New Jersey Law Favors Free Competition by Former Employees in the Absence of a Valid Written Restrictive Covenant

New Jersey Law Favors Free Competition By Former Employees In The Absence Of A Valid, Written Restrictive Covenant, But An Employee May Not Violate His Duty Of Loyalty By Soliciting Customers Or Co-Employees While Still Working For The First Employer

 

Under New Jersey law a former employee may properly and legally compete with his former employer, in the absence of a contractual covenant not to compete. The former employee may properly and legally solicit the customers of his former employer in order to compete for their business. United Board & Carton Corp. v. Britting, 63 N.J. Super. 517 (Ch. Div. 1959), aff’d and mod. Other gr., 61 N.J. Super 340 (App. Div. 1960), certif. Den. 33 N.J. 326 (1960); Midland-Ross Corporation v. Yokana, 185 F.Supp. 594 (D.N.J. 1960), aff’d 293 F.2d 411 (3 rd Cir. 1961) – applying New Jersey law.

A noted jurist in New Jersey, Vice Chancellor Jayne, dismissed an application for a preliminary injunction and Order To Show Cause in Abalene Exterminating Co. of N.J. v. Elges, 137 N.J. Eq. 1, 43 A.2d 165 (Ch. 1945) noting that the application “occupies a doubtful place in the family of available equitable remedies.” Judge Jayne explained the applicable rules and applied them as follows:

It has long been the settled and frequently repeated general rule in our jurisdiction that ‘in the absence of a restrictive covenant, and when no fraud is practiced, a former employee will not be enjoined from soliciting the customers of his former employer.’ The law distinguishes between an employee pirating his employer’s trade by fraudulent means, and honestly competing with him for it. (Citations omitted).

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To catalog the employee’s own knowledge of his employer’s customers in a simple artless business as a ‘trade secret’ or ‘confidential information’ and thus perpetually enjoin the employee from thereafter honestly soliciting business from such customers in a competitive enterprise seems to me at the moment to be an unreasonable restraint of trade unsupported by any dominant social or economic justification.

Thus, the rule is that an employee can take away from his job all of the knowledge and general experience, all of the skill, and all of the information which is acquired by him during the course of his employment and which is not a true trade secret. Sun Dial Corporation v. Rideout, 16 N.J. 232 (1954).

A good example of a case in which the employees crossed the line is found in United Board & Carton Corp. v. Britting, supra . In that case the employees secretly began to compete and to operate their competitive business while they were still employed by the plaintiff. That represents a clear violation of the duty of loyalty of the employee. Under New Jersey law an employee is permitted to make preparations to enter into a new business, such as by organizing his corporation, but may not begin to solicit business and may not begin to actively compete while he remains an employee. In United Board & Carton Corp., supra, the employee surreptitiously took customers’ dyes from the employer, solicited customers while they were employees, and suddenly resigned enmasse pursuant to a secret agreement among themselves, leaving the employer without a single one of its key sales personnel and without many of its principal customers. In that case, the court imposed a two year injunction against the employees, restraining them from doing business with the customers who they had stolen while in the plaintiff’s employ. Even under the egregious circumstances of that case, however, the court held that defendant should not be prohibited from competing forever: “The defendant should not be kept out of competition forever, for such a policy would destroy free enterprise and the wholesome benefits which fair and honest competition creates.”

The strong public policy in New Jersey is to foster and encourage free competition, and to encourage the right of employees to seek better business opportunities. Whitenmeyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971). The policy is so strong, that it can prevent the issuance of an injunction even when the defendants have acted wrongfully. Thus, in Wear-Ever Aluminum v. Townecraft Ind., 75 N.J. Super. 135 (Ch. Div. 1962), the court found that the defendants had “maliciously interfered with the plaintiff’s existing contractual and advantageous relations with its distributors and dealers, and its advantageous relation with its assistant manager and managers, . . .” Notwithstanding that finding, the court refused to grant injunctive relief on the grounds that to do so would interfere with the freedom of the third party dealers and distributors to seek better business opportunities.

The applicable rules were succinctly expressed in Auxton Computer Enterprises, Inc. v. Parker, 174 N.J. Super. 418 (App. Div. 1974), as follows:

“It is clear, then in light of these general principles, that the employee owes a duty of loyalty to the employer, and the employee must not, while employed, act contrary to the employer’s interests. Equally clear is the proposition that the employee is entitled to make ‘arrangements’ for some new employment by a competitor and should be given some latitude in this regard.”

In Auxton supra, the employer filed an action against a former employee alleging that the employee breached his duty of loyalty, interfered with the employer’s prospective economic advantages and engaged in unfair competition. The employer also sued the competitor who hired the former employee and the President of the competitor alleging that they had induced the employee to violate his duty of loyalty by soliciting business for the competitor while the employee was still in the plaintiff’s employ. The case against the competitor and the competitor’s President was settled before it reached the Appellate Division. The Appellate Division affirmed the judgement against the employee, Mr. Parker. In relevant part the court held:

“An employee who is not bound by a covenant not to compete after the termination of employment, and in the absence of any breach of trust, may anticipate the future termination of his employment, and while still employed, make arrangements for some new employment by a competitor or the establishment of his own business in competition with his employer. The only restriction to such action is that he may not solicit his employer’s customers for his own benefit before he has terminated his employment. Nor may he do other similar acts in direct competition with the employer’s business. This would constitute a breach of the undivided loyalty which the employee owes to his employer while he is still employed.” (Citations omitted).

For an employer, it is clear that protection can only be adequately maintained through a written agreement with key employees which restricts their right to compete after termination of employment for a period of time and within a geographic area which is necessary and reasonable in order to protect the legitimate competitive interests of the employer. Drafting these restrictive covenants is an essential protective measure for every employer. Making sure that these agreements go no further than absolutely necessary to protect the legitimate interests of the employer is an essential concern of every employee. In most cases a fair reasonable balance of the competing interests can be achieved. What is really required is a clear understanding by the draftsman of the applicable law, and a frank recognition by the parties of the material, realistic and practical needs and interests of each of the parties.

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