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ADP, LLC v. Kusins

Superior Court of New Jersey, Appellate Division

July 26, 2019

ADP, LLC, Plaintiff-Appellant/ Cross-Respondent,
v.
ERIK KUSINS, Defendant-Respondent/ Cross-Appellant. ADP, LLC, Plaintiff-Appellant,
v.
RYAN HOPPER, Defendant-Respondent. ADP, LLC, Plaintiff-Appellant,
v.
ANTHONY M. KARAMITAS, Defendant-Respondent. ADP, LLC, Plaintiff-Appellant,
v.
NICK LENOBLE, Defendant-Respondent. ADP, LLC, Plaintiff-Appellant,
v.
MICHAEL DEMARCO, Defendant-Respondent. ADP, LLC, Plaintiff-Appellant,
v.
DANIEL HOBAICA, Defendant-Respondent.

          Argued May 15, 2019

          On appeal from the Superior Court of New Jersey, Chancery Division, Essex County, Docket Nos. C-000264-15, C-000023-16, C-000143-16, C-000117-16, C-000120-16, and C-000118-16.

          Timothy J. Lowe (McDonald Hopkins, PLC) of the Michigan bar, admitted pro hac vice, argued the cause for appellant/cross-respondent in A-4664-16 and appellants (Genova Burns, LLC, James Boutrous (McDonald Hopkins, PLC) of the Michigan bar, admitted pro hac vice, and Timothy J. Lowe, attorneys; Harris S. Freier, James Boutrous, and Timothy J. Lowe, on the briefs in A-4664-16, A-0692-17, A-2990-17, and A-4407-17; Harris S. Freier and Timothy J. Lowe, on the briefs in A-0693-17; Harris S. Freier, on the briefs in A-4527-17).

          John H. Schmidt, Jr., argued the cause for respondent/ cross-appellant in A-4664-16 and respondents (Lindabury, McCormick, Estabrook & Cooper, PC, attorneys; John H. Schmidt, Jr., and Stacey K. Boretz, on the briefs).

          Before Judges Koblitz, Currier, and Mayer.

          OPINION

          HEIDI W. CURRIER, J.A.D.

         In these consolidated appeals, we consider the enforceability of the restrictive covenant agreements (RCAs) executed by the six defendants during their employment with plaintiff ADP, LLC. Each defendant was a top-performing sales representative. To award and incentivize their success, ADP invited defendants to participate in a stock award incentive program conditioned on their acceptance and execution of an RCA. Each defendant assented to the RCA and accepted the stock awards for several years.

         The RCA included non-solicitation and non-compete provisions that restricted an employee from soliciting ADP's clients and competing with ADP upon leaving the company. The defendants left ADP at varying times and each accepted employment with the same direct competitor. Consequently, litigation ensued in which ADP sought to enforce its RCAs.

         The courts'[1] treatment of the various lawsuits has been inconsistent. We strive to bring some clarity and uniformity to the consideration of an RCA, and to provide the parties guidance for the drafting of such covenants.

         In our review of the RCAs at issue here, we are satisfied that because ADP presented evidence of a legitimate business interest to support the imposition of the covenant's restrictions, the covenant is not entirely unenforceable. However, its non-solicitation and non-compete provisions are overly broad and require blue-penciling[2] to ensure they reasonably guard ADP's interest in protecting its customer relationships without imposing an undue hardship on its former employees.

         For the reasons that follow, ADP may only prohibit its employees, upon separation from the company, from soliciting any of ADP's actual clients with whom the former employee was directly involved or who the employee knows to be ADP's client. As to the solicitation of prospective clients, it is unreasonable and onerous to restrict defendants from soliciting clients unknown to defendants while at ADP. Therefore, when working for a competitor, a former employee is only prohibited from soliciting a prospective ADP client if the employee gained knowledge of the potential client while at ADP and directly or indirectly, solicits that client after leaving.

         In considering the non-compete provision, we find it reasonable for ADP to restrict its former employees, for a reasonable time, from providing services to a competing business in the same geographical territory in which the employee operated while at ADP.

         We, therefore, reverse the trial court orders that found the RCAs to be unenforceable.[3] We also reverse the trial court orders that fell short of declaring the RCAs unenforceable, but placed greater restrictions on the non-solicitation and non-compete provisions than the standards set here.[4] Because each defendant breached the RCAs to some extent, we remand the matters to the trial court to determine the appropriate remedy for the breach and to consider ADP's application for counsel fees.[5]

         I.

         ADP, a human capital management firm, provides a range of business outsourcing and software services pertaining to human resources, payroll, taxes, and benefits administration to over 620, 000 companies worldwide. It contends that to protect its confidential business interests, it uses a two-tiered system of restrictive covenants.

