Kenneth Vercammen is a Middlesex County Trial Attorney who has published 130 articles in national and New Jersey publications on Criminal Law, Probate, Estate and litigation topics.

He was awarded the NJ State State Bar Municipal Court Practitioner of the Year.

He lectures and handles criminal cases, Municipal Court, DWI, traffic and other litigation matters.

To schedule a confidential consultation, call us or New clients email us evenings and weekends via contact box www.njlaws.com.

Kenneth Vercammen & Associates, P.C,

2053 Woodbridge Avenue,

Edison, NJ 08817,

(732) 572-0500

Monday, October 17, 2011

Non-Compete Covenants in Employee Agreements - Don't Let Your Employees Steal Your Clients

Non-Compete Covenants in Employee Agreements - Don't Let Your Employees Steal Your Clients

By Kenneth Vercammen, Esq.

Most businesses spend thousands of dollars developing client lists, training staff and promoting and advertising their businesses. After investing substantial time and money in good will, an owner wants to protect the business from employees attempting to leave and take away accounts. Without a restrictive covenant, an employee can open up a competing business on the same street! An employer does not want to pay an employee to build relationships and develop a business, only for that employee to leave, take the fruits of the employers investment, and compete directly against the employer.

Restrictive covenants are very useful for businesses to prevent an employee from taking your clients and your business. Maw v. Advanced Clinical Communications, Inc 179 N.J. 439, 846 A.2d 1222. (2004) Karol Maw began working for Advanced Clinical Communications, Inc. (ACCI) as a graphic designer on November 1, 1997. ACCI provides marketing and educational services for the pharmaceutical and healthcare industries. Maw had been hired to design written materials used by ACCI in its marketing and educational programs. Maw was promoted to Senior Graphic Designer in January 2001. Thereafter, pursuant to a new company policy, ACCI required all of its employees at or above the level of ³coordinator² to sign a non-compete agreement as a condition of continuing employment. The agreement precluded, among other things, Maw from becoming employed by any competitor or customer of ACCI for a period of two years following the termination of her employment. Maw was informed that she could seek legal advice concerning the employment agreement. Maw consulted her father, an attorney, who suggested changes. Maw presented those revisions to ACCI¹s Human Resource Department but was told that no changes could be made. Maw did not sign the non-compete agreement, prompting her termination by ACCI in March 2001 for failing to comply with company policy.

The private nature of plaintiff¹s dispute notwithstanding, her CEPA claim must fail because our State¹s public policy respecting noncompete agreements is not set forth in a ³clear mandate,² and does not ³concern[] the public health, safety or welfare or protection of the environment.² N.J.S.A. 34:19-3c(3). Over a generation ago, our Court sketched the broad parameters for determining whether a noncompete agreement was unenforceable. Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971); Solari Indus. Inc. v. Malady, 55 N.J. 571 (1970). In Solari, The Court canvassed, much as has the dissent, the historical treatment of noncompete agreements, and acknowledged the previously held negative view of such agreements. 55 N.J. at 575-84. The Court cited academic writings on the topic that elaborated in greater detail on the relation of such agreements to Anglo-American commercial practices. See, e.g., Solari, supra, 55 N.J. at 574-77 (citing Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625 (1960)). But Solari was a turning point, for The Court held then ³that the time is well due for the abandonment of New Jersey¹s void per se rule in favor of the rule which permits the total or partial enforcement of noncompetitive agreements to the extent reasonable under the circumstances.² 55 N.J. at 585. In Whitmyer, supra, The Court expanded on Solari, establishing what is now known as the Solari/Whitmyer test for determining whether a noncompete agreement is unreasonable and therefore unenforceable. Under the Solari/Whitmyer test, a noncompete agreement is enforceable ³if it Œsimply protects the legitimate interests of the employer, imposes no undue hardship on the employee and is not injurious to the public.¹² Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 628 (1988) (quoting Whitmyer, supra, 58 N.J. at 32-33). The first two prongs of the test require a balancing of the employer¹s interests in protecting proprietary and confidential information and the asserted hardship on the employee. Ingersoll-Rand, supra, 110 N.J. at 634-35. The third requires the reviewing court to analyze the public¹s broad concern in fostering competition, creativity, and ingenuity. Id. at 639. Solari/Whitmyer has now become an accepted part of the common law, not only in New Jersey but also in other jurisdictions around the country. Id. at 630-34. Although our dissenting colleagues may contend that do-not-compete provisions are, or should be, per se illegal, in point of fact, they are not illegal per se. It is not accurate to describe our current caselaw, which allows enforcement of reasonable non-compete agreements, as a ³clear mandate² that disfavors such agreements. The Solari/Whitmyer test is a multi-part, fact-intensive inquiry. Not only must multiple interests of differing parties and entities be identified, but also, those interests must be gauged for reasonableness and legitimacy. The application of that test here, and as a general matter, simply does not evoke the type of a ³clear mandate of public policy² that was contemplated by N.J.S.A. 34:19-3c(3). The Court are informed by the amici that non-compete agreements are a common part of commercial employment. The Court do not accept as a premise that employers, in large numbers, are engaging in a practice that is ³indisputably dangerous to the public health, safety or welfare.² Dzwonar, supra, 177 N.J. at 464. It is more appropriate to characterize the business community as having adapted to the Solari/Whitmyer approach that recognizes that noncompete agreements can serve a useful purpose so long as the agreement is not unreasonable. The Court conclude that plaintiff¹s private dispute over the terms of the do-not-compete provision in her employment agreement does not implicate violation of a clear mandate of public policy as contemplated by Section 3c(3) of CEPA. As previously noted, plaintiff did have options available to her. If she could not negotiate terms that were to her liking, she was free to dispute the reasonableness of those terms if and when her employer attempted to enforce the agreement. The burden then would be on the employer to hire counsel and initiate enforcement litigation, Solari, supra, 55 N.J. at 574, and nothing would preclude an employee-defendant in such an action from asserting any and all affirmative defenses and counterclaims. Ingersoll- Rand, supra, 110 N.J. at 621-22

