A RESTRICTIVE COVENANT CAN COST MORE THAN IT'S WORTH

I recently had a case involving enforcement of a Restrictive Covenant. Even though my client technically "won" the case, he lost due to the prohibitive cost of litigation. A restrictive covenant seeks to prevent a former employee from engaging in a similar business with that of his previous employer. The agreement is usually for a limited time and geographic scope. It can be signed prior to employment or at any time thereafter.

Restrictive covenants are, by definition, anti-competitive and a restraint on trade. In New Jersey, the long standing common law view is that post employment restraints on competition are looked at with disfavor and presumptively invalid. Such restrictive covenants prohibit free trade and competition. Additionally, they harm employees by preventing them from pursuing alternative employment or business opportunities.

Therefore, Courts have taken and continue to take a narrow view on what constitutes a legitimate business interest to justify enforcement of a restrictive covenant. The Supreme Court has stated that an employer has "no legitimate interest in preventing competition." Courts will not enforce restraints "merely to aid the employer in extinguishing competition...." Courts will also consider who ended or terminated the employment relationship.

Restrictive covenants are more likely to be enforceable if "reasonable" in both duration and geographic area or scope. New Jersey Courts have generally determined a ten mile radius and one to two years duration to be reasonable. Each case must be evaluated individually and is very fact sensitive. Very often the agreements are "blue penciled" or limited by the Court if litigation occurs.

In my opinion, unless the former employer attempts to establish a competitive business, contacts an employer's existing customers or clients or utilizes its trade secrets including pricing info, it is not worthwhile to litigate an alleged breach of agreement.

What really will protect your business is a "non solicitation clause." An agreement that prevents your former employee from contacting your clients and customers is ultimately more reasonable and more likely to be upheld by the Court. For more information contact our office in Brick, New Jersey through our website by clicking here or you can give us a call at 732-785-0800.