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The Garden State Law Podcast discusses all things legal in the state of New Jersey. Presented by lawyers from Saiber LLC, the Garden State Law Podcast highlights trending topics in litigation, transactional law, real estate, and more.
00:00:04:06 - 00:00:26:23
Tim Lough
Good afternoon and welcome to the Garden State Law Podcast. I'm your host, Tim Lough, Director of Business Development and Marketing of Saiber LLC, a full service law firm headquartered in Florham Park, New Jersey. Today, I'm joined by John “Jack” Losinger. Jack is a commercial litigator with Saiber, concentrating his practice on commercial disputes with a specific focus on the violation of restricted covenants and the misappropriation of trade secrets and confidential information.
00:00:27:01 - 00:00:28:07
Tim Lough
Jack, thank you for joining us today.
00:00:28:09 - 00:00:29:15
John "Jack" Losinger
Thank you, Tim. Happy to be here.
00:00:30:02 - 00:00:55:24
Tim Lough
Today we will be discussing one of Jack's specialties, and that is restricted covenants. If you’ve been keeping an eye on the news recently, you may have noticed that there are several pieces of federal and state legislation that may impact the enforceability of restricted covenants, including non-compete and non-solicitation agreements. So, Jack, before we get into detail about the pending legislation, can you please give us a high level overview of some of the different types of restrictive covenants and how they're used by employers?
00:00:55:28 - 00:01:15:25
John "Jack" Losinger
Sure. Just to give like a 30,000 foot view of the kind of the most common restrictive covenants that we see. The first is a non-competition agreement or a non-compete, and that's simply an agreement between an employer and an employee that says when the employee leaves the company, he or she can't go work for a competitor. That's a non-compete.
00:01:16:10 - 00:01:46:01
John "Jack" Losinger
A non-solicitation isn't agreement that says when the employee leaves, he or she can't steal the employer's customers. You can't solicit the customers of the old employer when you go work for a new company. That's a non-solicitation agreement. A non-disclosure agreement is an agreement where the employee agrees that when he or she leaves the company, he won't disclose the company's proprietary or confidential information.
00:01:46:06 - 00:02:11:19
John "Jack" Losinger
A non-disparagement agreement is an agreement that says when the employee leaves, he or she won't disparage or badmouth the prior employer. That's a non-disparagement agreement. And those are kind of the four most basic restrictive covenants we see. Oftentimes, you'll see them all in the same document and oftentimes that document is just referred to generally as a non-compete, but it includes all four of those restrictive covenants oftentimes.
00:02:11:21 - 00:02:20:06
Tim Lough
Okay. So now that we have a better understanding of different type of restrictive covenants, what is the current state of the possibility of restrictive covenants, for example, of non-compete agreements?
00:02:20:16 - 00:03:01:09
John "Jack" Losinger
Well, non-compete agreements are generally governed by state contract law. So so here in New Jersey, the current state of the law is that a non-compete agreement can be enforceable just as a matter of contract law, and it will be enforced by the court if it's reasonable. And that, of course, is a question for the court to decide and what the court does in determining if a non-compete is reasonable is it does a balancing test between the hardship placed on the employee for having to to not compete for a period of time versus the legitimate business interests of the employer and having that employee not compete for a period of time.
00:03:01:22 - 00:03:20:24
John "Jack" Losinger
And the court will look at things like the geographic scope of the non-compete. You know, are you saying that this person can't compete nationwide? Is it restricted to the Northeast? Is it restricted to a certain county? And it will look at the the timeframe of the of the non-compete? Is it a year? Is two years is six months.
00:03:22:10 - 00:03:59:03
John "Jack" Losinger
There's no bright line rule, but usually anything over a year the court starts to get worried about it. But the bottom line is, is the court will do this balancing test. And if it determines that the non-compete is overly broad or unduly burdensome on the employee, it can do what we call is blue, blue pencil the agreement and narrow it to a point where it is reasonable and decide, okay, what's reasonable under these circumstances is say, six months within the state of New Jersey or some reasonable scope of the non-compete.
00:03:59:11 - 00:04:16:02
John "Jack" Losinger
But the court will look at the individual factors of each case in making that determination. And it's a fact by fact analysis which is different for each company, each employee. And if it's all just a balancing test, but that's that's the current state of the law in New Jersey in terms of enforcing non-compete.
00:04:16:15 - 00:04:24:07
Tim Lough
So this has been a pretty hot topic here in the Garden State specifically because there is some proposed legislation currently. Can you walk us through the proposed legislation?
00:04:24:10 - 00:04:52:05
John "Jack" Losinger
Sure. There's there's legislation that has been proposed in New Jersey. It's the number of it is a3715, but that's been pending for some time. And it's unclear if it will gain steam and ultimately be passed. But the proposed legislation would limit the scope of non-compete in New Jersey. And one way that it would limit it is there would be a bright line rule in terms of the geographic scope of a non-compete.