Recently, a State Appellate Division case recognized the importance of confidential information owned by a business. The case of Lamorte Burns v. Walters held employees have a duty of trust and cannot interfere with their employers economic advantage.

HIRE the law office of Kenneth Vercammen & Associates to prepare Restrictive Covenants to deter employees from taking your business. Call 732-906-2180 for a confidential consultation.

The following are some of the provisions we included in 2005 in employment agreements with restrictive covenants. We have revised our employment agreements to include provisions recommended in recent cases.

1. Employment. 1 2. Term of Contract. 1 3. Compensation. 1 4. Adjusted Compensation. 1 5. Extent of Services. 2 6. Vacations. 2 7. Disability. 2 8. Termination. 2 9. Termination Upon Sale of Business. 2 0. Death During Employment. 3 11. Restrictive Covenant. 3 12. Arbitration. 3 13. Notice. 3 14. Waiver of Breach. 3 15. Assignment. 3 16. Entire Agreement. 3

EMPLOYMENT CONTRACT Employer e1 Employee e2 Location of business e3

AGREEMENT, made this ______ day of __________ 20__, between e1. a corporation organized under the laws of New Jersey, having its principal office at e3, New Jersey (hereinafter referred to as "Employer") and e2, residing at ____________________________ (hereinafter referred to as "Employee").

.c.1. Employment.; The Employer hereby employs Employee as ________ of the Employers business at e3, and in that capacity to perform all services necessary to the operation of the business, including retail sales of merchandise and such other related capacities as shall be determined by the Employer.,

.c.2. Term of Contract. ; Employment pursuant to this contract shall commence on ___

.c.3. Compensation. ; The Employer agrees to pay the Employee as compensation for his services the sum of $_____ during the first year of this Agreement; which sum shall be payable in weekly installments of $____ each. During the succeeding years, the Employees compensation shall be determined as hereinafter set forth.

.c.4. Adjusted Compensation. ; During the second and each succeeding year of this Agreement, if the Employee performs services for Employer in accordance with this contract, Employee shall be compensated in the following manner:

(a) Employees salary as specified in Paragraph 3 above shall be increased by 10%, or if the maximum permitted by law is less than 10%, then the percent of increase shall be said maximum lawful increase which shall be payable in approximately equal weekly installments; and

(b) This contract between e1 and e2 is based on two years of satisfactory work performance.

.c.5. Extent of Services.; The Employee shall devote all his time, attention and best efforts to the business of the Employer, and shall not during the term of this Agreement be engaged directly or indirectly in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage; but this shall not be construed as preventing the Employee from investing his assets in such form and manner as will not require any services on the part of the Employee in the operation of the affairs of the companies in which such investments are made.

