Covenants, Not-To-Compete, and Restraints Against Competition FAQs

Covenants not to compete, also known as non-compete agreements or restrictive covenants, are provisions within contracts that restrict a party’s ability to engage in activities that compete with the other party, usually an employer. These agreements are often used in employment contracts, business sales, or partnership agreements to protect an employer or business’s legitimate interests, such as trade secrets, customer relationships, or proprietary information.

In New Jersey, non-compete agreements are enforceable, but they must meet certain requirements and are subject to limitations. Courts in New Jersey will generally enforce a non-compete agreement if it:

Protects a legitimate business interest: The restriction should be aimed at safeguarding the employer’s trade secrets, confidential information, customer relationships, or other legitimate business interests.

Is reasonable in scope: The non-compete agreement should be reasonable in terms of its geographical scope, duration, and the types of activities restricted. New Jersey courts will consider factors such as the nature of the business, the employee’s role, and the potential impact on the employee’s ability to find new employment.

There is no specific rule on what constitutes a reasonable duration or geographical scope, as it depends on the individual circumstances of each case.

Does not impose an undue hardship on the employee: The non-compete agreement should not be overly burdensome or restrict the employee’s ability to earn a living to an unreasonable extent.
Does not harm the public interest: The non-compete agreement should not negatively impact the public, for example, by restricting access to essential services or creating a monopoly.

A New Jersey court may choose to “blue-pencil” or modify the agreement to make it more reasonable and enforceable. However, courts have discretion in this regard, and there is no guarantee that they will modify the agreement rather than declare it unenforceable.

While non-compete agreements or restrictive covenants can be beneficial for various types of businesses in New Jersey, they are particularly relevant for businesses with legitimate interests to protect, such as trade secrets, proprietary information, or valuable customer relationships. Some examples are technology companies, franchise businesses, healthcare providers, professional service firms, and manufacturing companies.

If a covenant or non-compete agreement is breached in New Jersey, the aggrieved party (usually the employer or business) can take legal action against the breaching party (usually the former employee or business partner).

Injunctive relief: The employer can seek a temporary restraining order (TRO) or a preliminary injunction from the court to stop the breaching party from continuing the prohibited activities. If the employer prevails in the case, the court may issue a permanent injunction to prevent further violation of the non-compete agreement.

Damages: The employer may seek monetary compensation for the losses incurred due to the breach of the non-compete agreement. This may include actual damages (e.g., lost profits, the cost of hiring a replacement employee, or the cost of training a new employee), as well as liquidated damages if specified in the agreement. Liquidated damages are a predetermined sum agreed upon by the parties to be paid in case of a breach.

Attorneys’ fees and costs: If the non-compete agreement includes a provision allowing for the recovery of attorneys’ fees and costs, the prevailing party in a lawsuit may be entitled to recover these expenses from the losing party.

Enforcement of other contractual provisions: If the non-compete agreement is part of a larger employment or business contract, the breach may also trigger other clauses within the contract, such as a termination clause or forfeiture of certain benefits.