00:04:52:05 - 00:05:16:22
John "Jack" Losinger
It could only apply to the state of New Jersey. So you couldn't make it broader than that. You could only say an employee cannot compete with you within the state of New Jersey. So, for example, if a company had an employee in Bergen County who did work in New Jersey and in New York, a non-compete with that employee could only limit he or she from working in New Jersey, the employee would be able to go across the river and work in New York.
00:05:17:02 - 00:05:42:10
John "Jack" Losinger
So that would be one significant change to non-compete. So if the legislation were to pass, another very significant piece of the legislation is that it would have a garden leave requirement, which means if a company is going to enforce a non-compete, it will have to pay the employee full salary and full benefits for the period of time that that employee is sitting out.
00:05:42:18 - 00:05:55:01
John "Jack" Losinger
Currently, that can be negotiated and sometimes it's done, but it's not mandated. And under this proposed legislation, it would be mandatory. So if you want an employee to sit out and not compete with you, you have to pay them for that time.
00:05:55:11 - 00:06:03:02
Tim Lough
And to be clear, garden leave doesn't necessarily mean a week or two. This could be upwards of six months, eight months or even a year. Is that correct? Well, it would be.
00:06:03:02 - 00:06:19:07
John "Jack" Losinger
However long the employer wants the employee to sit out and not compete. So, yeah, it could be a year if the employer says, I don't want this employee competing with me for a year, then you would have to pay that employee a full year of salary and benefits.
00:06:19:26 - 00:06:27:00
Tim Lough
Okay. So that's how the pending legislation in New Jersey would impact non-competes. How would it impact non-solicitation agreements?
00:06:27:07 - 00:06:55:20
John "Jack" Losinger
So under the proposed legislation, non-solicitation agreements would remain enforceable, but only to the extent that the former employee solicits or initiates contact with the customer. So if an employee were to leave a company and have a non-solicitation agreement in place, it would only be enforceable if the employer could show that that employee initiated the contact with the customer.
00:06:56:11 - 00:07:17:21
John "Jack" Losinger
So in my mind, that's where the future of the litigation would be if this legislation were to pass. It would be the factual dispute of whether or not the former employee initiated the contact with the customer. You know, it would be a debate of I didn't initiate the contact with the customer. The customer came to me. You know, I saw her in the grocery store and she said, Where have you been?
00:07:17:21 - 00:07:27:12
John "Jack" Losinger
And now I have this new business. I didn't initiate it. And that would be, I think, the the future of the litigation. You know, if the proposed legislation in New Jersey were to pass.
00:07:27:20 - 00:07:33:16
Tim Lough
Okay. So that's proposed legislation in New Jersey. There's also a few things going on, a federal law, is that correct?
00:07:33:22 - 00:08:19:28
John "Jack" Losinger
Yeah. So the the what's been in the news most recently and has been getting a lot of press coverage is the Federal Trade Commission's the FTC's proposed rule. And under the FTC's proposed rule non-compete agreements would be banned nationwide. They would be unenforceable across the nation and very significantly, this would apply retroactively to existing non-compete. So if employees have a non-compete, if this proposed rule were to be enacted, employers would be obligated to inform their employees who have non-compete so that the non-compete is no longer enforceable and that they're free to to work anywhere.
00:08:20:20 - 00:08:49:03
John "Jack" Losinger
So it would completely, you know, eviscerate the concept of non-compete agreements. There are few exceptions under the proposed rule that have to do with sale of a business and non-compete could conceivably still exist if you were to sell your business. But in the general employer employee context, the proposed rule would eliminate non-compete and it would also eliminate what they're calling de facto non-compete.
00:08:49:11 - 00:09:05:28
John "Jack" Losinger
So if there was a non-solicitation agreement that was overly broad, it could be considered a de facto non-compete and would also be unenforceable under the proposal the FTC's proposed rule.
00:09:06:18 - 00:09:12:11
Tim Lough
So as a follow up to that, does there do you believe that the FTC has the authority to do this?
00:09:13:18 - 00:09:44:00
John "Jack" Losinger
That's it's an interesting question, Tim, and that's it's being hotly debated as we speak right now. It's a it's a bigger question for a much longer podcast than this one. But there is certainly a question as to whether the FTC is overstepping its constitutional authority in passing such a sweeping, broad rule that will completely upend state contract law that has been developed over the past 201 or 50 years.
00:09:44:25 - 00:09:54:13
John "Jack" Losinger
So it's certainly a question, and I think that if the FTC rule were to be passed, it will quickly be challenged on a constitutional basis.
00:09:54:27 - 00:09:58:11
Tim Lough
Okay. So tell us a little bit about the proposed federal legislation.
00:09:58:27 - 00:10:31:02
John "Jack" Losinger
Sure. So shortly after the FTC’s proposed rule came out, the Workforce Mobility Act, which is a bipartisan piece of legislation in Congress, it was introduced a few years ago and it's recently at the beginning of the year, was reintroduced into Congress and the Workforce Mobility Act would also prohibit non-compete nationwide. But unlike the FTC's proposed rule, it would only do so on a going forward basis.
