SYLLABUS
(This syllabus is not part of the opinion of the Court. It has
been prepared by the Office of the Clerk for the convenience of the
reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not
have been summarized).
Argued February 2, 2004 -- Decided May 4, 2004
PER CURIAM
Karol Maw began working for Advanced Clinical Communications, Inc. (ACCI) as a graphic designer on November 1, 1997. ACCI provides marketing and educational services for the pharmaceutical and healthcare industries. Maw had been hired to design written materials used by ACCI in its marketing and educational programs.
Maw was promoted to Senior Graphic Designer in January 2001. Thereafter, pursuant to a new company policy, ACCI required all of its employees at or above the level of “coordinator” to sign a non-compete agreement as a condition of continuing employment. The agreement precluded, among other things, Maw from becoming employed by any competitor or customer of ACCI for a period of two years following the termination of her employment. Maw was informed that she could seek legal advice concerning the employment agreement. Maw consulted her father, an attorney, who suggested changes. Maw presented those revisions to ACCI’s Human Resource Department but was told that no changes could be made. Maw did not sign the non-compete agreement, prompting her termination by ACCI in March 2001 for failing to comply with company policy.
Maw brought a claim under both the Conscientious Employee Protection Act (CEPA) and
the common law for wrongful termination in violation of public policy. Maw claimed
that ACCI committed impermissible retaliatory action when it terminated her employment because she
refused to sign the agreement, which she believed to be contrary to public
policy.
ACCI moved before the Law Division to dismiss the complaint for failure to
state a claim for which relief can be granted. On February 14, 2002,
the Law Division granted ACCI’s motion, finding that the complaint failed to assert
a sufficient public-policy interest within the meaning of CEPA and, similarly, lacked the
requisite showing to state a claim under the common law.
A majority of the Appellate Division reversed, finding that the Law Division erred
in concluding that, as a matter of law, Maw did not demonstrate a
violation of public policy necessary to sustain a cause of action. The court
held that the dismissal of Maw’s claims before she had an opportunity to
develop her case through discovery was premature. The majority panel also reinstated Maw’s
common-law claim for wrongful discharge in violation of public policy. One judge dissented,
concluding that the Law Division did not err in dismissing Maw’s claims because
an employee’s interest in freely moving from employer to employer is primarily a
private interest beyond the protections of CEPA. The dissent found no clear mandate
of public policy at issue and, therefore, concluded that Maw failed to state
a claim under CEPA or the common law.
ACCI appealed as of right to the Supreme Court based on the dissent
in the Appellate Division.
HELD: Maw’s private dispute over the terms of the do-not-compete provision in her
employment agreement does not implicate a violation of a clear mandate of public
policy as contemplated by Section 3c(3) of CEPA.
1. The Court disagrees with and reverses the judgment of the Appellate Division
substantially for the reasons expressed by the dissenting member of the appellate panel.
The Court provides additional explanation of its conclusion that Maw has failed to
state a cause of action under CEPA. (P. 2)
2. CEPA prohibits an employer from taking 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) (Section
3c(3)). The Court must for the first time determine the contours and scope
of a “clear mandate” sufficient to assert a claim under Section 3c(3) of
CEPA. (Pp. 2-3)
3. The reference in Section 3c(3) to “clear mandate of public policy” conveys
a legislative preference for conduct recognized to be in the public interest. A
clear mandate of public policy suggests an analog to a constitutional provision, statute,
and rule or regulation promulgated pursuant to law such that, under Section 3c(3),
there should be a high degree of public certitude in respect of acceptable
versus unacceptable conduct. Legislative intention concerning a clear “mandate” of public policy demonstrates
a desire not to devolve into arguments between employers and employees over what
is, or is not, correct public policy. The Court reaffirms the limiting principle
enunciated in Mehlman that the complained of activity must have public ramifications and
that the dispute between employer and employee must be more than a private
disagreement. (Pp. 3-5)
4. Maw’s dispute with ACCI is private in nature because the true dispute
is over the terms of the non-compete agreement. Maw’s CEPA claim also must
fail because the State’s public policy concerning non-compete agreements is not set forth
in a “clear mandate” and does not concern the public health, safety or
welfare or protection of the environment. Do-not-compete provisions are not per se illegal;
therefore it is inaccurate to describe current case law, which allows enforcement of
reasonable non-compete agreements, as a “clear mandate” that disfavors such agreements. The application
of the Solari/Whitmyer test to this case does not evoke the type of
“clear mandate of public policy” that was contemplated by Section 3c(3). (Pp. 5-8)
5. If unable to negotiate acceptable terms, Maw is free to dispute the
reasonableness of those terms and then ACCI would have the opportunity to try
to enforce those terms through litigation. What the Court will not do is
alter the traditional contract remedies available in restrictive-covenant litigation by recasting this dispute
as a CEPA action. (Pp. 8-9)
Judgment of the Appellate Division is REVERSED.