         When an employee is initially hired by ADP, he or she is required to sign either a sales representative agreement (SRA), a non-disclosure agreement (NDA), or both. Those agreements contain general non-compete and non-solicitation provisions that are narrowly tailored in scope and geographical region, and prevent employees from soliciting any clients the employee had contact with at ADP for twelve months after terminating their employment.[6]

         For its top employees who meet or exceed their sales targets, ADP offers an annual stock option incentive. The incentive is conditioned upon the acceptance of a secondary RCA. The RCAs tied to the stock incentives are "click-wrap" agreements, which require the employee to check a box on a computer screen to indicate he or she reviewed the RCA and agreed to its terms, before accepting the stock incentive.[7]

         Prior to 2013, the RCAs for the stock options were narrowly tailored and largely tracked the initial SRAs and NDAs that employees signed upon their hire. The pre-2013 RCAs only precluded an employee from soliciting ADP's clients with whom he or she had contact, and limited the non-compete provisions to the geographical territory the employee worked in while at ADP.

         The post-2013 RCAs, however, were more restrictive and prevented employees from soliciting any actual or prospective ADP client, regardless of the employee's geographical location or personal contact with the client, for a twelve-month period after termination. Any violation of the RCA tolled the time period that the covenants remained in effect. In addition, the later RCAs permitted ADP to recoup all reasonable attorney's fees and costs incurred in their enforcement.

         Participation in the stock award program was voluntary; ADP's top employees who chose not to participate in the program were not required to accept the RCAs. The 2014 RCA is the crux of this dispute.

         Against that backdrop, we turn to a discussion of each defendant, his employment history, and the trial court proceedings.

         A.

         In May 2007, defendant Erik Kusins was hired by ADP and signed a SRA, which contained non-compete and non-solicitation provisions. Those provisions prohibited Kusins from soliciting ADP's clients that he had contact with at ADP, and prevented him from working in a similar role for a competitor in "any territory" that he managed or was assigned to while at ADP.

         Kusins was initially hired as a client district manager. In that role, he managed ADP's accounts for clients with 100 to 1000 employees in "towns and areas throughout Eastern Massachusetts" for approximately five and a half years. Thereafter, Kusins accepted a position in ADP's business process outsourcing department, where he worked for approximately one year. During that time, he was responsible for attracting prospective clients with 150 to 1000 employees in Eastern Massachusetts.

         In 2013, Kusins was promoted to sales executive, where he managed employees responsible for attracting new clients for ADP in the Eastern Massachusetts region. Kusins was promoted again in 2015 and assigned to ADP's national accounts division, where he sold ADP products and services to employers with between 1000 and 5000 employees in Massachusetts, New Hampshire, and Maine. He had a list of seventy-five clients and prospects, and access to pricing information.

         During his employment with ADP, Kusins met or exceeded his yearly sales targets six times between 2008 and 2014. In those six years, he accepted the incentive stock options and the required RCAs by clicking an online agreement. The RCAs executed from 2008 through 2012 were similar to the SRA, and narrowly tailored in scope and geographic territory. As stated, the RCAs in 2013 and 2014 were much broader.

         The disputed 2014 RCA, assented to by each defendant, states, in relevant part:

3. Non-Competition. I agree that during my employment and for a period of twelve (12) months from the voluntary or involuntary termination of my employment for any reason and with or without cause, I will not, directly or indirectly, own, manage, operate, join, control, be employed by or with, or participate in any manner with a Competing Business anywhere in the Territory where doing so will require me to (i) provide the same or substantially similar services to a Competing Business as those which I provided to ADP while employed. . . .
4. Non-Solicitation of and Non-Interference with Clients, Business Partners, and Vendors.
a. Clients: I agree that during my employment and for a period of twelve (12) months following the voluntary or involuntary termination of my employment for any reason and with or without cause, I will not, either on my own behalf or for any Competing Business, directly or indirectly, solicit, divert, appropriate, or accept any business from, or attempt to solicit, divert, appropriate, or accept any business from any Client for the purposes of providing products or services that are the same as or substantially similar to those provided in the Business of ADP, for any Client: (i) whom ADP provides products or services in connection with the Business of ADP; (ii) whom ADP has provided products or services in connection with the Business of ADP and with whom ADP reasonably expects business within the two (2) year period following my termination of employment from ADP; (iii) whom ADP has actively solicited in connection with the Business of ADP within the two (2) year period prior to my termination of employment from ADP; or (iv) about whom I have any trade secret information. I also agree that I will not wrongfully induce or encourage or attempt to wrongfully induce or encourage any Clients to cease doing business with ADP or materially alter their business relationship with ADP.
. . . .
5. Non-Solicitation of Employees. I agree that during my employment with ADP and for a period of twelve (12) months following the voluntary or involuntary termination of my employment for any reason and with or without cause, I will not, directly or indirectly, hire, solicit, recruit, or encourage to leave ADP, any current employees of ADP or hire, solicit, recruit, or contact with employees who terminate their employment with ADP within twelve (12) months following my termination date.
6. Non-Disclosure and Non-Use of Confidential Information and Trade Secrets. During my employment . . . and after the voluntary or involuntary termination of my employment for any reason and with or without cause, I will not disclose, use, reproduce, distribute, or otherwise disseminate ADP's Confidential Information. . . .
. . . .
11. Relief, Remedies, and Enforcement. I acknowledge that ADP is engaged in a highly competitive business, and the covenants and restrictions contained in this Agreement, including the geographic and temporal restrictions, are reasonably designed to protect ADP's legitimate business interests, including ADP['s] goodwill and client relations, Confidential Information and trade secrets . . . . I agree that if ADP substantially prevails in any litigation arising out of or relating to this Agreement . . . ADP shall be entitled to recovery of its reasonable attorneys' fees and associated costs. . . .
12. Tolling. The restricted time periods in paragraphs three (3) through six (6) above shall be tolled during any time period that I am in violation of such covenants, as determined by a court of competent jurisdiction, so that ADP may realize the full benefit of its bargain. This tolling shall include any time period during which litigation is pending, but during which I have continued to violate such protective covenants and a court has declined to enjoin such conduct or I have failed to comply with any such injunction.