00:10:31:03 - 00:11:02:27
John "Jack" Losinger
It wouldn't apply to existing non-compete agreements. So that's a major difference. The other significant piece of the Workforce Mobility Act is that it would charge the FTC with enforcement of the act and it would provide a private cause of action for employers who could then sue their employees in federal court if they were subject to a unenforceable non-compete agreement.
00:11:03:22 - 00:11:04:26
John "Jack" Losinger
So it would have some teeth to it.
00:11:05:21 - 00:11:13:20
Tim Lough
So more recently, the National Labor Relations Board announced new guidance with respect to non-disparagement agreements. Can you tell us a little bit about that?
00:11:13:27 - 00:11:45:03
John "Jack" Losinger
Sure. The National Labor Relations Board, the NLRB, recently came out with a decision called McLaren McComb. And without getting into the nitty gritty details of the facts of the case, the takeaway from that decision was that the NLRB determined that overly broad non-disparagement agreements in the context of a severance package. So an employee is leaving an employer and they're paid a severance amount.
00:11:45:03 - 00:12:13:13
John "Jack" Losinger
But as part of that, they're told you can't disparage the company overly broad, non-disparagement agreements in that context, according to the NLRB, would be a violation of the National Labor Relations Act. And after the decision, there were a lot of questions and the NLRB issued a memo that clarified a few things. And one of the things that it clarified was that this decision would apply retroactively.
00:12:13:14 - 00:12:48:01
John "Jack" Losinger
So even existing non-disparagement agreements would be subject to this analysis, that if it's overly broad, it's a violation of the NLRA. The NLRB did point out that it's not saying that non-disparagement agreements are, per se, a violation of the NLRA. It's only if they're overly broad. So the takeaway from that decision is that non-disparagement agreements have to be narrowly tailored to the specific facts of each case and each employee and each employer.
00:12:48:20 - 00:13:03:03
John "Jack" Losinger
What is it exactly that you're trying to protect? It can't just be a broad catchall non-disparagement. That's what's at issue in the McLaren Macomb case. But definitely something to think about for employers who are putting together severance packages.
00:13:03:14 - 00:13:12:02
Tim Lough
So the $100,000 question is what should New Jersey employers be doing proactively with respect to potential changes with restrictive covenants?
00:13:12:27 - 00:13:51:09
John "Jack" Losinger
Well, Tim, what I would say for employers just generally with the sea change of moving away from enforceability of non-compete, is that the old days of yore broad brush, one size fits all non-compete, not solicitation, non-disclosure agreements that apply to all your employees. Those days are gone. And if if part of an employer's onboarding process is for just all employees to sign these boilerplate documents, you're going to find yourself in a situation where you have unenforceable non-compete.
00:13:51:17 - 00:14:18:18
John "Jack" Losinger
So if your entry level clerk is signing the same non-compete as your C-suite executive, you're going to have a difficult time enforcing it against the C-suite executive. So it's important for employers to look at each employee individually and each restrictive covenant covenant individually. What are you trying to protect? What's reasonable? What are your legitimate business interests that has to be examined on a case by case basis?
00:14:18:18 - 00:14:24:06
John "Jack" Losinger
If you want to create non-compete or non-solicitation agreements that are enforceable.
00:14:24:14 - 00:14:30:28
Tim Lough
So on the flip side, what should employees with restrictive covenants be considering moving forward as well?
00:14:31:19 - 00:14:57:22
John "Jack" Losinger
I think the takeaway for employees is don't believe everything you see on Twitter or in the headlines. Non-compete are still enforceable. They're still subject to state contract law until some of the until the Workforce Mobility Act passes or the FTC rule goes into effect. They're still enforceable. So keep that in mind. If you have a non-compete, you're still subject to that non-compete.
00:14:57:22 - 00:15:28:04
John "Jack" Losinger
And if you think it's unreasonable, that has to be negotiated or litigated. But more importantly, I think for employees to keep in mind is none of this proposed legislation or this proposed rule, nothing in there suggests that employees are permitted to take an employer's proprietary confidential information and steal it and use it at a new job that remains protected and illegal under state and federal law.
00:15:28:24 - 00:15:52:15
John "Jack" Losinger
Employees are not permitted to take the the secret sauce, if you will, and leave the company with it and use it at a competitor. You can't steal proprietary, confidential information. And that hasn't changed. And I don't see that changing any time in the future. That's a protectable interest and employees need to keep that in mind moving forward.
00:15:53:12 - 00:16:18:09
Tim Lough
Well, thank you Jack, it’s all very informative. If any of our listeners have questions for Jack about the restrictive covenants, you can reach them at 973-232-0606 or jlosinger@saiber.com. That'll do it for today's episode of the Garden State Law Podcast. We'll be back soon with more discussion of the legal issues that impact businesses in New Jersey today.
00:16:18:21 - 00:16:20:16
Tim Lough
Have a great day and thank you for listening.