N ew Jerseys whistleblower law, the New Jersey common law. This - - PDF document

Employment Law Alert

June 2003

Terminating An Employee Who Refuses to Sign a Restrictive Covenant Agreement - Not So Fast

By Martha L. Lester, Esq. and Paul Salvatoriello, Esq.

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ew Jersey’s whistleblower law, the Conscientious Employee Protection Act (“CEPA”), is intended to protect New Jersey employees from employer retaliation when the employee objects to, or refuses to participate in, an employer activity that is incompatible with public health, safety, or welfare. A typical CEPA case can include a situation in which an employee informs a governmental agency of a real estate broker’s unethical or illegal conduct, or a case in which a nurse reports the actions of co-workers in an intensive care unit when those actions could have endangered public health and safety. A recent decision by the New Jersey Appellate Division, however, may expand the reach of CEPA to protect employees who are fired for refusing to sign an employment agreement that contains a non-compete provision. In Maw v. Advanced Clinical Communications, Inc., et al., a divided appellate panel held that requiring an employee to sign a non-compete agreement may, in some circumstances, violate public policy and therefore allow for a cause of action under both CEPA and New Jersey common law. This case, the first to address whether CEPA applies to an employee’s refusal to sign a non-compete agreement, has the potential to affect all New Jersey employers who require that non-compete agreements be executed by employees as a condition of employment. Based

• n Maw, New Jersey employers should be aware

that the scope and terms of non-compete, non- solicitation, and confidentiality agreements may fall under more stringent scrutiny by New Jersey courts in the future. In Maw, the defendant, Advanced Clinical Communications, Inc. (“ACCI”), a provider of marketing and educational services for the pharmaceutical and healthcare industries, hired plaintiff, Karol Maw, in 1997 as a graphic designer.

• Ms. Maw’s job responsibility was to design written

materials used by ACCI in its marketing and educational programs. Ms. Maw had no training or education in any medical or pharmaceutical science, and her job duties did not require her to have such knowledge. In January 2001, ACCI determined as a matter

• f company policy to require all employees of a

certain level to sign an employee agreement that contained a “non-compete covenant,” restricting these employees from working in the industry for two years. After consulting an attorney, Ms. Maw

New Jersey employers should be aware that the scope and terms of non-compete, non- solicitation, and confidentiality agreements may fall under more stringent scrutiny.

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proposed certain changes to the agreement. When ACCI declined to consider those changes, Ms. Maw refused to the sign the agreement. ACCI then terminated Ms. Maw’s employment for non- compliance with company policy. In her subsequent lawsuit against ACCI, Ms. Maw alleged that the non-compete clause violated public policy under CEPA and New Jersey common law because, as a graphic designer, she did not have any specialized knowledge of ACCI’s business that would justify the need for a non-compete

• agreement. According to Ms. Maw, the agreement

served only to bind her to employment with ACCI, and unnecessarily restricted her employment

• pportunities.

The trial court dismissed Ms. Maw’s claims, finding that Ms. Maw could not dictate the terms and conditions of her employment as an at-will

• employee. The trial court also was “not persuaded”

that the non-compete clause violated public policy. On appeal, the Appellate Division reversed the trial court’s decision, holding that Ms. Maw had asserted enough facts to survive a summary

• dismissal. Notably, the Appellate Division did not

determine whether ACCI actually violated public policy, but merely found that Ms. Maw’s claims made a threshold showing that ACCI may have violated public policy by forcing her to sign the non-compete agreement. Under both CEPA and New Jersey common law, employees may have a legal cause of action for wrongful termination when the termination is contrary to a “clear mandate of public policy.” Non-compete agreements are typically viewed with disfavor by New Jersey courts because such agreements potentially restrict trade, but courts will find a restrictive covenant (such as a non-compete) reasonable if it: (i) protects the legitimate interests

• f the employer; (ii) imposes no undue hardship on

the employee; and (iii) is not injurious to the public. Given that three-part test, the Appellate Division noted that “a court must carefully scrutinize the interests asserted by the employer before the non-compete clause is determined to be reasonable and enforceable. The agreements may not be used merely to restrict competition nor to bind particular employees to the employer.” In this case, the appellate court found that the interests asserted by ACCI (protection of its confidential and proprietary information) were not legitimate as they related to Ms. Maw, because as a graphic artist, she did not possess any confidential

• r proprietary information that could be used to

injure ACCI. In addition, the appellate court recognized that the non-compete was unduly burdensome on Ms. Maw because it both mandated a long period of non-competition without giving reasons for doing so, and contained no geographic limitation.