JUSTICE ZAZZALI, dissenting, in which JUSTICE LONG joins, is of the view that
Maw has set forth allegations in her complaint that state a claim for
wrongful termination under both CEPA and the common law. There exists in this
State a clear mandate that overly restrictive non-compete agreements violate public policy. Because
ACCI has not and could not demonstrate that its non-compete agreement is reasonable,
Justice Zazzali would affirm the decision of the Appellate Division.
CHIEF JUSTICE PORITZ and JUSTICES VERNIERO, LaVECCHIA, and WALLACE join in this PER
CURIAM opinion. JUSTICE ZAZZALI filed a separate dissenting opinion, in which JUSTICE LONG
joins. JUSTICE ALBIN did not participate.
SUPREME COURT OF NEW JERSEY
A-
99 September Term 2002
KAROL MAW,
Plaintiff-Respondent,
v.
ADVANCED CLINICAL COMMUNCIATIONS, INC., and MICHAEL F. FORTE, President,
Advanced Clinical Communications, Inc.,
Defendants-Appellants.
Argued February 2, 2004 – Decided May 4, 2004
On appeal from the Superior Court, Appellate Division, whose opinion is reported at
359 N.J. Super. 420 (2003).
Debbie Rodman Sandler argued the cause for appellants (White and Williams, attorneys).
Richard M. Schall argued the cause for respondent (Schall & Barasch, attorneys; Mr.
Schall and Patricia A. Barasch, on the briefs).
Mark A. Saloman and John J. Sarno argued the cause for amicus curiae
Employers Association of New Jersey (Proskauer Rose, attorneys; Marvin M. Goldstein, of counsel;
Mr. Saloman, Mr. Sarno, Mr. Goldstein and Richard S. Reig, on the brief).
Alan H. Schorr argued the cause for amicus curiae National Employment Lawyer’s Association-New
Jersey (Alan H. Schorr & Associates, attorneys).
David M. Wissert submitted a brief on behalf of amicus curiae New Jersey
Defense Association (Lowenstein Sandler, attorneys; Mr. Wissert, Lauren M. Hollender and Martha L.
Lester, on the brief).
PER CURIAM
Plaintiff, Karol Maw, filed this action under the Conscientious Employment Protection Act, N.J.S.A.
34:19-1 to –8 (CEPA), after she was terminated for refusing to execute an
employment agreement containing a do-not-compete provision. She claimed that her employer committed impermissible
retaliatory action when it terminated her employment because she refused to sign an
employment agreement that she perceived to be contrary to public policy. We disagree
and reverse the judgment of the Appellate Division,
substantially for the reasons expressed
in the cogent dissent by Judge Cuff.
Maw v. Advanced Clinical Communications, Inc.,
359 N.J. Super. 420, 442-48 (App. Div. 2003) (Cuff, J.A.D., dissenting). Briefly, we
add the following in explanation of our conclusion that plaintiff has failed to
present a cause of action under CEPA.
I.
CEPA prohibits an employer from taking 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) (Section 3c(3)). In this case we confront for the first time
a question as to the meaning of the phrase “clear mandate of public
policy.” More specifically, we must determine the contours and scope of a “clear
mandate” sufficient to assert a claim under Section 3c(3). We begin with the
observation that a public policy expressed in the form of a statute, rule
or regulation promulgated pursuant to law, is not what was meant under Section
3c(3). To so hold would reduce N.J.S.A. 34:19-3c(1) (Section 3c(1)) to mere surplusage,
since it employs those legal precepts as a frame of reference for evaluating
an employer’s conduct.
That said, Section 3c(1) is helpful in resolving the question before us. Like
Section 3c(1), the reference in Section 3c(3) to a “clear mandate of public
policy” conveys a legislative preference for a readily discernable course of action that
is recognized to be in the public interest. A “clear mandate” of public
policy suggests an analog to a constitutional provision, statute, and rule or regulation
promulgated pursuant to law such that, under Section 3c(3), there should be a
high degree of public certitude in respect of acceptable verses unacceptable conduct. Indeed,
prior decisions involving CEPA claims have reasoned similarly when discussing Section 3c(3) claims.
E.g., Higgins v. Pascack Valley Hosp.,
158 N.J. 404, 420 (1999) (citing Mehlman
v. Mobil Oil Corp.,
153 N.J. 163, 189-90 (1998) (finding that CEPA “prohibits
employer retaliation against an employee who objects to an employer practice that violates
a foreign country’s public policy, as expressed in an industry safety guideline”)). The
legislative approach vis-à-vis a “clear” mandate of public policy bespeaks a desire not
to have CEPA actions devolve into arguments between employees and employers over what
is, and is not, correct public policy. Such an approach also fits with
the legislative requirement of a “mandate” as opposed to a less rigorous standard
for the type of public policy that is implicated.
