Adp, LLC v. Nicole Rafferty Adp, LLC
923 F.3d 113
3rd Cir.2019Background
- ADP maintains two layers of post-employment restraints for sales staff: (1) a baseline Sales Representative Agreement (SRA) and Non-Disclosure Agreement (NDA) required at hire; and (2) a more restrictive Restrictive Covenant Agreement (RCA) that high-performing employees must accept to receive stock awards.
- The SRA/NDA prohibit soliciting clients, bona fide prospective clients, or marketing partners for one year after termination and protect confidential information.
- The RCA (accepted voluntarily by employees eligible for stock) adds broader non-solicitation (covers clients ADP "provides, has provided, or reasonably expects to provide" business within two years after termination), a non-compete tied to the employee’s two-year client territory, and extends to "Business Partners" (including referral partners).
- Appellees Rafferty and Mork signed SRAs/NDAs and repeatedly accepted RCAs; they left ADP and joined a direct competitor, Ultimate, prompting ADP to seek preliminary injunctions enforcing the agreements.
- District Courts denied relief as to the RCA, holding the RCA unenforceable per se (selective imposition tied to stock awards looked like an anti-competitive buyout), but upheld/declined to disturb the SRA/NDA.
- The Third Circuit considered whether (under New Jersey law) the RCA: (a) protects a legitimate business interest, (b) is invalidated by selective imposition, (c) imposes undue hardship, and (d) injures the public — and whether the proper remedy is blue-penciling rather than total invalidation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the RCA is a per se unenforceable restraint on trade | ADP: RCA necessary to protect client relationships and goodwill from high-performing employees | Rafferty/Mork: RCA is an unlawful restraint because it was imposed selectively as a condition of stock awards (not employment) and thus aims to reduce competition | RCA is not per se unenforceable; it can protect a legitimate interest and is subject to blue-penciling rather than outright invalidation |
| Whether selective, second-tier imposition negates employer’s legitimate interest | ADP: selective imposition targets employees with greater client contact (measured by sales) and therefore protects legitimate interests | Rafferty/Mork: selective imposition shows intent to "buy out" competition; not tied to extra confidential access | Selective imposition does not negate legitimacy; targeting high performers can be less restrictive and aimed at protecting client relationships |
| Whether the RCA is unduly burdensome on employees | Rafferty/Mork: RCA’s broad territory and prospective-client ban unreasonably restrict job mobility | ADP: hardship is limited; employees voluntarily accepted RCA for compensation and courts can tailor scope | Undue-hardship concerns favor blue-penciling; the District Court must assess and tailor geographic, temporal, and scope limits to avoid undue burden |
| Whether enforcement would injure the public interest | Rafferty/Mork: public interest in competition and employee mobility | ADP: public interest tolerates reasonable restraints protecting goodwill; no special public-service impact here | Public interest is equivocal; no strong public-policy bar to enforcement, but tailoring required; remand for district court to apply Solari factors and blue-pencil as needed |
Key Cases Cited
- Solari Indus., Inc. v. Malady, 264 A.2d 53 (N.J. 1970) (establishes three-part test and New Jersey preference for partial enforcement/blue-penciling)
- Karlin v. Weinberg, 390 A.2d 1161 (N.J. 1978) (recognizes courts may compress overbroad covenants rather than invalidate)
- Maw v. Advanced Clinical Commc’ns, Inc., 846 A.2d 604 (N.J. 2004) (reaffirms Solari framework and reasonableness approach)
- Ingersoll-Rand Co. v. Ciavatta, 542 A.2d 879 (N.J. 1988) (employer lacks legitimate interest in banning general skills/knowledge; legitimate interests include trade secrets/confidential info and client relationships)
- Whitmyer Bros., Inc. v. Doyle, 274 A.2d 577 (N.J. 1971) (rejects protecting employee’s general knowledge; outlines employer’s legitimate interests)
- A.T. Hudson & Co. v. Donovan, 524 A.2d 412 (N.J. Super. Ct. App. Div. 1987) (upholds covenant protecting client relationships and investment in client development)
- Coskey’s Television & Radio Sales & Serv., Inc. v. Foti, 602 A.2d 789 (N.J. Super. Ct. App. Div. 1992) (blue-penciling to narrow covenant that would have devastating employee impact)
- Cmty. Hosp. Grp., Inc. v. More, 869 A.2d 884 (N.J. 2005) (discusses public-interest limits and blue-penciling; narrow exceptions for certain professions)
- Raven v. A. Klein & Co., Inc., 478 A.2d 1208 (N.J. Super. Ct. App. Div. 1984) (examples of limiting covenants to protect only trade secrets)