What Restrictive Covenants Aren't Enforceable in New Jersey?
Putting them in contracts doesn’t automatically mean they’re binding
on October 18, 2021
Restrictive covenants may be enforceable in New Jersey—but only if they are “reasonable.” Courts in New Jersey will use a three-pronged test in order to determine whether or not a restrictive covenant is legally valid. In this article, you will find an overview of the most important things to know about the enforceability of restrictive covenants in New Jersey.
What is a Restrictive Covenant?
Broadly defined, a restrictive covenant is a contract provision that prohibits one or more parties from engaging in certain actions in the future. Most often, restrictive covenants are found in employment agreements or in contracts between companies entering into a commercial relationship. Some notable examples of restrictive covenants include:
- Noncompete agreements
- Nondisclosure agreements
- Nonsolicitation agreements
Three Requirements a Restrictive Covenant Must Satisfy to Be Enforceable
Unlike some other jurisdictions, New Jersey does not have a specific statute for restrictive covenants. However, courts have developed a three-part test in order to assess the enforceability of these types of contract provisions. Whether you have a noncompete, a nondisclosure agreement, a nonsolicitation agreement, or any other type of restrictive covenant, a New Jersey court will only uphold the terms of the contract if the following three criteria are met:
- Legitimate Business Interest: Businesses, organizations, and other employers can only use restrictive covenants that protect a legitimate interest. A restrictive covenant that goes beyond protecting a legitimate business interest will be deemed too broad.
- No Undue Hardship: Restrictive covenants must not put an undue burden on an employee, independent contractor, or other entity. As an example, a noncompete that is permanent will likely be too broad to enforce on the grounds that it imposes an undue hardship.
- Consistent With Public Policy: Finally, restrictive covenants must be consistent with New Jersey public policy to be enforceable. A nondisclosure agreement that bars someone from reporting a crime is against public policy in New Jersey, and can be thrown out.
New Jersey Courts May “Blue Pencil” a Restrictive Covenant
New Jersey is sometimes referred to as a “blue pencil state” for restrictive covenants. In effect, this means that courts in New Jersey can modify the terms of a restrictive covenant to make them reasonable and enforceable instead of invalidating them altogether.
In ADP, LLC v. Kusins, a New Jersey court upheld a nonsolicitation agreement that ADP required an employee to sign. However, the court found that the restrictive covenant was too broad—it “blue penciled” the agreement, narrowing the number of clients who could not be solicited.
The enforceability of a restrictive covenant in New Jersey is very much a case-by-case issue. The terms of the agreement must be reasonable. If you have any questions about the enforceability of restrictive covenants, contact an experienced New Jersey contract law attorney for help. And if you’d like to learn more about this area of the law, please see our contract law overview.