The dissent below is in accord with our analysis in respect of its
discussion of both the purpose of CEPA, Maw, supra, 359 N.J. Super. at
444-446 (Cuff, J.A.D., dissenting), and our precedent construing CEPA. Id. at 446-47. Judge
Cuff’s summary of CEPA’s purpose echoes our observation last term that “[t]he Legislature
enacted CEPA to ‘protect and encourage employees to report illegal or unethical workplace
activities and to discourage public and private sector employers from engaging in such
conduct.’” Dzwonar v. McDevitt,
177 N.J. 451, 461 (2003) (quoting Abbamont v. Piscataway
Twp. Bd. of Educ.,
138 N.J. 405, 431 (1994)). As stated in Dzwonar,
supra, CEPA is designed to “‘prevent retaliation against those employees who object to
employer conduct that they reasonably believe to be unlawful or indisputably dangerous to
the public health, safety or welfare.’” 177 N.J. at 464 (quoting Mehlman v.
Mobil Oil Corp.,
153 N.J. 163, 193-94 (1998) (emphasis added)). The dissent found
“that a helpful limiting principle [for CEPA claims] is that the offensive conduct
must implicate the public interest.” Maw, supra, 359 N.J. Super. at 446 (Cuff,
J.A.D., dissenting) (citing Mehlman, supra, 153 N.J. at 187-88). “[T]he offensive activity must
pose a threat of public harm, not merely private harm or harm only
to the aggrieved employee.” Mehlman, supra, 153 N.J. at 188. We reaffirm the
limiting principle enunciated in Mehlman that the complained of activity must have public
ramifications, and that the dispute between employer and employee must be more than
a private disagreement.
In this matter, plaintiff’s dispute with her employer is private in nature. Plaintiff concedes that she possessed confidential and proprietary information, and that she had no objection to those portions of the noncompete agreement that would preclude her from sharing such information with future employers. In other words, plaintiff’s true dispute was over the reasonableness of the terms of the noncompete agreement, an argument she was free to make if and when her employer tried to prevent her from working at another company. It is telling that plaintiff uniformly refers to the effect that signing the noncompete agreement would have on “her ability to find employment in her field,” and that “she believed that there was no legitimate business reason for defendants to require her to enter into a noncompete agreement.” (Emphasis added). Allowing plaintiff’s admittedly private dispute with her employer to go forward under CEPA’s rubric dilutes the statute’s salutary goals.
The private nature of plaintiff’s dispute notwithstanding, her CEPA claim must fail because our State’s public policy respecting noncompete agreements is not set forth in a “clear mandate,” and does not “concern[] the public health, safety or welfare or protection of the environment.” N.J.S.A. 34:19-3c(3). Over a generation ago, our Court sketched the broad parameters for determining whether a noncompete agreement was unenforceable. Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971); Solari Indus. Inc. v. Malady, 55 N.J. 571 (1970). In Solari, we canvassed, much as has the dissent, the historical treatment of noncompete agreements, and acknowledged the previously held negative view of such agreements. 55 N.J. at 575-84. We cited academic writings on the topic that elaborated in greater detail on the relation of such agreements to Anglo-American commercial practices. See, e.g., Solari, supra, 55 N.J. at 574-77 (citing Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625 (1960)).
But Solari was a turning point, for we held then “that the time is well due for the abandonment of New Jersey’s void per se rule in favor of the rule which permits the total or partial enforcement of noncompetitive agreements to the extent reasonable under the circumstances.” 55 N.J. at 585. In Whitmyer, supra, we expanded on Solari, establishing what is now known as the Solari/Whitmyer test for determining whether a noncompete agreement is unreasonable and therefore unenforceable. Under the Solari/Whitmyer test, a noncompete agreement is enforceable “if it ‘simply protects the legitimate interests of the employer, imposes no undue hardship on the employee and is not injurious to the public.’” Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609, 628 (1988) (quoting Whitmyer, supra, 58 N.J. at 32-33). The first two prongs of the test require a balancing of the employer’s interests in protecting proprietary and confidential information and the asserted hardship on the employee. Ingersoll-Rand, supra, 110 N.J. at 634-35. The third requires the reviewing court to analyze the public’s broad concern in fostering competition, creativity, and ingenuity. Id. at 639. Solari/Whitmyer has now become an accepted part of the common law, not only in New Jersey but also in other jurisdictions around the country. Id. at 630-34.
