The Competing Interests of the Non-Compete: Are Employees Who Refuse to Sign Restrictive Covenants Entitled to Whistleblower Status?

Andrew E. Anselmi, Director
Amy C. Grossman, Of Counsel

In our modern economy of corporate acquisitions and work place transience, in-house counsel, employees and litigation counsel daily are dealing with the issue of non-compete agreements and their enforceability. While many states have chosen to address the matter on a case-by-case basis, legal observers have been anxious to discern a trend. New Jersey 's highest court, always looked upon as a leader in employment law, has recently handed a victory to employers in this hard fought battle, which may indicate a national trend toward acceptance of reasonably drawn non-compete agreements.

The Issue

In Maw v. Advanced Clinical Communications, Inc ., 179 NJ 439, 846 A.2d 604 (2004 ), the New Jersey Supreme Court held that an employee who was terminated due to her refusal to sign a non-compete agreement did not state a claim under New Jersey 's Conscientious Employee Protection Act (CEPA), commonly known as its "whistleblower" law. The question for employers nationally is whether other states will adopt the New Jersey Supreme Court's reasoning that non-compete clauses are a private matter between an employee and an employer, or follow the rationale of the dissent, which found that based on public policy that these agreements require less deference and closer scrutiny.

The Facts

Plaintiff Karol Maw worked for Advanced Clinical Communications Inc. (ACCI) as a graphic designer from November 1, 1997 until January 2001, when she was promoted to Senior Graphic Designer. Pursuant to a new company policy passed there after, all employees above the level of coordinator were required to sign a non-compete agreement as a condition of continuing their employment with ACCI. Maw was informed that she could consult counsel about the non-compete, and she did so. When Maw went to see Human Resources about the proposed modifications suggested by her attorney, who was also her father, she was told that no changes could be made. Maw opted not to sign the agreement, and she was terminated in March 2001 for violating company policy. Maw filed suit, alleging violations of New Jersey 's CEPA, as well as common law wrongful termination in violation of public policy. New Jersey 's Law Division dismissed the suit, determining that Maw had failed to state a claim upon which relief could be granted. The Appellate Division reversed, holding that it was premature to dismiss her claim before Maw had an opportunity to develop her claims through discovery.

CEPA's "Clear Mandate of Public Policy" Clause at Center of Case

New Jersey 's CEPA prohibits an employer from "taking any retaliatory action against an employee who objects to, or refuses to participate in any activity, policy or practice which the employee reasonably believes . . . is incompatible with a clear mandate of public policy concerning public health, safety, or welfare or protection of the environment." N.J.S.A. 34: 19-3c(3). In ruling that termination based upon a refusal to sign a non-compete cannot, as a matter of law, rise to the level of a whistleblower cause of action, the Maw Court wrestled with the proper source of a "clear mandate of public policy" pursuant to CEPA. The court found that the law did not envision a "clear mandate" to be found only in statutes, rules or regulations; instead, the court held, such a "clear mandate" suggests an "analog to a constitutional provision, statute or regulation promulgated pursuant to law, such that . . . there should be a high degree of public certitude in respect of acceptable versus unacceptable policy."

The majority in Maw held that the non-compete agreement in dispute was a private matter between Maw and ACCI that did not rise to the level of a CEPA claim because no public policy issue was involved. The court relied heavily upon New Jersey 's Solari/Whitmeyer test, developed in 1970-71, to determine the enforceability of the non-compete agreement. The Solari/Whitmeyer test (which is used many states, including Iowa , New York , Oklahoma and Tennessee ) balances the employer's need for confidentiality of proprietary information against the hardship on the employee. The court found that under Solari and Whitmeyer , New Jersey reached a turning point, abandoning a void per se rule to find that covenants not to compete could be found completely or partially enforceable after application of a multipart and fact-sensitive inquiry. The court emphasized that the plaintiff could have signed the agreement and waited until the employer brought litigation to enforce the agreement. Had she done so, the court stated, she could have asserted as an affirmative defense that the non-compete agreement was too restrictive and unenforceable.

The Dissent's Analysis

After chronicling over four hundred years of jurisprudence, the dissent in Maw explained the disfavor with which most non-compete agreements were looked upon was based on public policy grounds. The Maw Court highlighted Solari Industries v. Malady , 55 NJ 571, 576 (1970), which held that such agreements are only enforceable if they are drawn to "simply protect the legitimate interests of the employer, impose no undue burden on the employee and [are] not injurious to the public," and reiterated its three part test, which recognizes the public's interest as separate and apart from the private interests of the employer and the employee in numerous cases. Ingersoll-Rand v. Ciavatta , 110 NJ 609, 628 (1988); Karlin v. Weinberg ; 77 NJ 408, 411-12 (1978); Whitmeyer Bros. Inc. v. Doyle , 58 NJ 25, 32 (1971).

Further, the dissent recognized that there was a strong public policy consideration in Ciavatta , when the court emphasized the desire to "protect the consuming public from the ‘naked restraints' on the marketplace posed by employer attempts to extinguish competition from a former employee." Maw , dissent at *8 (citing Ciavatta , 110 NJ at 635).

Ultimately, the dissent found that the "better approach" would be to allow a claim under the whistleblower statute when an employee refuses to sign a noncompete based on what he or she believes to be a violation of public policy. The employer could then proffer the reasonableness of the agreement as a defense to the action.

Number of Cases Likely to Increase Nationwide

The well-reasoned opinions of both the majority and dissent in Maw underscore that the validity of covenants not to compete are not susceptible of easy measure. The majority opinion considers these non-compete agreements a private matter between employers and employees, affording employers legitimate protections when reasonably drawn. The dissent makes a persuasive argument that non-compete agreements can significantly affect the consuming public, which can be threatened by the sort of modern-day monopoly that a powerful employer can create by forcing employees with few resources to sign away their ability to compete.

States nationwide, either under their whistleblower statutes or common law public policy doctrines, will have to decide whether these post-employment restrictions are a private consideration or a public detriment. If the Maw majority and dissent are any indication, it appears that the non-compete agreement will continue to be considered a legitimate employer interest for the foreseeable future, though the scrutiny regarding their reasonableness may heighten as the number of cases increases.

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