Protecting Customer Lists and Client Relationships

Often I am questioned by employers and employees about to leave their employers, whether their customer’s lists and customers relationships are protected.  The answer unfortunately is…it depends!

As previously mentioned in this site, the precedent case for non-compete agreements in New Jersey is Solari Industries, Inc. v. Malady, 55 N.J. 571 (1970).  This New Jersey Supreme Court decision sets forth a three part test:  the non-compete agreement must protect a legitimate business interest of the employer; it must not impose an undue burden on the employee; and it must not impair the public interest.  Once found enforceable, the court may “blue pencil” (see my discussion on “blue pencil” relief found in this site) the agreement and limit its application concerning its geographic area, duration, or scope of covered activity.

In cases dealing with customers business relationships involving the protection of the business’s customer relationships, the first factor to consider is whether there is a legitimate business interest at stake.  New Jersey courts have consistently recognized three legitimate business interest categories:  (1) trade secrets; (2) confidential business information; and (3) customer relationships.  However, if the purpose is to restrain competition that is not commonly regarded as improper or unfair, the restraint on employee movement is void.  What is improper or unfair is of course the threshold question.  Therefore, the courts will enforce some non-compete agreements that are meant to protect customer relationships.

To help answer that question, the courts also look to the weight of the business interest to determine if the proposed injunctive relief is reasonable or an undue burden.  (“Generally, how much protection is needed by an employer depends upon the legitimate interests for which he may claim protection”).  There are many facts that come into play in this part of the analysis.  Generally speaking, the weight will be determined by how important those customer relationships are to the operations of the business.  For example, in one case, the court took note that the company’s primary dealings were with government entities and public bidding.  Because the public bidding process is largely a function of price and not personal favor, the business interest was not sufficient to justify injunctive relief.  In essence, the customer relationships must be meaningful to the operation of the business.

Another factor is when those relationships were nurtured.  Relationships that existed prior to the employer-employee relationship should not be touched by non-compete agreements.  “What (employee) brought to this employer, he should be able to take away.  This is little different than the tradesman who brings his tools….and upon separation leaves with them”).  Employee’s relationships with customers that started, and were nurtured, at the company are afforded protection.  On the other hand, it has been suggested that this principle has an important exception.

Extrapolation of such a principle to other cases might be dangerous.  For instance, if a young employee joins a company and for 20 years establishes all of his contacts within an industry, but has signed a similar restrictive covenant, such as principle could require that the employee leave the industry or at least the geographical area if he wished to change employer.

Yet another factor is the effort the company put into the development of those contracts.  If there is evidence that, in the particular industry companies “expend great energy and money in soliciting clients and developing projects for their benefit, then each client that plaintiff was able to attract represent a significant investment of time, effort and money with is worthy of protection.

There are additional factors that have been recognized.  For example, if there is “close contact between the (employee) and the management employees of the client” and the amount of customers in the market compared to who the former employee is trying to solicit (with larger market/same clients as former employer favoring enforcement).  Ultimately, any fact may become material in a particular situation.  It seems best to view the facts in light of whether the prohibited activity is akin to improper or unfair by society.
Finally, the restrictions protecting a legitimate business interest must not be an undue burden on the employee.  Enforcing the customer relation interest despite the burdens ranges from dealing with all of former employees actual customers, obviously, denial of relief.  The effect of a non-compete should not be to make the employee an “indentured servant”.  As such, giving an employee the choice between staying with his current employer and moving his family and giving up professional contracts that he had personally developed over 31 years, with and before his current employer, is unfair and not a legally viable dichotomy.

Ultimately, it is difficult to discuss the undue burden analysis without specific facts.  Courts will only enforce as much of the agreement as is reasonably necessary to protect the business interest; however, it must be repeated that, depending on the weight of the interest and how onerous the restrictions, results vary wildly.

Do you have a question(s) not addressed here?  If so, contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or e-mail him at fniemann@hnlawfirm.com/ to schedule a consultation about your particular needs.  He welcomes your calls and inquiries and you’ll find him very approachable and easy to talk to

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