Although our dissenting collegues may contend that do-not-compete provisions are, or should be, per se illegal, in point of fact, they are not illegal per se. It is not accurate to describe our current caselaw, which allows enforcement of reasonable non-compete agreements, as a “clear mandate” that disfavors such agreements. The Solari/Whitmyer test is a multi-part, fact-intensive inquiry. Not only must multiple interests of differing parties and entities be identified, but also, those interests must be gauged for reasonableness and legitimacy. The application of that test here, and as a general matter, simply does not evoke the type of a “clear mandate of public policy” that was contemplated by N.J.S.A. 34:19-3c(3).
We are informed by the amici that non-compete agreements are a common part of commercial employment. We do not accept as a premise that employers, in large numbers, are engaging in a practice that is “indisputably dangerous to the public health, safety or welfare.” Dzwonar, supra, 177 N.J. at 464. It is more appropriate to characterize the business community as having adapted to the Solari/Whitmyer approach that recognizes that noncompete agreements can serve a useful purpose so long as the agreement is not unreasonable.
We conclude that plaintiff’s private dispute over the terms of the do-not-compete provision in her employment agreement does not implicate violation of a clear mandate of public policy as contemplated by Section 3c(3) of CEPA. As previously noted, plaintiff did have options available to her. If she could not negotiate terms that were to her liking, she was free to dispute the reasonableness of those terms if and when her employer attempted to enforce the agreement. The burden then would be on the employer to hire counsel and initiate enforcement litigation, Solari, supra, 55 N.J. at 574, and nothing would preclude an employee-defendant in such an action from asserting any and all affirmative defenses and counterclaims. Ingersoll- Rand, supra, 110 N.J. at 621-22. What we decline to do, however, is to alter the traditional contract remedies available in restrictive-covenant litigation by recasting the dispute as a CEPA action. See N.J.S.A. 34:19-5e, -5f.
III.
The judgment of the Appellate Division is reversed.
CHIEF JUSTICE PORITZ and JUSTICES VERNIERO, LaVECCHIA, and WALLACE join in this per curiam opinion. JUSTICE ZAZZALI filed a separate dissenting opinion in which JUSTICE LONG joins. JUSTICE ALBIN did not participate.
SUPREME COURT OF NEW JERSEY
A- 99 September Term 2002
KAROL MAW,
Plaintiff-Respondent,
v.
ADVANCED CLINICAL COMMUNCIATIONS, INC., and MICHAEL F. FORTE, President,
Advanced Clinical Communications, Inc.,
Defendants-Appellants.
JUSTICE ZAZZALI, dissenting.
As fully set forth in the majority opinion of the Appellate Division, the
facts of this case concern an employee who was fired for refusing to
sign a non-compete agreement. She brought suit against her employer, alleging that her
termination violated the Conscientious Employee Protection Act (CEPA), N.J.S.A. 34:19-1 to -8, and
her common-law right against discharge contrary to public policy. Because the allegations of
the complaint implicate a clear mandate of public policy that the majority, in
adopting the dissent below, fails to apprehend, I must respectfully dissent.
This case comes to the Court on a motion to dismiss for failure to state a claim. Therefore, the facts as alleged in the complaint, as well as all reasonable inferences to be drawn therefrom, must be taken as true. Craig v. Suburban Cablevision, Inc., 140 N.J. 623, 625-26 (1995).
In 1997, plaintiff Karol Maw began working for defendant Advanced Clinical Communications, Inc., as a graphic designer. Plaintiff had been performing well enough to warrant a promotion to the position of Senior Graphic Designer in January 2000. Thereafter, pursuant to a new company policy promulgated in January 2001, defendant required all of its employees at or above the level of “coordinator” to sign a non-compete agreement as a condition of continuing employment. Among other things, it provided that upon ceasing to work for defendant, the employee would be enjoined from working for any competitor or customer of defendant for a period of two years.
Plaintiff was presented with a copy of the proposed “Noncompete Covenant,” which informed her that she was free to seek the advice of counsel with respect to the document. Plaintiff consulted her father, an attorney, who suggested some changes. Plaintiff presented those revisions to defendant’s Human Resources Department. A representative of that department informed her, however, that “it is the President’s [c]ompany and . . . he is not going to make any exceptions.” Plaintiff did not sign the document, prompting defendant to inform her by letter that she had been “terminated based on noncompliance with company policy.”
Plaintiff filed suit, claiming that her employer violated CEPA and the common-law right against termination in violation of a clear mandate of public policy. Defendant moved to dismiss the claim for failure to state a claim upon which relief can be granted. R. 4:6-2(e). The Law Division granted the motion, finding that the complaint failed to aver a sufficient public-policy interest within the meaning of CEPA and that, similarly, it lacked the requisite showing to state a claim under the common law.