.c.6. Vacations.; The Employee shall be entitled each year to a vacation of ________ weeks which shall be taken consecutively anytime between June 1 and August 31. During the vacation period, weekly compensation shall be paid pursuant to Paragraph 4(a) above.

.c. 7. Confidential Information; Employee shall not disclose to any person any information concerning the business operation, or internal structure of employer, or the customers or clients of employer. Further, upon leaving the employ of employer for any reason whatsoever, employee shall not take with them, without the prior written consent of employer, any written, graphic of recorded information relating or pertaining to employer or its customers In the event of breach of this agreement or paragraph, employer shall be entitled to an injunction restraining Employee from violating such provision.

.c.8. Termination.; This Agreement shall not be terminated during its term except for just cause upon written notice pursuant to Paragraph 13 infra or with the consent of the Employee. A termination either because of a continuous absence of more 5 days or because of sale of business pursuant to Paragraph 9(a) and (b) shall be considered just cause. Any rights which the Employee may have as a result of his ownership of any shares of the corporation shall not be affected by the termination of his employment.

.c.9. Termination Upon Sale of Business.

(a) Notwithstanding anything herein contained to the contrary, the Employer may terminate this Agreement upon ten days notice to the Employee pursuant to Paragraph 13 prior to the occurrence of any of the following events: (1) The sale by the Employer of substantially all of its assets to a single purchaser or to a group of associated purchasers; (2) the sale, or exchange or other disposition, in one transaction, of two-thirds of the outstanding corporate shares of the Employer; (3) the merger or consolidation of the Employer in a transaction in which the shareholders of the Employer receive less than 50% of the outstanding voting shares of the new or continuing corporation.

(b) Notwithstanding anything herein contained to the contrary, the Employer may also terminate this Agreement by giving notice in the manner provided in Paragraph 13 ten days after making a bona fide lawful decision to terminate its business and liquidate its assets.

1.c.0. Death During Employment.; If the Employee dies during the term of this contract or any renewal thereof, the Employer shall pay to the estate of the Employee the compensation which would otherwise be payable to the Employee up to the end of the month in which the death occurs.

.c.11. Restrictive Covenant. ; For a period of two years after the termination of his employment for any reason, Employee will not, within Middlesex County or any municipality contiguous thereto directly or indirectly, own, manage, operate, conduct, be employed by, participate in, or be connected in any manner with the ownership, management, operation or conduct of any business similar to the type of business being conducted by the employer at the time of the termination of this Agreement.

By Kenneth Vercammen, Esq. Most businesses spend thousands of dollars developing client lists, training staff and promoting and advertising their businesses. After investing substantial time and money in good will, an owner wants to protect the business from employees attempting to leave and take away accounts. Without a restrictive covenant, an employee can open up a competing business on the same street! An employer does not want to pay an employee to build relationships and develop a business, only for that employee to leave, take the fruits of the employers investment, and compete directly against the employer.

Restrictive covenants are very useful for businesses to prevent an employee from taking your clients and your business. Maw v. Advanced Clinical Communications, Inc 179 N.J. 439, 846 A.2d 1222. (2004) Karol Maw began working for Advanced Clinical Communications, Inc. (ACCI) as a graphic designer on November 1, 1997. ACCI provides marketing and educational services for the pharmaceutical and healthcare industries. Maw had been hired to design written materials used by ACCI in its marketing and educational programs. Maw was promoted to Senior Graphic Designer in January 2001. Thereafter, pursuant to a new company policy, ACCI required all of its employees at or above the level of ³coordinator² to sign a non-compete agreement as a condition of continuing employment. The agreement precluded, among other things, Maw from becoming employed by any competitor or customer of ACCI for a period of two years following the termination of her employment. Maw was informed that she could seek legal advice concerning the employment agreement. Maw consulted her father, an attorney, who suggested changes. Maw presented those revisions to ACCI¹s Human Resource Department but was told that no changes could be made. Maw did not sign the non-compete agreement, prompting her termination by ACCI in March 2001 for failing to comply with company policy.

