The New Jersey Appellate Division recently ruled that a restrictive covenant imposed upon an employee may only be enforced as to the employer’s actual clients and not all of the employer’s prospective clients. In ADP LLC v. Eric Kusins, et al., ADP brought suit against six of its employees, who were top performing sales representatives. Each of these employees had been invited to participate in a stock award incentive program during their employment, conditioned on their acceptance and execution of various restrictive covenant agreements (“RCAs”). Participation in the program was entirely voluntary, and ADP’s top employees who chose not to participate in the program were not required to accept the RCAs.
The RCA at issue specifically prohibited solicitation of ADP’s clients upon any of the six defendants’ departure from ADP. Additionally, the agreement contained various non-compete provisions that also prohibited the defendants from competing with ADP upon a departure from the company. The pertinent non-compete and non-solicitation provisions were highly detailed and read, in part, as follows:
3. Non-Competition.I agree that during my employment and for a period of twelve (12) months from the voluntary or involuntary termination of my employment for any reason and with or without cause, I will not, directly or indirectly, own, manage, operate, join, control, be employed by or with, or participate in any manner with a Competing Business anywhere in the Territory where doing so will require me to provide the same or substantially similar services to a Competing Business as those which I provided to ADP while employed. . . .
4.Non-Solicitation of and Non-Interference with Clients, Business Partners, and Vendors.I agree that during my employment and for a period twelve (12) months following the voluntary or involuntary termination of my employment for any reason and with or without cause, I will not . . . directly or indirectly solicit . . . or attempt to solicit . . . any business from any Client for the purposes of providing products or services that are the same or substantially similar to those provided in the Business of ADP; whom ADP has provided products or services in connection with the Business of ADP and with whom ADP reasonably expects business within the two (2) year period following my termination of employment from ADP . . .
After execution of the above covenants, each of the six defendants ultimately resigned, and subsequently found employment in positions that ADP believed resulted in their violation of the RCAs. Litigation then ensued when ADP sought to enforce the RCAs. At the trial court level, each of the defendants were rendered differing judgments, since the defendants had all filed each of their claims independently. On appeal, the Appellate Division consolidated the defendants’ claims, seeking to establish a uniform judgment given the similarity of their claims against ADP.
New Jersey courts have generally held that if a noncompetitive agreement is deemed overly broad, it would be struck as void per se. See, e.g., Solaris Indus., Inc. v. Malady, 55 N.J. 571, 583 (1970). A restrictive covenant is deemed enforceable if it “simply protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not injurious to the public,” in addition to the particular restrictions being reasonable in duration, area, and scope of activity. Id. at 576, 581-82.
The Appellate Division found that the RCAs accepted and executed by the defendants could only be deemed partially unenforceable under the New Jersey Supreme Court’s framework established in Solaris. Given the depth and extent of the customer relationships the defendants were trained to develop while at ADP, ADP sufficiently demonstrated a legitimate protectable interest in its customer relationships sufficient to justify enforcement of its RCA, thus, the non-complete provision deserved enforcement. However, though such an interest existed, ADP was not permitted to prohibit the defendants from soliciting business from all of ADP’s 620,000 existing clients, regardless of the individual defendant’s dealings with the particular client; rather the covenant was only enforceable as to any clients that the defendants actually serviced on behalf of ADP, or acquired knowledge about during their tenure.
ADP’s provision for prohibiting solicitation of prospective ADP clients that the company reasonably expected to service within two years was similarly overbroad. Provided that the defendants remained within the same industry following departure from ADP, any company that defendants approach could possibly be a “prospective” ADP client. Therefore, enforcing such a provision would place an unreasonable burden and undue hardship upon defendants, and thus the clause pertaining to prospective clients would only be enforceable against a former employee who gained knowledge of a potential client while at ADP, and directly or indirectly solicited that client after leaving and working for a competitor.
Through this opinion, the Appellate Division has provided a framework for how the New Jersey courts will treat restrictive covenants concerning “prospective” clients going forward. Notably, when an employer seeks to draft a restrictive covenant to protect any prospective client that may be retained, it must be cognizant of the unreasonable burden and undue hardship that said covenant has on the employee, or risk having the covenant struck down to the employer’s detriment. For more information on this topic, please contact MKC&I’s Tom Emala at firstname.lastname@example.org or at (973)-822-1110. MKC&I’s Summer Associate Angel Hierrezuelo provided invaluable editorial and research assistance in the preparation of this article.