The Appellate Division noted that “a court must carefully scrutinize the interests asserted by the employer before the non- compete clause is determined to be reasonable and enforceable.”

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With regard to whether the non-compete violated public policy, thereby implicating liability under CEPA, the appellate court reasoned that “New Jersey’s strong prohibition against restraint of trade, and against unduly burdening employees by restricting their right to engage in their chosen field

• f employment,” established the public policy

violation to support Ms. Maw’s claims. The dissenting member of the panel, Judge Cuff, maintained that the dispute over the non- compete agreement was essentially a private dispute between an employer and an employee. Thus, reasoned Judge Cuff, no public policy violation can be found on the record, and the CEPA claim must fail. The interplay between the majority and dissent in this case reveals the real heart of the issue: Is the public harm sufficient to warrant CEPA liability when an employer requires employees to sign a non-compete clause? This is still an open question because Ms. Maw’s claims have yet to be fully litigated, and the New Jersey Supreme Court likely will weigh in on the case given the divided appellate panel. New Jersey employers, however, need not wait for further litigation before taking action. Employers should use the lessons from Maw to reevaluate their non-compete, non-solicitation, and confidentiality agreements, and minimize the potential for liability. As Maw suggests, restrictive covenants (such as non-compete agreements) must satisfy the three-part test stated above. For example, a non-compete agreement that covers all employees and does not distinguish between employees who possess, and those who do not possess, confidential and proprietary information may be rendered invalid and unenforceable under the first part of the test. Similarly, agreements that mandate an excessively long non-compete period or contain broad geographical expanses, could also be deemed invalid under the second part of the test. Courts recognize that although a business has the right to protect its trade secrets and proprietary information, a business should not be allowed to merely stifle competition or force employees to remain in its employ through the use of non- compete agreements. Unfortunately, there is little certainty in this area of the law. Determining the validity of non- compete agreements is a fact-intensive inquiry because of the particularities of sensitive proprietary information in any given industry. Yet, employers can minimize their exposure by consulting with counsel about their covenant agreements, and by carefully analyzing these agreements to ensure that they satisfy the three- part test. The following guidelines, while certainly not exhaustive, provide a brief summary of some of the factors employers should consider when placing restrictive covenants in employment agreements:

Employers should use the lessons from Maw to reevaluate their non-compete, non- solicitation, and confidentiality agreements, and minimize the potential for liability.

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First, in light of Maw, non-compete agreements actually should protect a legitimate business interest vis-à-vis the employees who are signing the agreements. Typically, an employer has an interest in protecting customer relationships, trade secrets, and confidential business information, but matters generally known within the industry will not be accorded judicial

• protection. In addition, employers would do

well to indicate clearly, in the agreement itself, the business interests intended to be protected.

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Second, non-compete agreements and other similar clauses in employment agreements should not overly burden employees. Employees may be deemed overly burdened by restrictive covenants when the duration, geographic area, and scope of the restricted activity protects more, on balance, than the employer’s legitimate protectable interest.

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Finally, as Maw suggests, non-compete agreements must remain consistent with public health, safety, and welfare. Because it appears that Maw is not the final word with regard to the connection between CEPA and non-compete clauses, we will continue to follow this case to see how it eventually unfolds. Should you have any further questions with regard to CEPA, non-compete agreements, or any other employment-related matters, please contact Martha L. Lester, Chair of the Employment Law Practice Group, at (973) 597-2388 or at mlester@lowenstein.com, or Paul Salvatoriello, an associate in the Employment Law Practice Group at (973) 597-2534 or at psalvatoriello@lowenstein.com.

COMING SOON

The 2003-2004 edition of The Practical Guide to Federal and New Jersey Employment Law: The Employer’s Resource will be available soon, and includes:

·

Federal Law Updates

·

Step-by-Step Diagnostic Charts to help you comply with state and federal mandates

·

Easy-to-Follow Index The Guidebook, published in conjunction with the New Jersey Business & Industry Association, is the resource for New Jersey employers seeking to comply with applicable Federal and New Jersey laws, regulations and procedures in the employment-related area.

UPCOMING EVENTS

Employment Risk Management for Risky Times June 26th Documentation in the Workplace September 30th Managing Your Workforce: From Hiring to Termination November 20th 8:00 am - 11:00 am Lowenstein Sandler PC Roseland, New Jersey To register for these complimentary breakfast seminars, please contact Katherine Teixeira Christie at 973.422.6448 or kteixeira@lowenstein.com.

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