U.S. - New Jersey

2019.04.26  New Jersey Noncompete Law Examined . . . in 3rd Circuit decision.  ADP was held to have embedded overly-broad non-competition restrictions within its stock option grants to key employees. The Third Circuit nevertheless remanded the case (ADP v. Rafferty) pursuant to the following decision under NJ law:​​

  • In this appeal, we must determine w whether certain restrictive covenants, which high-performing employees enter into as a condition of a stock award, constitute an impermissible restraint on trade under New Jersey law. We conclude that these restrictive covenants are not unenforceable in their entirety because they serve a legitimate business interest, but they may place an undue hardship on employees because they are overbroad. Accordingly, we will remand for the District Court to consider whether and to what extent it is necessary to curtail the restrictive covenants’ scope, which is the approach prescribed by the New Jersey Supreme Court when confronted with overbroad restrictive covenants such as these. [page 2 of PDF]
  • New Jersey has evolved from invalidating overbroad restrictive covenants outright to presumptively “compress[ing] or reduc[ing]” their scope “so as to render the covenants reasonable.” Karlin v. Weinberg, 390 A.2d 1161, 1168 n.4 (N.J. 1978); see Maw v. Advanced Clinical Commc’ns, Inc., 846 A.2d 604, 608-09 (N.J. 2004). Known as partial enforcement or blue penciling,7 this rule favors granting “that limited measure of relief within the terms of the noncompetitive agreement” that (1) protects a legitimate business interest, (2) does not unduly burden an employee, and (3) adheres to the public interest. Solari, 264 A.2d at 61.  

2017.02.07  Stock Award Web Process Works: Non-compete Enforced.   As a general matter, employers “win” when they seek to enforce stock plan terms that have been fairly disclosed -- and accepted -- by award recipients.  ADP recently had such a victory.  In a case decided under New Jersey Law (ADP vs Lynch), the 3rd Circuit upheld the granting of a preliminary injunction against two former employees who had joined a competitor in violation of restrictive covenants set forth in their stock awards. 

The former employees argued that ADP’s web-based system for issuing stock awards did not adequately alert them to the consequences of the stock awards they accepted. They lost because ADP’s check-the-box award system involved the following key steps that led the court to bind them to the stock award agreements and the associated noncompetes:

  • Step 1:  The employees accessed a webpage containing the award documents. 
    • Poerio Comment: electronic issuances of stock awards can be more efficient and reliable (and green) than hard copy approaches which frequently challenge employers to find signed documents when they need them.
  • Step 2:  The employees were able to link to a PDF presenting 19 pages of award documentation. The first page gave them up to 90 days to consider the documents.
    • Poerio Comment: It makes sense to impose a deadline by which employees must accept awards. 90 days seems long and could open the door for tax and accounting arguments that the grant date for stock options has been delayed until the employee accepts the award. A period of about 10-20 days would seem sufficient for employee review and acceptance (depending on the complexity of the documents).
  • Step 3:  The employees checked a box indicating they had read the award documents.   
    • Poerio Comment:  The 3rd Circuit found proof of this significant to defeat arguments by the employees that they had not read the award or Noncompete agreements.  The court cited precedent stating that “[w]hen a party enters a signed, written contract, that party is presumed to understand and assent to its terms.”
  • Step 4:   On a liked webpage, the employees entered their personal password and clicked the “Accept Grant” button (rather than the “Reject Grant” button).
    • Poerio Comment: The 3rd Circuit concluded that this “sealed the deal” for binding the employees to the award agreements and associated noncompete agreement.

Overall, ADP’s stock award process established that the employees had full access to the award documents and accepted their terms and conditions. The court pointed out that the first page of both the stock award and the noncompete agreement “specifically advise employees that the acceptance of the award was conditioned on the agreement to the noncompete.”  When making stock awards, employers have the opportunity to accomplish goals that range from –
•    providing stock-based incentives, to 
•    imposing restrictive covenants such as non-competes, to
•    reserving clawback rights and other remedies that discourage (or end) violations; to
•    better positioning for litigation by using a new award as consideration for amending past awards, such as to require that all award claims be raised promptly, be decided with deference to employer determinations, and/or be litigated in a selected forum. 

The above discussion is intended to suggest the corporate purposes and efficiencies that may be achieved through well-considered stock award programs and documents.  Often under-appreciated is the value of reviewing past awards, strengthening trade secret and restrictive covenants, and considering vagaries in state laws (because updating could spell success).  There is also an under-appreciated potential to design awards so that ERISA preempts state noncompete laws that would otherwise invalidate a forfeiture-for-competition provision.  Employers interested in “ERISA-fying” a stock plan face the challenging, but surmountable, task of  triggering ERISA coverage, perhaps by deferring a portion of management’s stock awards into a top-hat retirement or severance plan. Finally, from a systems side, employers should be ready to demonstrate that employees have received adequate notice of award terms, and have personally accepted them. As ADP found in its litigation, it is worth giving attention to award program details.

2012.Mar.23  General Non-compete Rule for NJ.  See Stryker v. Hi-Temp Specialty Metals (D.NJ), stating that -- 

  • "two-year restrictive covenants are generally found to be reasonable in New Jersey, and there is no indication that this Restrictive Covenant was entered into for the sole purpose of “stifling competition.”    See Trico, 2009 WL 1687391, at *7 (holding two-year restriction reasonable); see Community Hosp. Group, Inc. v. More, 365 N.J. Super. 84, 105 (N.J. Super. Ct. App. Div. 2003) (explaining that restrictive Case 2:11-cv-06384-CCC-JAD   Document 19    Filed 03/02/12   Page 14 of 16 PageID: 33115 covenants containing a two-year period of restriction have generally been upheld as reasonable by New Jersey courts)."

​NOTE:  NJ Wage Law and Stock Plans

  • 2008.06.25 . . .  the New Jersey Supreme Court held in Melvin Rosen v. Smith Barney, Inc. that deferred compensation plans with vesting periods and forfeiture provisions do not violate New Jersey's wage and hour law or public policy. The claims came from two former Smith Barney employees regarding the company's voluntary deferred compensation stock purchase plan, called the Capital Accumulation Plan (CAP).