Remedies for Breach of a Restrictive Covenant
by Joan H. Hillenbrand
Under New Jersey law, there are a number of legal and equitable remedies that are available to an employer when a former employee breaches the non-competitive covenant in his employment contract. For example, the employer might obtain an injunction that fully enforces the covenant as drafted and bars the employee from any further breach.1 Or, the employer might be awarded what is called "partial enforcement" of the covenant, namely, if the covenant is found to be unreasonably broad, a court might enforce the covenant to the extent it is lawful.2 Or, the court might decide to grant the employer legal relief, namely, the damages it sustained as a result of the employee's breach.3 However, the employer may not be entitled to any of the mentioned remedies unless it can meet the standards imposed by the Supreme Court in Solari Industries, Inc. v. Malady4 and its subsequent decisions, Whitmyer Bros., Inc. v. Doyle5 and Karlin v. Weinberg.
Furthermore, even if the employer ultimately is awarded any of those remedies, they may not be completely efficacious. For example, unless the employer is able to obtain preliminary injunctive relief, by the time the lawsuit is concluded, the damage caused by the breach may be irreparable. And yet, it may be extremely difficult for an employer to meet the burden necessary to obtain such preliminary relief. In addition, an award of damages may not be satisfactory because, unless there is an enforceable liquidated damages clause, proof of the employer’s lost profits would be required. Understandably, an employer might be hesitant to have that information disclosed to others, particularly a former employee who is now one of its competitors.
Solari, Whitmyer and Karlin
In 1970 the New Jersey Supreme Court rendered its decision in Solari Industries, Inc. v. Malady,7 in which it radically changed the law of New Jersey as it applied to restrictive covenants. In Solari, the Supreme Court refused to follow earlier New Jersey decisions that had held that a restrictive covenant was unenforceable if it failed to contain an express geographical limitation. In so doing, the Supreme Court essentially was refusing to lay down any hard and fast rules as to what kind of provisions must be included in a restrictive covenant if it is to be enforceable.
Instead, the Supreme Court in Solari adopted a test of reasonableness. It held that a restrictive covenant will be enforceable to the extent it is reasonable under all the circumstances of the particular case.8 Moreover, as a guide for determining reasonableness, the Supreme Court declared that a covenant "will generally be found to be reasonable where it simply protects the legitimate interests of the employer, imposes no undue hardship on the employee, and is not injurious to the public."9 This has become known as Solari's "three-pronged test"10 and was assiduously followed by the Supreme Court in its two subsequent decisions on restrictive covenants, Whitmyer Bros., Inc. v. Doyle11 and Karlin v. Weinberg.12
Accordingly, if an employer is to succeed in having its covenant enforced as drafted, the employer will have to prove that the covenant (1) simply protects the employer’s legitimate interests, (2) imposes no undue burden on the employee, and (3) does not hurt the public. As for the first "prong" of this test, the Supreme Court stated quite emphatically in Whitmyer that an employer has no legitimate interest in preventing competition as such.13 In contrast, Whitmyer recognized that an employer has patently legitimate interests in protecting its trade secrets, its confidential business information and its relationships with its customers.14
Nevertheless, in both Solari and Karlin the Supreme Court made it clear that a covenant would not be enforced beyond the extent necessary to protect those legitimate interests. For example, in Solari the Court indicated that a limited restraint against the employee's dealing with the employer's actual or prospective customers might well have sufficed, as opposed to broadly restraining the employee from selling any products sold by the employer.15 In Karlin, which involved an employment agreement between physicians, the Court said the covenant would be enforced only for the time necessary for the physician to reestablish his relationship with the patients. The covenant would be enforced neither beyond that geographical area needed to protect the physician's practice, nor as to activities not in competition with the employer’s practice.16
As for the second prong of the Solari test, namely, undue hardship on the employee, Karlin found relevant the likelihood of the employee finding work elsewhere in the field. It also found the reason for the termination of the relationship significant – whether it was the result of any wrongful conduct by the employee or rather merely the employee’s desire to end the relationship. If the latter, then it should be more difficult to find undue hardship. Furthermore, a mere showing of personal hardship, without more, would not amount to "undue hardship."17
Finally, as to Solari's third prong, i.e., injury to the public, Karlin indicated that the covenant should not be enforced in any way that might leave the patients in the area without an adequate number of physicians whom they could choose to service their needs.18 In other words, the Court in Karlin seemed reluctant to allow enforcement of the covenant if it resulted in a seriously limited number of providers of the relevant services or goods.