The private nature of plaintiff¹s dispute notwithstanding, her CEPA claim must fail because our State¹s public policy respecting noncompete agreements is not set forth in a ³clear mandate,² and does not ³concern[] the public health, safety or welfare or protection of the environment.² N.J.S.A. 34:19-3c(3). Over a generation ago, our Court sketched the broad parameters for determining whether a noncompete agreement was unenforceable. Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971); Solari Indus. Inc. v. Malady, 55 N.J. 571 (1970). In Solari, The Court canvassed, much as has the dissent, the historical treatment of noncompete agreements, and acknowledged the previously held negative view of such agreements. 55 N.J. at 575-84. The Court cited academic writings on the topic that elaborated in greater detail on the relation of such agreements to Anglo-American commercial practices. See, e.g., Solari, supra, 55 N.J. at 574-77 (citing Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625 (1960)). But Solari was a turning point, for The Court held then ³that the time is well due for the abandonment of New Jersey¹s void per se rule in favor of the rule which permits the total or partial enforcement of noncompetitive agreements to the extent reasonable under the circumstances.² 55 N.J. at 585. In Whitmyer, supra, The Court expanded on Solari, establishing what is now known as the Solari/Whitmyer test for determining whether a noncompete agreement is unreasonable and therefore unenforceable. Under the Solari/Whitmyer test, a noncompete agreement is enforceable ³if it Œsimply protects the legitimate interests of the employer, imposes no undue hardship on the employee and is not injurious to the public.¹² Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 628 (1988) (quoting Whitmyer, supra, 58 N.J. at 32-33). The first two prongs of the test require a balancing of the employer¹s interests in protecting proprietary and confidential information and the asserted hardship on the employee. Ingersoll-Rand, supra, 110 N.J. at 634-35. The third requires the reviewing court to analyze the public¹s broad concern in fostering competition, creativity, and ingenuity. Id. at 639. Solari/Whitmyer has now become an accepted part of the common law, not only in New Jersey but also in other jurisdictions around the country. Id. at 630-34. Although our dissenting colleagues may contend that do-not-compete provisions are, or should be, per se illegal, in point of fact, they are not illegal per se. It is not accurate to describe our current caselaw, which allows enforcement of reasonable non-compete agreements, as a ³clear mandate² that disfavors such agreements. The Solari/Whitmyer test is a multi-part, fact-intensive inquiry. Not only must multiple interests of differing parties and entities be identified, but also, those interests must be gauged for reasonableness and legitimacy. The application of that test here, and as a general matter, simply does not evoke the type of a ³clear mandate of public policy² that was contemplated by N.J.S.A. 34:19-3c(3). The Court are informed by the amici that non-compete agreements are a common part of commercial employment. The Court do not accept as a premise that employers, in large numbers, are engaging in a practice that is ³indisputably dangerous to the public health, safety or welfare.² Dzwonar, supra, 177 N.J. at 464. It is more appropriate to characterize the business community as having adapted to the Solari/Whitmyer approach that recognizes that noncompete agreements can serve a useful purpose so long as the agreement is not unreasonable. The Court conclude that plaintiff¹s private dispute over the terms of the do-not-compete provision in her employment agreement does not implicate violation of a clear mandate of public policy as contemplated by Section 3c(3) of CEPA. As previously noted, plaintiff did have options available to her. If she could not negotiate terms that were to her liking, she was free to dispute the reasonableness of those terms if and when her employer attempted to enforce the agreement. The burden then would be on the employer to hire counsel and initiate enforcement litigation, Solari, supra, 55 N.J. at 574, and nothing would preclude an employee-defendant in such an action from asserting any and all affirmative defenses and counterclaims. Ingersoll- Rand, supra, 110 N.J. at 621-22

Recently, a State Appellate Division case recognized the importance of confidential information owned by a business. The case of Lamorte Burns v. Walters held employees have a duty of trust and cannot interfere with their employers economic advantage.

HIRE the law office of Kenneth Vercammen & Associates to prepare Restrictive Covenants to deter employees from taking your business. Call 732-906-2180 for a confidential consultation.

The following are some of the provisions we included in 2005 in employment agreements with restrictive covenants. We have revised our employment agreements to include provisions recommended in recent cases.

