Restrictive Covenants and Non-Compete Agreements
Restrictive covenants are clauses in contracts where the parties agree that one or both of the parties agree to restrict their ability to act in certain ways during or after the term of the contract. There are a variety of restrictive covenants, such as “non-poaching” agreements, were a party agrees not to employ the other party’s employees; non-disclosure agreements, or NDAs, where the parties agree not to disclose the other’s confidential information or trade secrets; and non-solicitation agreements, where one or more of the parties agree not to solicit or do business with the
In the employment context, the most common restrictive covenant is a non-competition agreement, in which an employee agrees that during or after their employment with the other party, they agree not to compete against it. Restrictive covenants are enforceable under New Jersey employment law, provided they meet certain requirements. The Appellate Division of the Superior Court of New Jersey recently addressed when an employee may challenge the validity of a non-compete agreement in court in the case of Ondik vs. Princeton Eye and Ear, LLC.
The Ondik Case
Dr. Michael Ondik, M.D. was physician with Princeton Eye and Ear, LLC (“Princeton”). He was employed pursuant to an employment contract which contained a non-compete agreement. The non-compete agreement was to last five years after he left the practice, and prohibited him from engaging in the same practice area within twenty miles of its offices or any hospital where the practice held privileges.
He gave notice that he did not intend to renew his employment contract when it expired and sought permission from Princeton to work for Hunterdon Otolaryngology & Allergy Associates (“Hunterdon”). Permission was needed because Hunterdon was 19.23 miles from Princeton’s offices in Lawrenceville, and 17.22 miles was from Hopewell Hospital where Princeton had privileges.
Princeton denied Dr. Ondik’s request. Princeton also sent a letter to Hunterdon explaining that it was aware that Hunterdon was considering hiring Dr. Ondik, advised it of the non-compete agreement, and explained that it would take all necessary steps to enforce its non-competition agreement with Dr. Ondik should Hunterdon hire him.
The Lawsuit
The procedural history is a little more complex, but essentially after Princeton’s denial and before he left its employment, Dr. Ondik filed a lawsuit in the Chancery Division of the Superior Court of New Jersey seeking to have the court declare the non-compete agreement invalid, and for the court to issue a temporary restraining order prohibiting Princeton from enforcing the non-compete agreement while the litigation was pending. The judge denied the request for the restraining order and dismissed the lawsuit without prejudice. The judge explained in his decision that because Dr. Ondik was still employed by Princeton there was not yet an actual controversy, a requirement for the court to have jurisdiction. However, the dismissal was without prejudice meaning that Dr. Ondik could refile after he left employment and was actually affected by Princeton’s actions. The judge did not reach the issue of the validity of the non-compete agreement. This effectively meant that Dr. Ondik had to leave his job without knowing whether Hunterdon would still hire him, and whether or not Princeton would take action to enforce the agreement, i.e., whether he would have a job—not exactly a great position when you have medical school loans and a mortgage.
The Appellate Division’s Opinion
Dr. Ondik appealed the dismissal and refusal to grant the restraining order to the Appellate Division.
Princeton argued that because the dismissal was without prejudice the order was not final and could not be appealed – in other words, that once again Dr. Ondik would be left with no remedy but to quit and take his chances. The Appellate Division disagreed.
The Court explained that the denial of permission and letter to Hunterdon were steps to enforce the non-compete agreement and restrict Dr. Ondik’s ability to work after he left employment with Princeton. Moreover, there were disputes as to whether Dr. Ondik still had a job offer from Hunterdon and whether he accepted a different position out-of-state.
Therefore, the Appellate Division remanded the case back to the Chancery Division to consider whether the non-compete agreement was valid under New Jersey employment law under the test established by the New Jersey Supreme Court in the case of Solari Industries vs. Malady. That test requires courts to determine whether a restrictive covenant protects the employer’s legitimate interests, imposes no undue hardship on the employee, and does not injure the public. Subsequent cases have explained that because the employee has a right to make a living, undue hardship is measured by a combination of geographic area, length of time the restriction is in effect, and how wide the scope of the restriction is. If any portion of the agreement is found to be invalid, it will be rewritten (or “blue penciled”) to remove the offending portion but leave the rest of the agreement in place; if blue penciling cannot save the non-compete agreement the court will void it and declare it unenforceable.
The Takeaway
Here the Appellate Division found that the employer’s action hindered the employee’s ability to make a living even though he was still employed by it. Essentially, the court found that since the employer was actively taking action to limit the ability of Dr. Ondik to work, even though he was still employed, the Chancer Division judge needed to review the case to determine if the provision in the agreement was valid. Thus, when an employer acts to enforce a non-compete agreement the courts will give the employee a venue to seek relief.
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Our New Jersey employment attorneys represent employees and employers in all aspects of employment law, including negotiating and drafting employment contracts and restrictive covenants, and litigation over their enforceability and breach. Call us at (973) 890-0004 or fill out the contact form on this page. We can help.