As States continue to diverge in their interpretation and enforcement of restrictive covenant agreements, it is now more important than ever to ensure those agreements are drafted to conform with jurisdiction-specific laws.
Main Types Of Restrictive Covenants
There are generally four main categories of restrictive covenants to consider in employment agreements: non-compete- meaning a former employee cannot work for a competitor within a specific geographic scope and time period; non-solicitation of customers-often with a time period restriction and sometimes with a specific geographic scope; non-solicitation of employees-normally with a specific time period restriction; and non-disclosure of trade secrets or confidential information-which normally have no time limits.
Oftentimes employers doing business throughout the country enter into form restrictive covenant agreements without acknowledging the nuanced laws of each respective state. Recently, in Nuvasive v. Miles, Civ. No. 2017-0720-SG, 2018 WL 4677607 (Del. Ch. Sept. 28, 2018), a Delaware court struck down a California employer’s noncompete provision under California law, despite a choice of law provision in the agreement declaring that it would be governed under Delaware law. Critically, the court relied on California law that prohibits such choice of law provisions in restrictive covenant agreements unless the employee is represented by counsel, which in this case, Miles was not. As a result, the Delaware court interpreted the noncompete provision under California law, which is significantly more restrictive than in Delaware.
Even regional businesses should consider tailoring their restrictive covenant agreements to conform with each neighboring states’ laws. For example, restrictive covenants for insurance brokers working in New York and New Jersey are subject to different requirements to remain enforceable.
New Jersey Case Law Specific To Insurance Industry
New Jersey does not have robust case law directly addressing restrictive covenants in the context of insurance brokers, but there is some guidance. In Grinspec, Inc. v. Lance, a broker was required to sign an updated restrictive covenant agreement as a condition of continued employment. A-3313-01T1, 2002 WL 32442790 (App. Div. Aug. 13, 2002), certif. denied, 178 N.J. 251 (2003). However, because the broker was terminated only four months later without any evidence of declining performance or misconduct in that timeframe, the court held there was inadequate consideration for the new agreement to be enforceable. To establish consideration in this context, the court held that the continued employment must be for a “substantial period,” which will depend on the facts and circumstances of each case.
Some courts have also considered restrictive covenants in the context of the sale of insurance business. In Peek v. Johl & Co. Inc., the sale of an insurance business included a five-year restrictive covenant limiting the sellers’ ability to compete with the purchaser. A-0499-10T4, 2012 WL 6115678 (App. Div. Dec. 11, 2012). The New Jersey Appellate Division upheld the restrictive covenant and concluded that it may be a material term of an agreement for the sale of an insurance business. In Ascencea, L.L.C. v. Zisook, Civ No. 08-5339, 2011 WL 12017 (D.N.J. Apr. 5, 2011), the District Court for the District of New Jersey held that rights under restrictive covenants can be assigned to a purchasing business entity in connection with the sale of a business.
Recently, the District Court in New Jersey considered a restrictive covenant agreement in Allstate Life Ins. Co. v. Stillwell, Civ. No. 15-8251, 2019 WL 2743697 (D.N.J. May 16, 2019). The court upheld the agreement which contained non-solicitation and non-compete provisions lasting one year from termination of employment, as well as a blanket prohibition for any competition within one mile of the employer. The agreement also contained provisions regarding protection of the employer’s confidential information and trade secrets.
Notwithstanding the lack of case law in New Jersey specific to brokers, Courts in New Jersey tend to enforce restrictive covenant agreements that are reasonable in terms of geographic scope and time restrictions, if they protect a legitimate interest such as trade secrets, confidential business information, or customer relationships. Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971); ADP, LLC v. Rafferty, 92 F.3d 113 (3d Cir. 2019); ADP LLC v. Kusins, 460 N.J. Super. 368 (App. Div. 2019). An employer’s legitimate interests includes “highly specialized, current information not generally known in the industry . . . which the employee has [obtained] solely due to his employment.” Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609 (1988).
New York Case Law
In New York, restrictive covenants are enforceable where necessary to protect against disclosure or use of trade secrets or confidential information, or where an employee’s services are “special or unique.” Ticor Title Ins. Co. v. Cohen, 173 F.3d 63 (2d Cir. 1999). An employer also has a legitimate interest in “preventing former employees from exploiting or appropriating the goodwill of a client or customer, which had been created and maintained at the employer’s expense, to the employer’s competitive detriment.” BDO Seidman v. Hirshberg, 690 N.Y.S.2d 854 (1999).
Note however that the basis of upholding a restrictive covenant in New York based upon the special or unique services rather than to prevent disclosure of trade secrets or confidential customer information is particularly difficult in the context of brokers because New York courts have not found them to be “special or unique” per se. See Veramark Tech., Inc. v. Bouk, 10 F.Supp.3d 395 (W.D.N.Y. 2014) (evidence was “wholly insufficient to transform Mr. Bouk from an ordinary salesman into a unique employee” despite being the employer’s highest-ranking sales executive); Marsh USA, Inc. v. Alliant Ins. Servs., Inc. 26 N.Y.S.3d 725 (Sup. Ct. 2015) (“Insurance brokers are generally not considered to be unique or extraordinary employees.”).
Indeed, the standard for an employee to be special or unique is so high that an employer must show “his services are of such character as to make his replacement impossible or that the loss of such services would cause the employer irreparable injury.” Reed Elsevier, Inc. v. Transunion Holding Co., Inc., Civ. No. 13-8739, 2014 WL 97317 (S.D.N.Y. Jan. 9, 2014). Nonetheless, “unique” employees can include brokers whose services are “unique based on their unique relationships with the customers with whom they deal.” Id. In Reed, the court would not enforce a restrictive covenant against a manager of salespersons as a “unique” employee, because it was not established that he had sufficient client relationships.
Once a legitimate interest is established, a restrictive covenant must still be “reasonable” under New York law. Similarly to New Jersey, the geographic scope and time restrictions of a restrictive covenant are important considerations in determining whether a restrictive covenant is reasonable. Distinct from New Jersey, there is a line of case law in New York, which suggests that restrictive covenants should not be enforced against employees terminated without cause. See e.g. SIFCO Industries, Inc. v. Advanced Plating Technologies, Inc., 867 F. Supp 155, 158 (S.D.N.Y. 1994). However, New York courts are not uniform in this view and the Second Circuit has cautioned against a bright line rule. Hyde v. KLS Prof’l Advisors Group, LLC, 500 F. App’x 24 (2d Cir. 2012).
As the legal landscape for restrictive covenant agreements continues to evolve and become more distinct on a jurisdictional basis, insurance employers should be mindful of crafting restrictive covenant agreements that are narrowly tailored to conform with each jurisdiction’s requirements.