The Appellate Division reversed. Maw v. Advanced Clinical Communications, Inc., 359 N.J. Super. 420 (2003). It held that the Law Division erred in concluding that as a matter of law, plaintiff did not demonstrate a violation of public policy necessary to sustain a cause of action. Id. at 427. Instead, because the agreement proffered by defendant “may, depending on the surrounding circumstances, violate the public policy necessary to support a cause of action under CEPA[,]” the court ruled that “dismissal of plaintiff’s claims before she had an opportunity to develop her case through discovery was premature.” Ibid. For similar reasons, the court also reinstated plaintiff’s common-law claim for wrongful discharge in violation of public policy, as recognized in Pierce v. Ortho Pharmaceutical Corp., 84 N.J. 58, 72 (1980). See footnote 1 Id. at 441.
The dissent, however, stated that the Law Division did not err in dismissing the complaint, because “an employee’s interest in freely moving from employer to employer is primarily a private interest beyond the protection provided by CEPA.” Id. at 442 (Cuff, J.A.D., dissenting). Consequently, the dissent viewed the matter as “essentially a private dispute between an employer and an employee.” Id. at 448. Determining no clear mandate of public policy to be at issue, the dissent concluded that plaintiff failed to state a claim under either CEPA or the common law. Ibid.
Because of the dissent in the Appellate Division, defendant appealed as of right. R. 2:2-1(a)(2). This Court now adopts the analysis of the dissent below, finding no clear mandate of public policy sufficient to render this matter anything but a dispute merely “private in nature.” Ante at ___ (slip op. at 5). A brief look at the public-policy considerations that have traditionally governed non-compete agreements reveals, however, that this matter does, in fact, give rise to serious public-policy concerns that transcend a mere private dispute.
A.
The Conscientious Employee Protection Act provides, in pertinent part, that
[a]n employer shall not take any retaliatory action against an employee because the employee . . . [o]bjects 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 the public health, safety or welfare or protection of the environment.
[N.J.S.A. 34:19-3 (emphasis added).]
The elements necessary to state a claim for wrongful termination under that provision of CEPA are not in dispute. A plaintiff
must demonstrate that: (1) he or she reasonably believed that his or her employer’s conduct was violating either a law, rule, or regulation promulgated pursuant to law, or a clear mandate of public policy; (2) he or she performed a “whistle-blowing” activity described in N.J.S.A. 34:19-3c; (3) an adverse employment action was taken against him or her; and (4) a causal connection exists between the whistle-blowing activity and the adverse employment action.
[Dzwonar v. McDevitt,
177 N.J. 451, 462 (2003).]
As in Dzwonar, the viability of the present claim hinges on whether the
complaint satisfies the first prong of the four-prong test. That is, it appears
clear that plaintiff meets the other three prongs because she refused to participate
in an activity (i.e., entering into the agreement) and was fired as a
direct consequence of that refusal. Thus, to survive a motion to dismiss, plaintiff
need only set forth facts from which a factfinder ultimately could conclude that
she acted on the basis of a reasonable belief that in demanding that
she sign the non-compete agreement, her employer was violating a clear mandate of
public policy. Ibid. And before a court can dismiss a CEPA claim as
a matter of law, it must satisfy itself that no law, rule, or
clear mandate of public policy “closely relates to the complained-of conduct.” Id. at
463.
B.
For more than four hundred years, Anglo-American jurisprudence has recognized the public-policy implications of non-compete agreements. See Harlan M. Blake, Employee Agreements Not to Compete, 73 Harv. L. Rev. 625, 635-36 (1960) (tracing jurisprudence of post-employment restraints to Dyer’s Case in Court of Common Pleas in 1414 and first public-policy explanation for invalidating them to Colgate v. Bacheler, decided by Queen’s Bench in 1602). In the “most cited case on common-law restraints of trade,” and perhaps the most influential opinion on the subject ever issued, Chief Justice Parker of Queen’s Bench explored the interests, both public and private, at stake when a citizen contracts away his right to work at his chosen craft. Blake, supra, 73 Harv. L. Rev. at 629 (citing Mitchel v. Reynolds, 24 Eng. Rep. 347 (Q.B. 1711)).
In Mitchel, the defendant leased some buildings including a bakehouse to the plaintiff. 24 Eng. Rep. at 347. The terms of their agreement included a provision that the defendant would “not exercise the trade of a baker” within the parish of St. Andrew’s Holborn during the five-year term of the lease. Ibid. If the defendant were to violate the term, and set up a competing shop, the plaintiff would be entitled to fifty pounds. Ibid. The plaintiff brought suit to enforce the provision; the defendant, however, maintained that the agreement was void. Ibid.
