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A New Jersey appeals court has brandished its “blue pencil” to modify terms of ADP's restrictive covenants that it determined were overly broad.

The appeals court reversed orders in cases involving three former ADP employees whose restrictive covenants were found so broad they were deemed unenforceable by a trial court. The appeals court also reversed decisions in three other cases where terms of the ADP restrictive covenants were not found unenforceable, but where the trial court made extensive modifications that were deemed too far-reaching on appeal.

The term “blue pencil” refers to a court's modification or tailoring of a restrictive covenant.

Because the six defendants were found to have breached the restrictive covenants to varying degrees, the appeals court remanded the case to the trial court to decide the appropriate remedy for the breaches and to weigh ADP's request for counsel fees.

The decision shed light on what sort of restrictive-covenant provisions might get “blue-penciled” as overly broad in future cases. For example, prohibiting employees who leave the company from soliciting any ADP clients with whom the former employee was directly involved or knew to be an ADP client was found to be fair game. But restrictions on soliciting prospective clients unknown to the former employee while at ADP was held to be “unreasonable and onerous.”

The defendants were six former high-performing sales representatives for ADP who were required to sign restrictive covenants as a condition of joining a stock-award incentive program. They left ADP at various times and all joined the same competitor, Ultimate Software Group. ADP brought suits to enforce its restrictive covenants.

The cases were handled by two different trial judges: One heard the cases of defendants Erik Kusins, Michael DeMarco and Daniel Hobaica, and declared the agreements in those cases anti-competitive restraints on trade and therefore unenforceable. ADP appealed those rulings.

Another judge heard the cases of defendants Ryan Hopper, Anthony Karamitas and Nick Lenoble. That judge did not address whether the restrictive covenants were unreasonable restraints on trade. But the Appellate Division judges—Ellen Koblitz, Heidi Currier and Jessica Mayer—read that judge's remarks to say that restrictive covenants were necessary to support a legitimate business interest. That judge ruled that the restrictive covenants' noncompete and nonsolicitation clauses were overly broad, necessitating a blue-pencil edit of their application to Hopper, Karamitas and Lenoble's particular circumstances.

ADP also appealed the blue-penciling by both judges as excessive and inconsistent.

ADP also brought other suits to enforce its restrictive covenants in federal court. In May the U.S. Court of Appeals for the Third Circuit issued a decision that likewise called for blue penciling of ADP's restrictive covenants, which were deemed to be enforceable but overbroad.

Currier, writing for the Appellate Division panel, agreed with the Third Circuit's finding that ADP had a legitimate business interest in imposing its restrictive covenant on successful salespeople, and its finding that the imposition of a heightened restrictive covenant on such persons reflects the greater damage they could inflict on ADP on their departure.

But ADP's restrictive covenant bars former employees from soliciting business from any of the company's 620,000 existing clients, not just those the employee had substantial dealings with or acquired knowledge about while working for the company.

“We find this unreasonable. That restrictive language is untenable as an ADP employee could not possibly know all of ADP's actual clients. Therefore, it is necessary to blue-pencil the RCA to achieve the balance of protecting ADP's interests against the hardship it imposes on former employees,” Currier wrote.

The panel concluded a restrictive covenant may bar an employee from having any dealings with existing ADP clients that the employee was actively involved with or whose names the employee learned during his or her employment.

The panel also found ADP's prohibition on former employees soliciting prospective clients that ADP “reasonably expects” to provide business to within a two-year period after the employee's departure is overbroad.

The RCA also prohibits a former employee from soliciting any prospective client that ADP “reasonably expects” to provide business to within the two-year period following the employee's departure. The noncompete clause blocks a former employee from working with a competing business and selling the same services in the geographic area in which they worked while at ADP.

“Due to the breadth of ADP's worldwide reach, any company defendants approach might be a potential 'prospective' ADP client. We cannot envision any practical manner in which defendants could conduct business without offending this provision. That is an unreasonable burden and undue hardship, and therefore subject to blue-penciling,” Currier wrote.

The panel added that the restriction should only apply to a former employee who “gained knowledge of a potential client while at ADP and directly or indirectly solicits that client after leaving and working for a competitor.”

John Schmidt Jr. of Lindabury, McCormick, Estabrook & Cooper in Westfield, who represented the six defendants, did not respond to a request for comment.

ADP's lawyers were from McDonald Hopkins in Detroit and Genova Burns in Newark.

ADP said in a statement about the latest decision: “The New Jersey Appellate Division's published ruling is consistent with the Third Circuit's decision in April 2019 to uphold ADP's restrictive covenant agreements. Both decisions validate ADP's efforts to protect its legitimate business interests and confirm that its restrictive covenant agreements comply with public policy. We believe these types of agreements are essential to ensure fair competition in the market. We are pleased that the New Jersey Appellate Division agrees with our position.”