Restricting Restrictive Covenants – New Jersey’s Current and Potential Future State of Law

Employers in New Jersey have long imposed post-employment restrictions on their employees and contractors through a variety of contractual provisions, including non-competition, non-solicitation (of customers, vendors, and/or employees), and non-disclosure (confidentiality).  The historical basis for permitting the use of restrictive covenants has been to protect the legitimate business interests of the employer, including protecting the employer’s investment in the employee (i.e. investment in training and advertising/promoting the employee), protecting the goodwill of the employer, ensuring the employee does not poach the employer’s business relationships, and to protect the confidential information of the employer. 

However, such provisions have recently drawn scrutiny nationally, and in New Jersey, particularly when same are applied to low-wage and lesser-skilled employees.  Critics argue in general that restrictive covenants limit market competition, prevent employee mobility, and suppress wages.  More specifically, with low-wage and lesser-skilled employees, critics allege that restrictive covenants are unnecessarily harsh, disproportionately threaten low-wage and lesser-skilled employees, and do not serve to protect the employer’s legitimate business interests.  See generally https://www.treasury.gov/resource-center/economic-policy/Documents/UST%20Non-competes%20Report.pdf.

For example, the New York attorney general accused a prominent sandwich restaurant chain of unlawful employment practices for utilizing a non-competition clause prohibiting employees from working for other businesses that sold certain hoagie/sub-style sandwiches within two (2) miles of any of its location in the entire United States for a period of two (2) years after the cessation of employment.  The attorney general argued that such provisions were unconscionable when applied to low-wage and lesser-skilled employees and did not further the employer’s legitimate business interests, and in announcing a settlement with the chain to refrain from utilizing or enforcing such provisions, stated, that restrictive covenants “limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued. Companies should stop using these agreements for minimum wage employees.” 

California (except for the shareholders in sales of entire businesses), Montana, Oklahoma, and North Dakota, have gone even further in largely abolishing non-competition provisions.  See e.g. Cal. Bus. & Prof. Code § 16600; N.D.C.C. § 9-08-06.  Other states have also passed legislation to curb, but not eliminate, restrictive covenants, including Massachusetts (which prohibits non-competition clauses for certain healthcare employees and the broadcast industry, as well as significantly limiting such clauses in general), Utah (limits duration of non-competition clauses to one year), and Hawaii (prohibits non-competition and non-solicitation clauses for employees of technology businesses). See e.g. https://www.mass.gov/info-details/massachusetts-law-about-noncompetition-agreements; HB1090 CD1.  Such provisions go well beyond limiting the use of restrictive covenants for low-wage employees, and are also being used to protect physicians, engineers, and highly skilled professionals.

Following the lead of other states, the New Jersey Legislature, in 2017, introduced Senate Bill 3518 (S-3518) / Assembly Bill 5261, which sought to substantially limited the enforceability and scope of restrictive covenants in New Jersey.  While S-3518 did not pass during the 2017-18 legislative session, a largely identical bill, Senate Bill 2872 (S-2872) / Assembly Bill 1769, has been introduced in the 2018-19 legislative session. See https://www.njleg.state.nj.us/2018/Bills/S3000/2872_I1.HTM.

Presently, New Jersey utilizes the so-called blue-pencil rule, which allows a court to limit, or modify, a restrictive covenant provision that is otherwise invalid (for example, the time period, scope of prohibition, or distance is too long, broad, or far), provided that the employer can demonstrate that such a restrictive covenant protects a legitimate business interest of the employer.  In all, New Jersey’s current system allows for the broad use of restrictive covenants, and blue penciling and/or the declaration of invalidity of restrictive covenants is fact-intensive and, as a practical matter, without a statutory structure in place that delineates specific instances where restrictive covenants are impermissible, often places the onus on the employee to prove that such a restriction is impermissible.

However, in the event of the passage of S-2872, the law would impose specific prohibitions from inclusion in restrictive covenant clauses, including, limiting non-competition to one (1) year, geographic limitations to where the employee had a material presence, allowing an employee to provide services to an employer’s customers/clients if the employee did not solicit said customer/client, and waiver of enforceability if the employee is not provided in writing shortly after the end of employment of the employer’s intent to enforce the restrictive covenant. 

Moreover, the law would prohibit restrictive covenants being enforced against nonexempt employees, temporary employees, employees terminated without a determination of misconduct, low-wage employees, independent contractors, and those employees employed for less than one (1) year, it would impose penalties for employers in violation of the law, as well as impose the requirement that the employer pay the former employee 100% of what she/he would have made if still employed, along with fringe benefits, for the restricted period (commonly known as garden leave/garden pay) so long as the employee was not terminated for good cause.

The proposed S-2872 stands in stark contrast with current New Jersey law.  While S-2872 remains in committee, momentum is building around the country to limit, if not outright eliminate, restrictive covenants, and employers, particularly those in industries with low-wage or temporary employees, industries with high employee turnover, and industries with specially-trained professionals, should become acquainted with the national trends surrounding limiting restrictive covenant enforcement, and how S-2872, and any future New Jersey iterations, may affect their business.

Protecting Goodwill and Intellectual Property - A Primer on Trademarks, Copyrights, and Trade Secrets

Imagine building a company that took years to gain momentum, thousands of hours of labor, sleepless nights, hundreds of thousands of dollars in costs, and mortgages on a house to obtain bank financing.  Through all your hard work and risk, the company is now financially successful and has established itself as a prominent provider/seller of [insert good or service here].

Unfortunately, your company did not a) adequately protect its intellectual property or b) conduct due diligence to ensure that the intellectual property it used was its own.

