciling, let's say that you are a salesperson and have relationships with certain customers. A judge assessing a customer non-solicitation provision would probably want to make sure that the restriction applied only to customers whom the salesperson actually called upon or about which the salesperson acquired confidential information. Absent evidence of some bad conduct, a court would not want it to apply to all company customers, particularly when the company and/or the customers are large corporations. Accordingly, a judge has the power to use his or her "blue pencil" to rewrite the restriction so that it is fair and reasonable, which could include limiting the customers who may be solicited, reducing the restriction's time period or both.

Editor: How big a role does e-discovery play?

Barry: E-discovery plays a very significant role in these cases. The first thing most companies do (or should do) when an executive with access to confidential information leaves for a competitor is examine that executive's email activity over the past 30 or 60 days to see whether she has been sending emails that pass along sensitive information to her own personal email accounts, a spouse or a competitor. Also, a forensic expert might be engaged to examine her computer to see if she has been accessing or downloading confidential company information or if she has engaged in other suspicious behavior.

If the employee has engaged in such behavior, a company needs to act quickly to make sure that its confidential customer information or relationships, trade secrets or the like are protected. How they can be protected can take a lot of different forms. It may be as simple as sending a letter to the new employer to put it on notice of the restrictive covenant or demanding that the information be returned and never again accessed. Or the company might go to court seeking an injunction that would require the new employer to terminate the employee or take or refrain from taking specified actions depending on the terms of the restrictive covenant. E-discovery is critical to both seeking and opposing any such application. On the one hand, if the employee downloaded confidential information to a flash drive, sent information to a personal email account or accessed information not needed in her work for the company, then a court might be more inclined to enforce a restrictive covenant that would assure that an important interest of the company is not going to be put at risk. On the other hand, if e-discovery demonstrates that the company didn't treat the information as worthy of protection or otherwise engaged in behavior contradicting the positions advanced in seeking the injunction, then the injunction may be rejected.

Editor: Why is it particularly important to act quickly when issues arise under restrictive covenants?

Barry: When an executive subject to a restrictive covenant leaves to go to work for a competitor, a company has to act immediately to prevent that person from either working there or to require the new company to take steps to assure that the terms of the restrictive covenants are observed. The company is asking the court to consider the application on an emergency basis, so it must show that it acted as if there is an emergency. It is not uncommon for me to get a call from a general counsel on a Friday, advising that a group of employees is leaving to go to work for a competitor. I have to be prepared to go into court immediately on Monday to get relief.

Editor: Is the inevitable disclosure doctrine applied in New Jersey?

Barry: Yes. The inevitable disclosure doctrine is a common law doctrine applied in the absence of an applicable restrictive covenant. If a company has an agreement with an executive and it says there is a non-compete or a non-solicit, then that will govern in New Jersey. However, if there is no such agreement, then the inevitable disclosure doctrine may be used in extremely limited circumstances to prevent the employee from working for the competitor.

The doctrine was recently applied in a case that is now commonly referred to as the "nooks and crannies" case. In Bimbo Bakeries v. Botticella, an employee with knowledge of the formula for the "nooks and crannies" in Thomas's English Muffins resigned to work for a competitor, Hostess. The employee did not have a restrictive covenant but he did have a confidentiality agreement. The court relied on the inevitable disclosure doctrine in its decision to prevent the employee from joining Hostess. Specifically, it found that the employee's dubious behavior prior to his departure coupled with the fact that his position with the competitor would be the same as his position with Bimbo Bakeries created a "substantial threat" of misappropriation.

Editor: What is the impact of the Internet and social media?

Barry: The Internet has allowed small companies to engage in global industries so that restrictive covenants now must be drafted to have global features. When a company can run its business simply by accessing the Internet, it's not enough to have a restriction that someone not go to work for a competitor in New Jersey. Indeed, a person could be competing when sitting with a computer under a palm tree in the Caribbean and going after one of your long-time customers in the building next to yours in New Jersey. Given the global nature of the Internet, companies need to update their restrictive covenants and their internal procedures to take these developments into account.

Social media is a big concern when it comes to protecting confidential information. For example, many sales people using LinkedIn identify their customers on their LinkedIn accounts. Under such circumstances, they may have revealed your confidential information to anyone with a computer. After that, it's very difficult to claim that those customer lists are somehow proprietary. Given that anyone with access to the Internet has access to those customers, companies must implement or update social media policies to make sure that employees do not divulge confidential information in social media.

I spend a substantial amount of time putting my trial experience to work, counseling clients about how to draft restrictive covenants that take into account the effects of the globalization of markets as well as the impact of social media and of the many new forms of communication that have emerged. Having many clients facing new challenges, I am in an excellent position to help.

Please email the author at jbarry@proskauer.com with questions about this article.