“Blue Penciling” of Restrictive Covenants is Alive and Well in New Jersey
The enforcement of non-compete and non-solicitation agreements is often fraught with uncertainty. The outcome is highly fact specific and often difficult to predict. Adding to the complexity, New Jersey case law allows courts to “blue pencil” or modify overly broad restrictions. However, there is no specific definition of what “blue penciling” exactly means and it is left to sound interpretation of the state and federal court judges analyzing the agreements in enforcement actions. The Third Circuit in ADP, LLC v. Nicole Raffterty (D.N.J. No. 2:18-cv-01922), and ADP, LLC v. Kristi Mork (D.N.J. No. 2:17-cv-04613), recently reaffirmed “blue penciling” as an appropriate tool for limiting the overbreadth of restrictive covenants.
The seminal case in interpreting restrictive covenants is Solari Industries v. Malady, 264 A.2d 53 (N.J. 1970). Solari provides that agreements restricting post-employment conduct will be enforced if: (1) they are reasonable in time, duration and scope of restrictions; (2) protect legitimate interests and are not solely anti-competitive; (3) do not impose an undue burden on the employee; and (4) are not injurious to the public interest. If a restrictive agreement is overly broad, but not per se unenforceable, Solari authorizes the court to “blue pencil” or modify the agreement so that it is partially enforceable. Only if a court finds an agreement to be solely anti-competitive and not in aid of a legitimate protectable interest should the court fail to enforce the agreement to some degree.
Recently, two former ADP employees Nicole Rafferty and Kristi Mork challenged ADP’s restrictive covenants prohibiting them from soliciting ADP employees for a one year period after their termination. Two New Jersey District Court judges ruled the ADP agreements were over broad because they did not prohibit solicitation of just the employee’s customers, but rather, all ADP customers even those that the employees did not know about or work with. District Court Judges Jose Linares and Claire Cecchi found the agreements to be anti-competitive and unenforceable per se. On April 26, 2019, the Third Circuit reviewing these cases on appeal ruled that the District Court misapplied the law. Specifically, the lower courts should have “blue penciled” the agreements to enforce them to the extent possible. It remanded the cases back to the lower court to consider blue penciling.
New Jersey employers who use these restrictive agreements to safeguard important business interests must carefully consider the purposes served by the agreements and be prepared to show that these agreements are just one part of a program designed to protect confidential information, customer good will or trade secrets. Also, employers may be well served to approach these agreements with specific reference to each employee and narrowly tailor the restrictions to balance the needs of the employee with its own needs to protect important customer relationships or confidential information.
If you would like to discuss implementation of non-solicitation or non-compete agreements or their enforcement, please feel free to call Vanessa Kelly, or the Clark Hill attorney with whom you work.