1. Employment. 1 2. Term of Contract. 1 3. Compensation. 1 4. Adjusted Compensation. 1 5. Extent of Services. 2 6. Vacations. 2 7. Disability. 2 8. Termination. 2 9. Termination Upon Sale of Business. 2 0. Death During Employment. 3 11. Restrictive Covenant. 3 12. Arbitration. 3 13. Notice. 3 14. Waiver of Breach. 3 15. Assignment. 3 16. Entire Agreement. 3

EMPLOYMENT CONTRACT Employer e1 Employee e2 Location of business e3

AGREEMENT, made this ______ day of __________ 20__, between e1. a corporation organized under the laws of New Jersey, having its principal office at e3, New Jersey (hereinafter referred to as "Employer") and e2, residing at ____________________________ (hereinafter referred to as "Employee").

.c.1. Employment.; The Employer hereby employs Employee as ________ of the Employers business at e3, and in that capacity to perform all services necessary to the operation of the business, including retail sales of merchandise and such other related capacities as shall be determined by the Employer.,

.c.2. Term of Contract. ; Employment pursuant to this contract shall commence on ___

.c.3. Compensation. ; The Employer agrees to pay the Employee as compensation for his services the sum of $_____ during the first year of this Agreement; which sum shall be payable in weekly installments of $____ each. During the succeeding years, the Employees compensation shall be determined as hereinafter set forth.

.c.4. Adjusted Compensation. ; During the second and each succeeding year of this Agreement, if the Employee performs services for Employer in accordance with this contract, Employee shall be compensated in the following manner:

(a) Employees salary as specified in Paragraph 3 above shall be increased by 10%, or if the maximum permitted by law is less than 10%, then the percent of increase shall be said maximum lawful increase which shall be payable in approximately equal weekly installments; and

(b) This contract between e1 and e2 is based on two years of satisfactory work performance.

.c.5. Extent of Services.; The Employee shall devote all his time, attention and best efforts to the business of the Employer, and shall not during the term of this Agreement be engaged directly or indirectly in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage; but this shall not be construed as preventing the Employee from investing his assets in such form and manner as will not require any services on the part of the Employee in the operation of the affairs of the companies in which such investments are made.

.c.6. Vacations.; The Employee shall be entitled each year to a vacation of ________ weeks which shall be taken consecutively anytime between June 1 and August 31. During the vacation period, weekly compensation shall be paid pursuant to Paragraph 4(a) above.

.c. 7. Confidential Information; Employee shall not disclose to any person any information concerning the business operation, or internal structure of employer, or the customers or clients of employer. Further, upon leaving the employ of employer for any reason whatsoever, employee shall not take with them, without the prior written consent of employer, any written, graphic of recorded information relating or pertaining to employer or its customers In the event of breach of this agreement or paragraph, employer shall be entitled to an injunction restraining Employee from violating such provision.

.c.8. Termination.; This Agreement shall not be terminated during its term except for just cause upon written notice pursuant to Paragraph 13 infra or with the consent of the Employee. A termination either because of a continuous absence of more 5 days or because of sale of business pursuant to Paragraph 9(a) and (b) shall be considered just cause. Any rights which the Employee may have as a result of his ownership of any shares of the corporation shall not be affected by the termination of his employment.

.c.9. Termination Upon Sale of Business.

(a) Notwithstanding anything herein contained to the contrary, the Employer may terminate this Agreement upon ten days notice to the Employee pursuant to Paragraph 13 prior to the occurrence of any of the following events: (1) The sale by the Employer of substantially all of its assets to a single purchaser or to a group of associated purchasers; (2) the sale, or exchange or other disposition, in one transaction, of two-thirds of the outstanding corporate shares of the Employer; (3) the merger or consolidation of the Employer in a transaction in which the shareholders of the Employer receive less than 50% of the outstanding voting shares of the new or continuing corporation.

(b) Notwithstanding anything herein contained to the contrary, the Employer may also terminate this Agreement by giving notice in the manner provided in Paragraph 13 ten days after making a bona fide lawful decision to terminate its business and liquidate its assets.

1.c.0. Death During Employment.; If the Employee dies during the term of this contract or any renewal thereof, the Employer shall pay to the estate of the Employee the compensation which would otherwise be payable to the Employee up to the end of the month in which the death occurs.

.c.11. Restrictive Covenant. ; For a period of two years after the termination of his employment for any reason, Employee will not, within Middlesex County or any municipality contiguous thereto directly or indirectly, own, manage, operate, conduct, be employed by, participate in, or be connected in any manner with the ownership, management, operation or conduct of any business similar to the type of business being conducted by the employer at the time of the termination of this Agreement.

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