Examining prior case law, the Chief Justice discerned the various interests implicated by voluntary restraints of trade. Id. at 350. He observed that such agreements can result in “mischief . . . to the party, by the loss of his livelihood, and the subsistence of his family . . .[and] to the publick, by depriving it of a[] useful member.” Ibid. The court then further explained the aggregate harm occasioned by such restrictions that extends beyond the concerns of the contracting parties:
Another reason is, the great abuses these voluntary restraints are liable to; as for instance, from corporations, who are perpetually labouring for exclusive advantages in trade, and to reduce it into as few hands as possible; as likewise from masters, who are apt to give their apprentices much vexation on this account, and to use many indirect practices to procure such bonds from them, lest they should prejudice them in their custom, when they come to set up for themselves.
[Ibid.]
The court acknowledged the circumstances in which such restrictive arrangements might be “useful
and beneficial,” for instance, “to prevent a town from being overstocked with any
particular trade” or to facilitate the sale of a business or trade no
longer profitable to its proprietor. Ibid. In weighing those competing considerations, however, the
court concluded that the mischief “plainly appears . . . but the benefit
(if any) can only be presumed.” Id. at 351. Underscoring the point that
the mischief is “not only private, but public,” the court pronounced the rule
to be that the law will presume such contracts “prima facie to be
bad” until the facts of an individual case indicate that the restriction constitutes
a “reasonable and useful contract” that “the courts of justice will [e]nforce[.]” Ibid.
Applying the rule to the facts of that particular case, the court held
that the plaintiff had overcome the presumption of invalidity because it would have
been unjust to allow the defendant to receive the benefit of the lease
agreement while permitting him to renege on his promise to allow the plaintiff
to have the benefit of the “trade in this neighbourhood.” Id. at 352.
Finding the restraint to be “exactly proportioned to the consideration” -- inasmuch as
the five-year term of the restraint was coextensive with that of the lease
-- the court determined “the concern of the public [to be] equal on
both sides,” and held the restriction enforceable. Ibid. Thus, the court kept public,
as well as private, concerns keenly within its focus throughout its analysis.
Consistent with the approach in Mitchel, in New Jersey historically we have presumed
such covenants to be invalid as restraints on trade and, therefore, violative of
public policy unless an employer demonstrates the reasonableness of its agreement. Mandeville v.
Harman,
42 N.J. Eq. 185, 189 (Ch. 1886). Mandeville involved a doctor who,
in exchange for an employment opportunity with an established practitioner, permanently bargained away
his right to practice for anyone else in the City of Newark. Id.
at 187-88. As Vice Chancellor Van Fleet explained in refusing to enforce the
agreement, the only covenants restricting employment that will be enforced are those in
which
the restraint is such only as to afford a fair protection to the
interest of the party in favor of whom it is given, and not
so large as to interfere with the interest of the public. Whatever restraint
is larger than the necessary protection of the party can be of no
benefit to either. It can only be oppressive, and if oppressive, it is,
in the eye of the law, unreasonable and void, on the ground of
public policy, as being injurious to the interests of the public. The rule,
as thus stated, is the law of this state.
[Id. at 190.]
In another case involving a non-compete agreement, by which an employee had “restrained
himself, generally and absolutely, without limitation as to time or place, from exercising
his talents and skill in making gig-saddles and coach-pads,” Vice Chancellor Fleet held
that “such a contract is void, on account of its repugnancy to public
policy.” Albright v. Teas,
37 N.J. Eq. 171, 173 (Ch. 1883). Elaborating upon
the public-policy implications of such a covenant, he explained, “It prevents competition, and
thus enhances prices, and exposes the public to all the evils of monopoly.”
Ibid.
In more recent cases, we have echoed the concerns regarding restrictive covenants that
originally were articulated in Mitchel, explicitly recognizing both the private and the public
interests implicated by these restraints on trade. For instance, in Solari Industries, Inc.
v. Malady,
55 N.J. 571, 576 (1970), we observed that public-policy considerations distinguish
employee non-compete agreements from restrictions designed to protect the good will attendant to
the sale of a business. We explained that although the latter are “freely
enforceable,” the former will meet with judicial approbation only if they “simply protect[]
the legitimate interests of the employer, impose[] no undue hardship on the employee,
and [are] not injurious to the public.” Ibid. We subsequently reiterated that tripartite
test, which expressly recognizes the public interest as distinct from the private concerns
of the employer and employee. Ingersoll-Rand Co. v. Ciavatta,
110 N.J. 609, 628
(1988); Karlin v. Weinberg,
77 N.J. 408, 411-12 (1978); Whitmyer Bros., Inc. v.
Doyle,
58 N.J. 25, 32 (1971). As we recognized in Ciavatta, not least
among the public-policy considerations is the desire to protect the consuming public from
“naked restraints” on the marketplace posed by employer attempts to extinguish competition from
a former employee. 110 N.J. at 635.
