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

G 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. N ew Jersey’s whistleblower law, the New Jersey common law. This case, the first to Conscientious Employee Protection Act address whether CEPA applies to an employee’s (“CEPA”), is intended to protect New refusal to sign a non-compete agreement, has the Jersey employees from employer retaliation when potential to affect all New Jersey employers who the employee objects to, or refuses to participate in, require that non-compete agreements be executed an employer activity that is incompatible with by employees as a condition of employment. Based public health, safety, or welfare. A typical CEPA on Maw , New Jersey employers should be aware case can include a situation in which an employee that the scope and terms of non-compete, non- informs a governmental agency of a real estate solicitation, and confidentiality agreements may broker’s unethical or illegal conduct, or a case in fall under more stringent scrutiny by New Jersey which a nurse reports the actions of co-workers in courts in the future. an intensive care unit when those actions could have endangered public health and safety. In Maw , the defendant, Advanced Clinical Communications, Inc. (“ACCI”), a provider of marketing and educational services for the New Jersey employers should be aware that pharmaceutical and healthcare industries, hired the scope and terms of non-compete, non- plaintiff, Karol Maw, in 1997 as a graphic designer. solicitation, and confidentiality agreements Ms. Maw’s job responsibility was to design written may fall under more stringent scrutiny. materials used by ACCI in its marketing and educational programs. Ms. Maw had no training or A recent decision by the New Jersey Appellate education in any medical or pharmaceutical Division, however, may expand the reach of CEPA science, and her job duties did not require her to to protect employees who are fired for refusing to have such knowledge. sign an employment agreement that contains a non-compete provision. In Maw v. Advanced In January 2001, ACCI determined as a matter Clinical Communications, Inc., et al. , a divided of company policy to require all employees of a appellate panel held that requiring an employee to certain level to sign an employee agreement that sign a non-compete agreement may, in some contained a “non-compete covenant,” restricting circumstances, violate public policy and therefore these employees from working in the industry for allow for a cause of action under both CEPA and two years. After consulting an attorney, Ms. Maw This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G proposed certain changes to the agreement. When violated public policy by forcing her to sign the ACCI declined to consider those changes, Ms. non-compete agreement. Maw refused to the sign the agreement. ACCI then terminated Ms. Maw’s employment for non- Under both CEPA and New Jersey common compliance with company policy. law, employees may have a legal cause of action for wrongful termination when the termination is contrary to a “clear mandate of public policy.” The Appellate Division noted that “a court Non-compete agreements are typically viewed with must carefully scrutinize the interests disfavor by New Jersey courts because such asserted by the employer before the non- agreements potentially restrict trade, but courts will compete clause is determined to be find a restrictive covenant (such as a non-compete) reasonable and enforceable.” reasonable if it: (i) protects the legitimate interests of the employer; (ii) imposes no undue hardship on In her subsequent lawsuit against ACCI, Ms. the employee; and (iii) is not injurious to the Maw alleged that the non-compete clause violated public. public policy under CEPA and New Jersey common law because, as a graphic designer, she did not have Given that three-part test, the Appellate any specialized knowledge of ACCI’s business that Division noted that “a court must carefully would justify the need for a non-compete scrutinize the interests asserted by the employer before agreement. According to Ms. Maw, the agreement the non-compete clause is determined to be served only to bind her to employment with ACCI, reasonable and enforceable. The agreements may and unnecessarily restricted her employment not be used merely to restrict competition nor to opportunities. bind particular employees to the employer.” The trial court dismissed Ms. Maw’s claims, In this case, the appellate court found that the finding that Ms. Maw could not dictate the terms interests asserted by ACCI (protection of its and conditions of her employment as an at-will confidential and proprietary information) were not employee. The trial court also was “not persuaded” legitimate as they related to Ms. Maw, because as a that the non-compete clause violated public policy. graphic artist, she did not possess any confidential or proprietary information that could be used to On appeal, the Appellate Division reversed the injure ACCI. In addition, the appellate court trial court’s decision, holding that Ms. Maw had recognized that the non-compete was unduly asserted enough facts to survive a summary burdensome on Ms. Maw because it both mandated dismissal. Notably, the Appellate Division did not a long period of non-competition without giving determine whether ACCI actually violated public reasons for doing so, and contained no geographic policy, but merely found that Ms. Maw’s claims limitation. made a threshold showing that ACCI may have

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