Grab your passports, compass and other essential travel gear, as this edition of The Restricting Covenant Series navigates through the treacherous waters of noncompete agreements and their geographic reach.
First Stop: New Jersey
Ah, the Garden State. Home to the most diners and shopping malls. Where the state bird is the American goldfinch, the state flower is the violet, but alas there is no official state song (perhaps a New Jersey native such as Bruce Springsteen, John Bon Jovi or Queen Latifah will change that). Who would ever want to leave? Well, suppose you worked for a New Jersey company that required you to sign a noncompete with a geographic restriction that prohibits you from competing in business against your employer anywhere within the entire Garden State after your employment ends (that’s right, all 365 exits and entrances on the Garden State Parkway). Could such a statewide geographic restriction be enforced? The short answer is: Maybe.
Most noncompete clauses have some type of geographic limitation, and that limitation can be defined in a variety of ways. New Jersey, like many other states, does not have a law that expressly dictates what is or is not a proper or reasonable geographic restriction. Instead, courts decide what is reasonable or unreasonable on a case-by-case basis using the following three guideposts: (1) is the geographic scope necessary to protect the employer’s legitimate business interests; (2) would it cause an undue hardship to the employee; and (3) does it impair the public interest? Thus, while in some cases restricting a person from working for a competitor within the entire state of New Jersey might be a reasonable restriction, in other cases it might not.
It is also worth noting that New Jersey is a “blue pencil” jurisdiction, meaning that even if a judge were to find the geographic restriction overbroad, the court can modify the scope to include only the geographic area needed to protect the employer’s legitimate business interests. For example, that happened in a physician and hospital noncompete dispute (Community Hospital Group v. More (2005)), where the Supreme Court of New Jersey reduced a neurosurgeon’s 30-mile geographic restriction down to less than 13 miles (and not to include Somerset County) based in large part on public policy concerns regarding the dearth of neurosurgeons within certain geographic areas of New Jersey.
Next Up: Coast to Coast Across the U.S.A.
Road trip! It is not uncommon to find a geographic restriction that extends to “the entire United States” in noncompete agreements, particularly for C-suite executives who are responsible for overseeing a company that conducts business nationwide. In determining whether a nationwide restriction would be valid and enforceable, a threshold question that must be answered is, which state’s law applies? The answer is critical because some states have laws that would not allow a nationwide restriction. If, for example, the executive’s agreement were governed by Louisiana law, a nationwide restriction would violate Louisiana’s noncompete law, which expressly limits enforcement of noncompetes to specific parishes or municipalities where the employer actually conducts business in Louisiana. These parishes or municipalities must be identified by name in the noncompete agreement. Several noncompete cases in Louisiana have been dismissed simply because the noncompete provision did not identify the specific parish or municipality or did not identify any geographic limitation.
In states that do not have specific laws that address the permissible scope of a geographic limitation within noncompete agreements, courts generally will look to similar guideposts used in New Jersey and other factors such as: Is a nationwide restriction necessary to protect the company’s legitimate business interests? Where does the company actually conduct business? Where are the company’s customers, competitors, suppliers, or business partners? Where does the company sell or market its products or services? Are there any specific public policy concerns that would override the employer’s interests? Could the employee obtain employment elsewhere without suffering an undue hardship?
Final Destination: To the ends of the Earth
When one state or even an entire country is not enough to protect a company’s business interests, some noncompete provisions identify the “entire world” or “worldwide” or otherwise suggest by its language that the entire world is the desired restricted geographic area. Would a court ever enforce a restriction that prohibits someone from working for a competitor anywhere in the world? Some might and some might not. The analysis is state-by-state and case-by-case specific.
In states that allow noncompete agreements, a court might enforce a global noncompete that is narrowly tailored to protect the company’s business operations. For example, if the employer can demonstrate that it is a worldwide manufacturer and distributor of products and the employee was responsible for overseeing and developing the company’s pricing strategies around the world or was otherwise involved in the research or development of those products for use worldwide, then a court might enforce a global restriction for a short period of time. Typically, in return for allowing such a broad geographic restriction, courts will look for the other limitations, such as the duration of the restrictions and the scope of the person’s business activities, to be curtained in order to mitigate the potential undue burden to the departing employee.
Technological advances of the job and the global nature of the business are critical factors that could affect the reasonableness of geographic limitations. As one judge noted, “In this Information Age, a per se rule against broad geographic restrictions would seem hopelessly antiquated.” That same judge concluded that if the relevant industry involves a worldwide market and the employer “focuses upon a very narrow specialized niche within which separable geographic zones are indistinguishable,” it would not be unreasonable for the employer to impose a worldwide noncompetition restriction on the employee.
The goal of The Restricting Covenant Series is to provide an overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants. It is not intended to provide and should not be construed as providing legal advice. Each situation is different, including the governing state law. If legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.