U.S. - New Jersey
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, the 3rd Circuit decision 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:
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 --
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