Overly Broad Restrictive Covenants Lose Their Bite
ADP, a well-known payroll company, has been aggressively enforcing restrictive covenant agreements with former employees in the Third Circuit, which includes federal courts in Delaware, New Jersey, and Pennsylvania. The good news for employers is ADP has been winning (for the most part)! The key to their success is remembering that pigs get slaughtered. In each case, the analysis is who is the pig?
Traditionally, when ADP hired sales representatives, it had them sign a non-disclosure agreement which included a provision prohibiting the employee from soliciting ADP clients with whom they were “involved or exposed” for one year after leaving the company. Then, if the sales representative was a high performer, ADP had them sign another agreement to participate in the stock award program. This second agreement extended this solicitation prohibition from clients to prospective clients, a much broader restriction. The latter agreement also prohibited the employee from working for a competing business in the employee’s current territory.
In the most recent litigation, ADP argued two former high performing sales representatives should be prohibited from working in their former territories in any way, having signed the more stringent restrictive covenants. In attempting to have the agreements enforced, ADP argued it was not trying to put the employees out of a job. They could cover other states they had not covered for ADP. Counsel for the former employees argued the restriction should be limited to the employees’ former ADP clients, not the whole territory, because ADP had no reasonable interest in preventing them from soliciting potential customers who never chose to work with ADP. The current case is still pending but the ADP litigation offers good lessons and reminders for employers.
The rub in restrictive covenants is the issue of reasonableness. The more broadly the restrictions are written the less likely a court is to enforce them unless there is a very strong reason. Courts are loath to prevent someone from earning a livelihood for their family.
In this case, the key will be if “high performance” is enough to justify the extra restriction. ADP will argue it “created” such great salespeople by investing in them and therefore ADP has a right to the greater restriction. If the court is not convinced, the employees will likely win. Time will tell if the wording of the agreements and the facts justify this stricter enforcement.
Brody and Associates regularly provides counsel on employment agreements, covenants not to compete, and employment litigation in general. If we can be of assistance in this area, please contact us at firstname.lastname@example.org or 203.454.0560.
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