This brief historical overview demonstrates that vindication of the public interest has consistently
been at the heart of our interpretation of covenants-not-to-compete. More is at stake
than merely the isolated subjugation of a single worker. Although the “undue hardship”
prong of Solari, supra, takes that consideration into account, our jurisprudence, time and
time again, has made clear that such restraints of trade implicate other, public
interests. Such repeated instruction by the judiciary amounts to a clear mandate that
overly restrictive covenants in restraint of future employment are in violation of New
Jersey public policy.
Although the majority attempts to make much of this Court’s rejection of the
so-called “per se” rule in Solari, supra, 55 N.J. at 585, it misconstrues
the import of that holding. Ante at ___ (slip op. at 7-9). Despite
the majority’s efforts to characterize Solari as a sea-change in our jurisprudence of
non-compete agreements, it represents nothing of the sort. The majority’s conclusion in that
regard and its claim that I am somehow arguing restrictive covenants “are, or
should be, per se illegal,” ante at __ (slip op. at 8), both
appear to stem from a fundamental misunderstanding of the “per se” rule in
pre-Solari case law.
The majority’s gloss notwithstanding, non-compete agreements were not as a general rule “per
se void” prior to Solari. Instead, the per se rule concerned specifically the
severability of non-compete agreements that were found to be unenforceable as written. 55
N.J. at 583. Prior to Solari, the courts of this State generally refused
to reform and enforce such agreements to the extent that they otherwise might
be reasonable. Id. at 583-84. In other words, if an employer failed to
draft an agreement enforceable on its face, courts usually would not reform such
a contract, even though a particular non-compete arrangement might be reasonable if enforced
on terms less restrictive than as written. Id. at 583. Rather than re-write
the contract for the parties, courts usually considered the inartfully drafted agreement to
be void per se. Ibid. In Solari, however, we held that if an
employer could demonstrate that its legitimate business interests would be protected, no undue
harm would be visited on the employee, and that the public interest would
not otherwise be injured, such a covenant would be enforced to the extent
reasonable in time and space, despite the fact that it had been drafted
in broader, unenforceable terms. Id. at 585.
So understood, Solari does not represent a bold departure from prior case law
treating non-compete agreements. Covenants not to compete were enforceable prior to our decision
in that case. See, e.g., Mandeville, supra, 42 N.J. Eq. at 189-90 (1886
opinion instructing that non-compete agreements will be enforced if limited to restrictions necessary
to protect interests of obligee and not so restrictive that they interfere with
public interest). Solari merely extended the concepts of severability and reformation of contract
to non-compete agreements. Most tellingly, however, neither Solari nor our subsequent cases removed
the burden from the employer to demonstrate the reasonableness of non-compete agreements. And
that burden continues to fall squarely on employers precisely because of the continuing
public-policy concerns engendered by these restraints on trade.
In spite of the manner in which non-compete agreements consistently have been viewed, the majority adopts the assessment of the dissent below that “an employee’s interest in freely moving from employer to employer is primarily a private interest beyond the protection provided by CEPA,” Maw, supra, 359 N.J. Super. at 442 (Cuff, J.A.D., dissenting), and, therefore, the present matter involves “essentially a private dispute between an employer and an employee.” Id. at 448. The difficulty with that approach is that it does not reckon with, much less reconcile, the vital public-policy considerations that undergird the jurisprudence of non-compete agreements. Simply put, for centuries the courts of England and of this State have stated repeatedly that covenants-not-to-compete implicate important public-policy interests. If there is any continuing truth to that notion, then a plaintiff who claims that she resisted signing an agreement that she believed to violate that public policy cannot be summarily cast out of court on the ground that her concerns constitute only a private dispute with her employer. In embracing such a rationale, the majority disserves both the remedial purpose of CEPA as well as the honorable tradition of protecting the free markets of this State. To be sure, as in all “private-sector” disputes, a private interest is involved. Here, however, the controversy clearly implicates long-established public concerns.
Defendant’s alternative argument in support of its motion to dismiss proves equally unpersuasive. It posits that until it attempts to enforce the agreement, there is no way of telling whether or not the restriction is unreasonable. Thus, the argument runs, plaintiff could not have held a reasonable belief that the covenant was in violation of public policy until the employer attempted enforcement. In support of that theory, defendant places particular weight on the clause of the proffered agreement that provides that permission to allow employees to work elsewhere will not be unreasonably withheld. The majority of this Court implicitly embraces that argument by observing that the deprivation of a CEPA cause of action does not leave plaintiff without a remedy inasmuch as she “was free to dispute the reasonableness [of the non-compete agreement] if and when her employer attempted to enforce the agreement.” Ante at ___ (slip op. at 9).
That reasoning stumbles on a number of levels. First, in stating that this employee was free to challenge this restrictive covenant in another forum, the majority fails to acknowledge that traditional contract remedies are inadequate to vindicate the public interest at stake in this type of dispute. Absent a cause of action under CEPA or the common law’s public-policy exception to termination of an at-will employee, nothing prevents an employer from demanding that such an employee agree to the most unreasonably restrictive non-compete agreement as a condition of continuing employment. Should the employee refuse, today’s holding allows the employer to terminate with impunity and leaves the employee but one avenue of real relief: find another job.
