What You Need to Know
- Restrictive covenants protecting confidential information, customer relationships, and goodwill are enforceable in New Jersey, but only if they protect a legitimate business interest and are reasonable in duration, geography, and scope, making enforceability heavily dependent on the specific language of the agreement and the surrounding facts.
- In recent years, lawmakers, regulators, and courts have increasingly questioned whether certain restrictive covenants unfairly limit employee mobility, suppress wages, and inhibit competition in the marketplace.
- Given the fact-sensitive nature of restrictive covenant disputes, early and experienced legal guidance can play a critical role in both drafting enforceable agreements and evaluating whether an existing restriction is likely to withstand judicial scrutiny.
Restrictive covenants – including non-compete agreements and unfair competition clauses – are common in employment contracts, independent contractor agreements, business contracts, and corporate or partnership arrangements. These agreements are designed to protect a business’s confidential information, customer relationships, and goodwill after a relationship with an employee, contractor, owner, partner, or other business associate ends.
New Jersey courts have recognized that restrictive covenants can significantly impact an individual’s ability to earn a living by limiting future career opportunities, and do not automatically enforce them simply because they were signed. Instead, the courts carefully consider whether the restriction is fair, narrowly tailored, and no broader than necessary to protect a legitimate business interest. In doing so, the courts seek to balance a business’s right to safeguard its confidential information, customer relationships, and goodwill against open competition and an individual’s right to pursue their career goals.
The Federal Trade Commission’s attempted nationwide ban on non-compete agreements placed restrictive covenants under increased scrutiny. In recent years, lawmakers, regulators, and courts across the country have increasingly questioned whether certain restrictive covenants unfairly limit employee mobility, suppress wages, and inhibit competition in the marketplace. Although the FTC’s proposed rule was ultimately blocked by federal courts, the effort reflects a broader national trend toward closer scrutiny of restrictive covenants and their impact on workers and competition.
What is a Restrictive Covenant?
Restrictive covenants are contractual provisions that limit certain competitive conduct after a business relationship ends, such as non-compete and non-solicitation agreements, confidentiality and trade secret provisions, and restrictions on contacting customers or clients or recruiting former employees. These provisions frequently appear in employment and independent contractor agreements, partnership and shareholder agreements, LLC operating agreements, and documents governing the sale of a business.
Are Restrictive Covenants Enforceable in New Jersey?
Yes, but enforcement is subject to limitations. New Jersey courts generally enforce restrictive covenants only when they are reasonable and narrowly tailored. Courts will not enforce agreements that merely seek to eliminate ordinary competition or unnecessarily prevent someone from working in their profession.
The leading New Jersey Supreme Court cases governing the enforceability of restrictive covenants are Solari Indus., Inc. v. Malady and Whitmyer Bros., Inc. v. Doyle, which established the modern framework for evaluating non-compete agreements.
These cases form what is often referred to as the Solari/Whitmyer test, which in summary confirms that a restrictive covenant is enforceable if it:
- Protects a legitimate business interest;
- Imposes no undue hardship on the employee;
- Is reasonable in duration, geographic scope, and scope of activity; and
- Is not injurious to the public interest.
What is a “Legitimate” Business Interest?
New Jersey courts recognize several legitimate business interests that may justify restrictive covenants, including those protecting trade secrets, confidential and proprietary information, customer relationships and goodwill, specialized processes or training provided by the employer, and protection against unfair competition by former employees who previously had access to sensitive business information.
It is important to note that an employer generally cannot use a restrictive covenant simply to prevent ordinary competition or punish a departing employee. For example, New Jersey courts are more likely to enforce restrictions against a high-level executive or salesperson with access to proprietary information and/or confidential client relationships than against an entry-level employee with limited access to sensitive information.
Reasonableness Is Critical
New Jersey courts closely examine whether the restriction is reasonable in terms of:
- Duration – While there are no specific time limitations on the duration of restrictions, shorter restrictions are more likely to be enforced. Many enforceable New Jersey restrictive covenants last between six months and two years, depending on the industry and circumstances.
- Geographic Scope – A geographic restriction should have some relation to the employer’s actual business operations. For example, a nationwide restriction may be unreasonable for a local business operating only in a limited market. At the same time, the reasonableness of a geographic limitation is often evaluated on a case-by-case basis and depends heavily on the nature of the business, the employee’s role, the scope of the employer’s operations, and the markets in which the employee worked.
- Scope of Activity – Courts also evaluate whether the agreement restricts only the type of competitive conduct necessary to protect the employer’s legitimate interests. A restriction preventing a former employee from working in any capacity within an entire industry may be considered overly broad.
New Jersey Courts May Modify Overly Broad Agreements
New Jersey follows the “blue pencil” doctrine, which allows courts to modify or partially enforce an overly broad restrictive covenant instead of invalidating it entirely. For example, a court may reduce the length of a restriction, narrow the geographic scope, or limit the prohibited activities. As a result, even an aggressive restrictive covenant may still be partially enforceable in New Jersey.
Restrictive Covenants in the Sale of a Business
New Jersey courts generally provide greater protection to restrictive covenants arising from the sale of a business. When a business owner sells a company, the purchaser is often buying goodwill, customer relationships, and market position. Restrictive covenants in this context are also frequently the product of a negotiated, arm's-length transaction, rather than a condition of employment imposed on an employee with limited bargaining power.
The FTC’s Attempted Ban
As referenced earlier, in April 2024 the FTC adopted a rule that, if allowed to stand, would have effectively banned most non-compete agreements nationwide. The FTC argued that non-compete agreements suppress wages, reduce worker mobility, and limit competition. The proposed rule would have prohibited most future non-compete agreements, invalidated many existing non-competes, and required employers to notify workers that certain restrictions were unenforceable.
The rule was quickly challenged, and in August 2024 a federal court held that the FTC likely exceeded its authority and blocked the rule nationwide. In September 2025, the FTC formally withdrew its appeals challenging the court’s rejection of its proposed ban.
As a result, restrictive covenants remain governed primarily by state law, including in New Jersey, although additional litigation and potential federal and state legislative efforts are likely to continue.
Practical Considerations for Businesses, Employers and Employees
As overly aggressive agreements may increase the likelihood of litigation and judicial modification, businesses and employers seeking to enforce restrictive covenants in New Jersey should draft narrowly tailored restrictions, clearly identify the legitimate business interests being protected, avoid excessively long or overly broad geographic or industry-wide restrictions, avoid imposing restrictions for an overly extended period of time, regularly review agreements for legal compliance, and consider less restrictive alternatives, such as confidentiality or non-solicitation agreements.
When asked to sign a restrictive covenant, employees should carefully evaluate the duration and geographic scope of the restriction, the activities it prohibits, whether it is broader than necessary, and if it would impair their future employment opportunities.
Conclusion
Restrictive covenants remain an important tool for protecting legitimate business interests in New Jersey. Given the fact-sensitive nature of restrictive covenant disputes, however, early and experienced legal guidance can play a critical role in both drafting enforceable agreements and evaluating whether an existing restriction is likely to withstand judicial scrutiny.
Businesses seeking to protect confidential information, customer relationships, and goodwill should ensure that their agreements are narrowly tailored and compliant with evolving law. Likewise, those presented with restrictive covenants should fully understand the practical and legal consequences of these provisions before signing or attempting to comply with them.
On both sides of the equation, it is equally important to be proactive in order to protect your rights and interests and avoid costly legal challenges.
Please contact the authors of this Alert with questions concerning restrictive covenants, or to discuss your specific business circumstances.
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Conor J. Hennessey |
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Charles J. Vaccaro |