Articles Posted in Non-Compete Agreements

In a recent New Jersey federal case, ADP LLC v. Lynch, 3d Cir. (Ambro, U.S.C.J.), the Third Circuit declined to lift an injunction prohibiting two former employees of ADP from soliciting its clients on behalf of a competitor. The injunction partially enforced non-compete agreements that Jordan Lynch and John Halpin agreed to online in what is commonly referred to as a “clickwrap” agreement. A clickwrap agreement is a type of contract in which a user must agree to terms and conditions prior to using the product or service. These are commonly used in the software or technology industry. It is interesting to see a court confirm its enforceability in the employment context.

Messrs. Lynch and Halpin each participated in ADP’s stock award plan for five consecutive years. To participate, they had to click on an electronic box to acknowledge that they had read related documents. Those documents included restrictive covenants which state that the employee cannot (1) solicit certain clients and prospective clients of ADP for one year after they stopped working for the company; (2) disclose any of ADP’s confidential information; or (3) use ADP’s confidential information regarding the identity of the company’s current, past or prospective clients. Mr. Lynch also signed a separate agreement, containing similar restrictions.

The employees resigned their sales positions at ADP and joined its direct competitor, Ultimate Software Group (“USG”). ADP sued Mr. Halpin and Mr. Lynch, asserting that they had violated their restrictive covenants. It also sought a preliminary injunction to prohibit them from working for USG and from soliciting ADP’s clients. Mr. Halpin and Mr. Lynch claimed that they never actually read or agreed to the restrictive covenants and therefore, the court should decline to enforce them as written.

The NJ Appellate Division has ruled, once again that it will not require enforcement of an arbitration clause absent a showing that the clause constituted a clear waiver by the plaintiff of his or her right to a jury trial.

In Anthony v. Eleison Pharmaceuticals LLC, Docket No. A-932-15T4 (App. Div. July 18, 2016), a former executive filed a lawsuit against his former employer under the New Jersey Wage Payment Act, alleging that the company failed to pay him wages that were due to him following the termination of his employment. The lawsuit also included breach of contract claims. The employer filed a motion to dismiss the lawsuit and order arbitration pursuant to a clause in the employment agreement which stated, among other things, that “[t]he parties agree that should any dispute arise out of this Agreement, a phased dispute resolution process shall resolve the dispute,” ending in binding arbitration. The trial court granted the employer’s motion, stating that the arbitration clause constituted a valid waiver by the employee of his right to pursue his claims in a judicial forum.

The lower court’s ruling in Anthony was clearly in error. The New Jersey Supreme Court ruled in Atalese v. U.S. Legal Services Group LP, 219 N.J. 430 (2014), that NJ courts will not enforce arbitration clauses unless they contain explicit language informing the employee that he or she was giving up the right to go to court and have a jury trial. The arbitration clause at issue in Anthony clearly did not contain such language. Accordingly, the Appellate Division reversed the lower court and the case will proceed to trial.

A recent case from the United States Court of Appeals for the Eighth Circuit makes clear that an employer will lose its contractual right to arbitration if it proceeds in litigation for eight months.  In Messing v. North Central Distributing Inc., the plaintiff, a former Vice President, brought a breach of contract and wrongful termination claim against his former employer.  The company actively engaged in defending the case in the litigation, including filing an answer with 24 affirmative defenses, removing the case to federal court, attending discovery conferences and setting discovery schedules, filing a venue transfer motion, and agreeing to a trial date.  Eight months into the litigation, the employer sought to compel arbitration under the Vice President’s employment contract.  The District Court denied the employer’s motion to compel arbitration, reasoning that the company had waived its right to arbitrate since 1) it knew of the existing right to arbitration, and 2) it had prejudiced the employee by acting inconsistently with that right.
On appeal, the Eighth Circuit upheld the lower court’s ruling, stating that the employer had failed to do “all it could reasonably have been expected to do” to assert its right to arbitration earlier.  Indeed, the employer’s answer did not plead the arbitration clause in its affirmative defenses, nor mention it at the pretrial scheduling conference, nor raise the issue in its motion to transfer venue.  Moreover, the Court credited the lower court’s finding that the employer’s actions had caused the employee prejudice, in that he had been forced to expend considerable time and money litigating the matter in federal court.
While there is a long line of cases which favor arbitration as an alternative way to resolve disputes between parties, employers and employees alike should be aware that a contractual right to arbitrate claims must be asserted in a timely way by the party seeking arbitration.  This “use it or lose it” principle is sometimes an effective way to defeat an otherwise unassailable arbitration provision.

New Jersey State Assemblymen Peter J. Barnes, III, Joseph V. Egan and Wayne P. Deangelo recently introduced a bill in the New Jersey State Assembly which limits the enforceability of certain post-employment restrictive provisions in employment contracts if the individual who is subject to these restrictions is eligible for unemployment compensation in the state. The bill provides that if an unemployed individual is found to be eligible to receive unemployment compensation benefits, that individual shall not be held bound by any covenant, contract or agreement not to compete, not to disclose or not to solicit.

The rationale behind the bill is to make it easier for a terminated employee to become re-employed. Although it is unclear if the Governor will ultimately sign the bill into law, there appears to be support within the state Assembly and Senate.

The bill, as written, only applies to agreements entered into after the date of the law’s enactment. Therefore, we expect to see more employers requiring that their employees sign these restrictive covenants in the near term in order to avoid potential coverage under the law. Employers may also design these contracts to provide for severance in the form of salary continuation pay so that the former employee may not be deemed eligible for unemployment during the term of the non- compete/non-solicitation.