Second, the majority’s approach ignores the obvious in terrorem effect such covenants have in restricting employee mobility. As plaintiff’s counsel suggested at argument, once an employee has affixed his or her signature, the employer has derived its sought-after benefit, irrespective of whether a court ultimately deems the covenant reasonable or not. Few are the employees with the resources -- or, for that matter, the prospective employers with the inclination -- to effectively challenge even the most patently unreasonable restrictive covenant.
Third, as noted, the fundamental policy and law in this State is that covenants-not-to-compete are in violation of public policy until proven otherwise -- that is, until the employer demonstrates that they are reasonable. Consistent with that approach, in the CEPA context, as in common-law or equitable actions treating such agreements directly, the employer should bear the burden of demonstrating that in the circumstances of a particular case, the proffered agreement would have been enforceable as a reasonable restriction. In the CEPA context, as in the more traditional common-law scenario, that presents a question for the court. In either setting, however, that determination cannot be made on the pleadings. Although it is a question for the bench and not the jury, it constitutes an inquiry that must be made in conjunction with a review of the relevant facts. The outcome will hinge on, among other things, the legitimate business interests of the employer that are to be served by the restriction in relation to the geographic, temporal, and substantive restraints placed upon the employee. Although such an inquiry may prove possible at the summary-judgment stage of the proceedings -- at which time, the employer may well prevail -- a court bound by the averments of a complaint cannot make such a ruling on a motion to dismiss.
Accordingly, the better approach, which would adequately safeguard the concerns of the employer while simultaneously vindicating the public interest, would be to hold that a plaintiff has stated a claim under CEPA when she has alleged that she refused to sign a non-compete agreement that she believed to be in violation of public policy. The employer would then be afforded the opportunity to demonstrate the reasonableness of the proffered agreement as a defense to the action. On that basis, I would affirm the judgment of the Appellate Division and allow the complaint to go forward.
I am aware of the concern by some that allowing a cause of action in these and similar circumstances might have a chilling effect on employers’ legitimate use of non-compete agreements, but that argument is unavailing. The approach I propose would have the salutary effect of encouraging employers to enter into agreements that comply with, rather than flout, sound public policy. Employers who do draft restrictive covenants tailored to serve their legitimate business interests can be confident of prevailing against a subsequent challenge for wrongful dismissal under CEPA or the common law should they choose not to retain an at-will employee who refuses to agree to reasonable terms. Moreover, such employers will be able to enforce executed agreements incorporating those terms in a court of equity. Conversely, the fact that illegitimate agreements will be disfavored should present no cause for concern.
IV.
In sum, I would hold that plaintiff has set forth allegations in her complaint that state a claim for wrongful termination under both CEPA and the common law. There exists in this State a clear mandate that overly restrictive non-compete agreements violate public policy. Plaintiff claims that she acted on the bona fide belief that her employer, in asking her to enter the agreement at issue here, sought to restrain her future employment without a legitimate reason and, thereby, violated that public policy. Consistency with our jurisprudence respecting non-compete agreements demands that employers should bear the burden of demonstrating that those suspect arrangements are reasonable in the circumstances of an individual case. Because this defendant has not done so and, indeed, cannot possibly have made such a showing on a motion to dismiss, I would affirm the judgment of the Appellate Division and remand the cause for further proceedings.
Justice Long joins in this opinion. SUPREME COURT OF NEW JERSEY
NO. A-99 SEPTEMBER TERM 2002
ON APPEAL FROM Appellate Division, Superior Court
KAROL MAW,
Plaintiff-Respondent,
v.
ADVANCED CLINICAL
COMMUNICATIONS, INC., and
MICHAEL F. FORTE, President,
Advanced Clinical
Communications, Inc.,
Defendants-Appellants.
DECIDED May 4, 2004
Chief Justice Poritz PRESIDING
OPINION BY Per Curiam
CONCURRING OPINION BY
DISSENTING OPINION BY Justice Zazzali
CHECKLIST
Footnote: 1
Because the same test concerning the requisite demonstration of public policy applies
under Pierce, the Appellate Division held that plaintiff stated a claim under the
common law. Maw, supra, 359 N.J. Super. at 441. The court went on
to address the exclusivity provision of CEPA. It found that although a plaintiff
who pursues a CEPA claim must forego a common-law claim, it would be
unjust to force a party into making that decision at the pleading stage
of the proceedings before a court has determined whether either action may lie.
Ibid. I find both aspects of the Appellate Division’s reasoning to be sound
and, therefore, subsume the common-law cause of action into my analysis of the
CEPA claim.