Competition for workers a good economic sign
As turnover rises, firms fear loss of critical information
Litigation is increasing over employment agreements that bar former employees from bringing their customers, clients and colleagues with them to a new job. Attorneys said this may be a sign the economy is picking up, prompting businesses to recruit new talent and take legal action when a key employee goes off to join the competition.
"We've seen a significant increase in activity" around these agreements, known as restrictive covenants, said attorney Richard J. Cino, of Jackson Lewis, which represents management in workplace legal cases. These covenants include agreements that bar former employees from working in the same industry sector for a certain period of time; nonsolicitation agreements banning contacts with former customers, co-workers and vendors; and confidentiality agreements that protect proprietary information and trade secrets. Jackson Lewis has locations throughout the country, and Cino said an informal poll of his colleagues found this kind of litigation is up nationwide, from the West Coast to Texas to the Southeast, as well as New Jersey. "It could be related to a greater confidence by businesses to invest in new ventures, or a greater confidence by individuals to take a chance and change jobs," Cino said.
Attorneys said employment agreement litigation rises and falls with the economy. "In the early 2000s, the volume of this work was just tremendous," Cino said, but it slowed after the 2008 financial crisis; he said the current upswing started about 12 months ago.
Adam Saravay, of McCarter & English, said, "Now that there has been some improvement in the job market, people are beginning to change jobs again, and that has led to an increase in litigation and disputes over noncompetition agreements."
However, LeClairRyan attorney Joseph P. Paranac Jr. said the increase in employment agreement litigation may also reflect the economy's fragility, as well as signaling increased mobility in the work force. These days, when a key employee leaves, the employer "feels that person has either hurt them, or has much more of a potential to hurt them, than would have been the case eight or 10 years ago."
Paranac is currently representing a company that hired an executive who has a nonsolicitation agreement with his former employer. Paranac said he was able to show the court that this individual has not significantly harmed his former employer, and the court denied a request for a preliminary injunction. "If that had happened seven or eight years ago, (the other side) would have walked away or settled." Instead, the former employer intends to litigate.
Neil Mullin, an employment attorney whose practice includes representing individuals who bring age and gender discrimination lawsuits, said the heightened anxiety of employers is a function of "living in the information age.
Companies know that information has value, and executives have a lot of critically important information in their heads. How do you prevent them from using that information to take a powerful competitive stance once they leave?"
An emerging issue, which Saravay said has not yet been settled by New Jersey courts, involves social media. When an employee takes a new job and updates his or her LinkedIn profile, a notification is sent to all contacts. "That could be viewed as soliciting customers in a way that is prohibited by a nonsolicitation agreement," Saravay said. He urges employers to update employment agreements, both to reflect changes in job responsibilities and to account for new technology.
Saravay said New Jersey courts enforce noncompete agreements if they are necessary to protect an employer's legitimate interests and are reasonable in scope, "but the courts won't enforce them just for the sake of eliminating competition."
Nevertheless, restrictive covenants "are alive and well in New Jersey," said Mullin, who currently is negotiating a settlement for an executive who alleges his firing was due to age discrimination. The company agreed to pay severance, and now wants a two-year noncompete agreement; Mullin said he's seeking more compensation for his client in exchange for the noncompete. "If you take someone out of their line of work for two years, or even one year, they lose all their contacts. People forget them," said Mullin, who wants the state Legislature to outlaw noncompetition agreements altogether.
While New Jersey courts are unlikely to enforce an overly broad noncompete agreement, a noncompete is very enforceable if the company pays for it — for example, a one-year noncompete agreement that includes a one-year severance package, said Tom Fuller, managing director of the executive search firm Epsen Fuller Group. "Basically, the company is paying them not to work."
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