Now, a competitor's product line/service has a distinctly similar name, a different competitor is using a markedly similar logo, and yet another competitor poached an employee without a non-disclosure agreement/non-competition agreement and is utilizing your company's trade secrets against you.  To top it all off, your company just received a cease-and-desist letter from a corporation on the other side of the country alleging that the company's slogan infringes on their trademark.

These are but a few of the many scenarios that could occur when a company does not take proactive legal measures to protect its goodwill and intellectual property, and was likewise using intellectual property haphazardly and without ensuring that there was no other owner of that intellectual property or that appropriate licensing was obtained.

In an era of global business and the information economy, the names, logos, and slogans of products and services, trade secrets, and other intellectual property often start off with little commercial value, but upon establishing goodwill for the business and/or creating a popular product or service, the value of a trademark can exponentially increase.  For instance, Forbes estimated the value of the trademark for Google® at over $40 billion dollars, or more than one-quarter of the company’s overall value (at the time of the Forbes publication). 

As such, this posting provides a basic overview of the three most common types of intellectual property encountered by small and medium-sized businesses.

Trademarks

Most basically, a trademark is a brand name. A trademark or service mark includes any word, name, symbol, device, or any combination, used or intended to be used, to identify and distinguish the goods/services of one seller/provider from those of others, and to indicate the source of the goods/services.  For instance, the words Facebook® and Microsoft® are both trademarked, as is Apple Computers’ partially bitten apple logo, and both McDonalds’s golden arches and its slogan “I’m loving’ it.”

Because trademarks serve as an indicator of the mark owner’s goodwill, federal trademark law was established to protect the unsuspecting public from confusing products/services and to prevent against attempts by unscrupulous competitors to deceive the public.

Federal trademark rights may be established by either being the first to use a mark in interstate commerce (a Section 1(a) filing), or a prospective mark may be reserved prior to use by filing an intent-to-use application (a Section 1(b) filing).

Although the law generally provides that the first user of the mark is entitled to legal protection, with or without a federal trademark registration, federal registration provides significant additional value as it allows for the ability to recover profits, damages, and costs against infringers, national notice of ownership of the mark, the presumption of the validity of the mark, access to federal courts, as well as incontestability status for the mark after five years of federal registration.  State registrations are also available, but do not offer the national, comprehensive protection of a federal trademark registration.

In light of the significant benefits of federally registering trademarks (names, logos, and slogans), the ever-increasing value of intellectual property and goodwill to all businesses, the need to protect and distinguish a mark from that a competitor, and to avoid claims of infringement, business must look closely at protecting their brand through trademark protection and likewise ensure their marks are not infringing on those of another business.

Copyrights

Similarly, copyrights protect literary, musical, artistic, and dramatic works such as novels, photographs, movies, songs, etc.  Copyrights can also protect creative works outside of the entertainment industry, including articles, blog postings, course materials, designs, graphs, charts, etc.

Unlike a trademark which requires federal filing, a work is copyrighted as soon as it is created.  However, benefits are gained by registering a work with the United States Copyright Office.  Promptly filing the copyright notice allows the holder to file a copyright infringement lawsuit, provides prima facie evidence of the validity of the copyright, and also provides the holder with the ability to obtain certain damages and attorney's fees upon prevailing in a copyright infringement lawsuit.

Conversely, while not all businesses produce copyrightable works, businesses must remain cognizant of utilizing the works of others without appropriate rights or licensing.  The most common scenario for a business being sued for inadvertently infringing copyrights are entertainment/restaurant establishments showing NFL/NHL/MLB games without an appropriate commercial license or playing music without an ASCAP license.  However, businesses can also face infringement actions for using copyrighted images on their website, reproducing a chart, or other seemingly innocuous activities.

In short, creators benefit from copyright protection and should register the works they have created, and business (or anyone else) using copyrighted material should be aware of the licensing requirements prior to using such works in a commercial environment.

Trade Secrets

Trade secrets, confidential information, proprietary information, and the like, encompass a wide variety of information that a business intends to keep secret and which those outside of the business are not afforded access.

Most famously, McDonalds's Big Mac sauce and the recipe for Coca-Cola, are such types of information.  However, more mundane information that almost all businesses utilize may qualify as a trade secret or otherwise necessitate protection from general release to the public.  This includes customer/client lists, vendor/supplier lists, processes, know-how, business plans, marketing plans, information on prospects, customer/vendor habits and preferences, creations, inventions, intellectual property (even if unregistered), etc.

Trade secrets are protected at both the state and federal levels, and many states utilize the Uniform Trade Secrets Act as a basis for defining a trade secret and cause of action thereunder.  While not all proprietary or confidential information constitutes a trade secret under statute, a substantial amount will.  A trade secret is often defined as information with economic value that is not generally known to other persons or is easily ascertainable, and the owner of the information has taken reasonable efforts to maintain its secrecy.

Given the immense value of intellectual property, businesses must take appropriate efforts to safeguard their trade secrets, both ensuring internally that employees do not take such information with them to another employer or otherwise use the information for their own benefit, and externally, so that such information is not otherwise obtained by a competitor. 

Conversely, in hiring an employee or engaging a contractor, a business must ensure that the potential hire/contractor is not disclosing protected trade secrets which will likely drag the business into a lawsuit for trade secret misappropriation.

As such, businesses should identify all of their trade secrets and employ appropriate electronic and physical safeguards to protect such information.  Likewise, businesses should actively utilize confidentiality agreements with anyone privy to the business's trade secrets to further protect against disclosure.

Conclusion

As intellectual property is a key asset to many businesses in the information economy, and is nevertheless important for protection of a business's goodwill, it is essential to proactively protect intellectual property through means of trademark, copyright, or trade secrets protections, and to likewise remain cognizant of the intellectual property of others' so as not to be subject to an infringement action.

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