Federal Appeals Court Upholds ADP’s Non-Compete Agreements

Recently, a unanimous U.S. Third Circuit appellate court upheld payroll company Automatic Data Processing’s (“ADP”) non-compete agreements but remanded the case to the district court for tailoring. The federal appeals court reversed a decision by the district court which had found the covenants not to compete to be unenforceable. In reversing the lower court, the Third Circuit found that the non-compete agreements were necessary to protect ADP’s client relationships and goodwill, interests that New Jersey courts, “consistently recognize as legitimate.”

According to the Third Circuit’s opinion, ADP requires certain high-performing employees to sign non-compete agreements and similar pledges in order to qualify for stock option awards. These restrictive covenants prohibit employees who received stock options from working for a competitor for one year and from soliciting ADP’s current or prospective clients for two years after leaving ADP. Two former ADP employees challenged ADP’s practice, alleging that the restrictive covenants were more onerous than they needed to be. The Third Circuit found that the solution in such circumstances is to amend, or “blue pencil” the non-compete agreements, not find them entirely unenforceable.

The dispute began shortly after two former sales managers, Nicole Rafferty and Kristi Mork, left ADP in 2017 and joined a competitor, Ultimate Software Group. ADP sued both Mork and Rafferty in New Jersey federal court seeking to impose injunctions enforcing the non-compete agreements effectively barring Mork and Rafferty from continuing to work for the competitor or from soliciting ADP’s current or prospective clients.

In April 2018, District Judge Jose Linares, the judge overseeing the Rafferty case, denied ADP’s motion for entry of a TRO and preliminary injunction finding that the non-compete was meant to reduce competition as opposed to protecting a legitimate business purpose. In June 2018, District Judge Claire Cecchi, the judge overseeing the Mork case, denied a similar motion adopting Judge Linares’s reasoning.

ADP appealed the denial of its motions in each case, arguing that the covenants were necessary to protect legitimate business interests, namely its relationships with clients from improper competition and its confidential information that had been disclosed to Mork and Rafferty in the course of their employment. ADP argued in its appeal that restrictive covenants are particularly appropriate and necessary for high-performing employees because they have the strongest relationships with ADP’s clients and are the most knowledgeable of ADP’s product offerings and marketing strategies.

In response, the employees argued that the covenants were improper restraints on trade and were not, as ADP contended, measures meant to protect legitimate business interests. In arguing for the unenforceability of the non-compete agreements, the employees argued that the agreements were selectively imposed on a subset of employees without evidence that those workers posed a greater risk to ADP.

In its opinion, the Third Circuit largely rejected the employees’ arguments. It found that selective imposition of the restrictive covenants does not in and of itself make them an improper restraint on trade. Quite the opposite, the court countered. The fact that the covenants are imposed only on a few employees makes them less of a restraint on trade than if they were imposed on all ADP employees. The court also rejected the argument that high-performing employees posed no greater threat to ADP than other employees. Competition from high-performing employees who make the most sales and have the most client contacts would pose a greater threat to ADP’s business than that from other less productive workers. To the extent the employees’ arguments had merit, the court concluded, the answer was to blue pencil or partially enforce and modify the agreements as needed to make them compliant with New Jersey law. The court’s full opinion is available here.

Whether you are an employee being asked to sign a non-compete agreement or an employer needing a non-compete agreement or needing to see if your existing agreement is still valid, it is important to speak with an experienced non-compete, non-solicitation, and non-disclosure law attorney. It is no less important to have a skilled non-compete attorney at your side if you find yourself in litigation over the enforcement of a covenant not to compete.

Super Lawyers named Illinois commercial law trial attorney Peter Lubin a Super Lawyer and Illinois business dispute attorney Patrick Austermuehle a Rising Star in the Categories of Business Litigation, Class Action, and Consumer Rights Litigation. Lubin Austermuehle’s Illinois business trial lawyers have over thirty years of experience in litigating complex class action, copyright, noncompete agreement, trademark and libel suits, consumer rights and many different types of business and commercial litigation disputes.  Our Naperville and Clarendon Hills business dispute lawyers, civil litigation lawyers and copyright attorneys handle emergency business lawsuits involving copyrights, trademarks, injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist Chicago and Oak Brook area businesses and business owners who are victims of fraud. You can contact us by calling at 630-333-0333.  You can also contact us online here.

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