According to CBS News, younger veterans who served in the years following the Sept. 11 attacks are having a harder time finding work than their civilian peers. The unemployment rate for veterans between 18 and 24 exceeded 20 percent last year and was also in double digits for those 25-34. CBS News reports that the unemployment rate for both age groups was higher than for their non-veteran peers and much higher than the national average.

This persistent problem has continued despite a wide range of private and public efforts to address the situation. For example, Congress has approved tax credits for companies that hire veterans and federal agencies have stepped up their preferential hiring of vets. In the private sector, companies such as Wal-Mart, General Electric and many others have announced programs designed to hire more veterans.

In the legal realm, it is unlawful for employers to discriminate against persons based on their status as a veteran. If you are a veteran who has had difficulty finding or keeping a job because of your military service, consider getting advice from a competent employment lawyer regarding your particular situation.

Traub Law, LLC has recently published a white paper entitled “Top Ten Ways to Maximize Your Unemployment Insurance Benefits.” Readers of this blog and visitors to our website can download this white paper for free.

The paper describes several ways that employees can improve their chances of being awarded unemployment insurance benefits. Some are obvious, such as “do not resign voluntarily.” Some are not so obvious, including what to say and what not to say to the Department of Labor at the initial fact-finding teleconference.

If you are recently laid off or terminated from your job, or considering whether or not to resign, take a few minutes to read up on this important subject.

Manufacturers are calling for restrictions on the current H-1B non-immigrant visa program to be lifted, calling them too rigid and a hindrance to the economy. In particular, automobile companies in Michigan want the H1-B program opened to skilled laborers for manufacturing jobs which are currently vacant.

The H-1B visa, which was created in the 1990s to fill a need for skilled information technology workers, allows foreign workers to take jobs in the U.S. for up to three years. Year after year, H-1B workers provide specialized computing and other skills to companies in the United States. The program accepts no more than 65,000 workers and is capped at an additional 20,000 for those with a master’s degree.

Automotive manufacturers want these caps lifted and the qualifications for obtaining an H1-B

When Zynga, the social network game developer known for addictive games such as Farmville, Cityville, and Mafia Wars, initially started, they attracted talented employees with company stock in lieu of a higher salary. Last year, while Zynga prepared for an initial public offering, the company realized that too much stock had been given out to earlier employees. As a result, Zynga executives decided to give some employees an ultimatum—either give back unvested stock or lose their job.

In deciding which employees were required to give back stock, Zynga evaluated whose contributions did not justify a potential cash “windfall” from the unvested stocks when the company went public. Unsurprisingly, the few employees asked to give back unvested stock were not happy. Some employees have decided to fight back with the assistance of lawyers and may be trying to settle the issue. It is unclear what specific agreement Zynga had with its employees when the company first started. Veteran employees of Zynga may now be regretting not negotiating a higher salary with Zynga instead of agreeing to the stock options. On the other hand, Zynga is well within its rights to fire employees they do not believe are performing well, in which case the employees would lose the unvested stocks anyway.

When employers do not give out high salaries and offer other types of incentives instead (such as stock options), employees should be mindful that while stock options may be lucrative for successful startup companies, they come with a risk. Lawyers and executives in Silicon Valley comment that taking back unvested stock from employees of internet startups is not a common practice, however they believe the practice has potential to become widespread.

Capital One Financial Corporation is suing former North Fork Bank executives, John Kanas and John Bohlsen, for the alleged breach of the non-compete agreements they signed with Capital One as part of Capital One’s purchase of North Fork in 2006. At issue in this case is a non-compete clause in the separation agreements the executives signed in mid-2007. The agreements stated that the two were prohibited from competing with Capital One as directors, stockholders, investors, employees, or in any other capacity in New York, New Jersey and Connecticut through August 2012. The executives had personally received more than $100 million each as part of the Capital One/North Fork merger and as compensation for agreeing to the non-compete.

After Kanas and Bohlsen left Capital One, they were members of a group of investors that purchased BankUnited, which operates in Florida. Clearly their involvement with BankUnited was not impermissible under their non-compete agreement with Capital One. The problem in this case arose when BankUnited signed an agreement to purchase Herald National Bank, a bank with offices in New York. Capital One claims, in their lawsuit, that the executives are violating their non-compete agreements by seeking to enter the New York market in direct competition with Capital One.

Mr. Kanas has issued a public statement re-asserting BankUnited’s planned acquisition of Herald Bank and that the acquisition will not cause him or Mr. Bohlsen to be in breach with their non-compete obligations with Capital One.

Peri Software Solutions, Inc., a Newark-based computer consulting company, has agreed to pay more than $765,00 in back wages and penalties to workers for violating provisions of the Immigration and Nationality Act, the U.S. Labor Department announced today. The company was investigated by the Department of Labor for alleged violations of the H1-B visa program — a program that allows qualified foreign-born workers to take employment in the United States so long as they are paid the same as American workers. The Labor Department alleged that Peri Software had improperly compensated its H1-B employees and not displayed the appropriate documentation in its offices.

According to the Labor Department, the company will pay nearly $640,000 in back wages and interest for 67 employees under this program. The company must also pay nearly $127,000 in penalties for failing to provide notice of the filing of labor condition applications in the offices where the employees worked. Peri Software is also prohibited from participating in the H-1B program for one year.

This firm has handled dozens of similar cases on behalf of H1-B workers. The modus operandi of companies like Peri Software is to recruit overseas workers with promises of great pay and job stability. Then, when the employee leaves his homeland and moves to the United States, he finds out that the pay is much less and the job stability is zero. At that point, however, the employee has already signed an onerous contract which greatly restricts his ability to find new employment. When the employee moves to a new job, the company files a lawsuit against him. These practices are despicable and I am very glad that the Department of Labor has come through with a big win. Hopefully, other New Jersey consulting firms take notice and begin to bring their practices in line with the law.