If the restrictive covenant as drafted is able to meet the standards set forth in Solari, Whitmyer and Karlin, the employer should be entitled to an injunction fully enforcing the covenant and barring the employee from any further breach. However, even if the court should determine the covenant as drafted is unreasonably broad, then pursuant to Solari, the employer may still be entitled to the covenant's partial enforcement.
Solari represented the first time under New Jersey law that a court held that there could be such partial enforcement of a restrictive covenant. Prior to Solari, if a covenant were found unenforceable as drafted, a court would have simply declared the covenant void and denied the employer any relief whatever. Under Solari, however, the fact that a restriction goes too far to be valid as a whole does not prevent a court from partially enforcing it to the extent it reasonably protects an employer's legitimate interests.19 However, Solari did recognize a significant qualification to a court's use of the remedy of partial enforcement, namely, an employer will not be entitled to that relief if it has been guilty of bad faith or inequitable conduct.20 That qualification essentially is nothing more than an application of the equitable doctrine of “clean hands.”
Furthermore, Whitmyer provided a significant caveat regarding the granting of preliminary injunctive relief. In Whitmyer, the covenant and its breach had been acknowledged and, based on those admissions, the trial court determined the employer was entitled to a broad preliminary restraint pending the final hearing, at which time the court would determine whether the restraint should be limited in any way The Supreme Court reversed. It held that to be entitled to a preliminary restraint, the employer had to make a "suitable showing" with respect to each of Solari's three prongs.21 In accordance with the standards usually applicable to applications for a preliminary injunction, an employer has the burden of demonstrating "reasonable probability of success" on each of the three prongs, and where all material facts are controverted, a preliminary injunction will not issue.22 In Whitmyer, the employees clearly and comprehensively denied the employer’s assertion that its legitimate interests were in jeopardy and, given those denials, the employer obviously was unable to meet its burden for a preliminary injunction.23
Indeed, one must wonder whether any employer will be able to meet the burden mandated by Whitmyer and Solari. In this regard, one also should point out that neither in Solari nor in any of the reported decisions subsequent to it, was preliminary injunctive relief upheld.24 Furthermore, absent preliminary injunctive relief, one would have to question the efficacy of any permanent injunction that might issue. During the interim period, the employee clearly will have the opportunity of "endearing" himself to the customers and even if a permanent injunction against his dealing any further with them should issue, it is problematical whether they would return to the employer as opposed to dealing with some third party.
Unless the parties' employment agreement contains an enforceable liquidated damages clause, the employer will be required to prove the profits it lost as a result of the employee’s breach. Aside from the proof problems that may be involved in establishing the lost profits, the employer understandably may be loath to disclose such information to a competitor such as its former employee. Thus, an award of damages also may prove to be a less than satisfactory remedy.
Given the foregoing circumstances, it should be obvious that employer remedies for breach of a restrictive covenant may be difficult to obtain and not as advantageous as hoped.
- Karlin v. Weinberg, 77 N.J. 408, 421 (1978).
- Solari Industries, Inc. v. Malady, 55 N.J. 571, 585 (1970).
- Id. at 586.
- 55 N.J. 571 (1970).
- 58 N.J. 25 (1971).
- 77 N.J. 408 (1978).
- 55 N.J. 571 (1970).
- 55 N.J. at 576.
- Mailman, Ross, etc. v. Edelson, 183 N.J. Super. 434, 438 (Ch. Div. 1982).
- 58 N.J. at 32-33.
- 77 N.J. at 417, 422-423.
- 58 N.J. at 33.
- 55 N.J. at 586.
- 77 N.J. at 423.
- 77 N.J. at 423-424.
- 77 N.J. at 424.
- 55 N.J. at 577, 585.
- 55 N.J. at 576.
- 58 N.J. at 37.
- Crowe v. De Gioia, 90 N.J. 126, 133 (1982).
- 58 N.J. at 37.
- Karlin, supra; Whitmyer, supra; A.T. Hudson & Co., Inc. v. Donovan, 216 N.J. Super. 426 (App. Div. 1987); Ingersoll-Rand Co. v. Ciatta, 216 N.J. Super. 667 (App. Div. 1987) certif. granted, 108 N.J. 192 (1987); Mailman, Ross, etc. v. Edelson, 283 N.J. Super. 434 (Ch. Div. 1982); Dwyer v. Jung, 133 N.J. Super. 343 (Ch. Div.) aff'd o.b.137 N.J. Super. 135 (App. Div. 1975).