         The agreement also defined certain key terms used above as follows:

c. "Clients" means any individual, corporation, limited liability company, partnership, joint venture, association, or other entity, regardless of form, or government entity for whom ADP provided or provides products or services in connection with the Business of ADP or whom ADP has actively solicited in connection with the Business of ADP.
d. "Competing Business" means any individual (including me), corporation, limited liability company, partnership, joint venture, association, or other entity, regardless of form, that is engaged in any business or enterprise that is the same as, or substantially the same as, the Business of ADP for that part of the business in which I have worked or to which I have been exposed during my employment with ADP (regardless of whether I worked only for a particular segment of that part of the business in which I worked - for example, business segments based on the number of employees a Client has or a particular class of business using an ADP product or service).
e. "Confidential Information" means information . . . that is created, compiled, or gathered by ADP or its agents and is related to the Business of ADP. . . . Confidential Information includes but is not limited to information about: ADP's operations, products, and services; research and development of ADP products and services; . . . names and other listings of current or prospective Clients, Business Partners, and Vendors (including contact information that may be compiled in computer databases that are not owned or controlled by ADP . . .; proposals made to current or prospective Clients, Business Partners, and Vendors or other information contained in offers or proposals to such Clients, Business Partners, and Vendors; the terms of any arrangements or agreements with Clients, Business Partners and Vendors, including the amounts paid for such services or how pricing was developed by ADP, the implementation of Client-specific projects, the identity of Business Partners and Vendors, and Business Partner and Vendor pricing information, the composition or description of future services that are or may be provided by ADP; ADP's financial, marketing, and sales information; and technical expertise and know-how developed by ADP, including the unique manner in which ADP conducts its business. . . .
. . . .
g. "Material Business Contact" means contact that is intended to establish or strengthen a business relationship for ADP.
h. "Territory" means the geographic area where I worked, represented ADP, or had Material Business Contact with ADP's Clients in the two (2) year period preceding the termination of my employment with ADP.

         Lastly, the RCA explicitly stated that it supplemented all existing agreements, "include[ing] the same or similar covenants," so those covenants would "provide ADP with the greatest protection enforceable under applicable law."

         In September 2015, Kusins resigned from ADP. He met with his direct supervisor, Anne Marie McMurray, to discuss the clients he had been working with and, later, sent a series of emails to McMurray, detailing the clients with which he was involved. Kusins also turned over all notes and documents containing ADP's confidential information, and his company-issued laptop and iPad. Two days later, ADP sent Kusins a letter reminding him of his obligations under the RCAs.

         Less than two weeks after his resignation, Kusins began working as a sales representative for Ultimate Software Group (USG). At USG, Kusins sold human resources software to companies with over 2500 employees in Massachusetts, New Hampshire, Maine, Connecticut, New York, New Jersey, and Pennsylvania. He had worked in three of those same territories while at ADP.

         ADP alleged that Kusins violated the terms of the SRA and RCAs by soliciting ADP's clients in his new employment. Its complaint asserted claims for breach of contract, breach of the duty of loyalty, misappropriation of trade secrets, and unfair competition. Kusins's answer and counterclaims contended that the 2013 and 2014 RCAs were overly broad and unenforceable.[8]

         Following the completion of discovery, ADP and Kusins filed competing motions for summary judgment. Finding contested issues of fact, the trial judge ordered a plenary hearing. During the hearing, McMurray and Kusins testified about the RCAs at issue and the nature of Kusins's employment with ADP.

         McMurray testified that she led the global enterprise solution division in the New England region for national accounts at ADP. In that role, she managed a team of associates, including Kusins.

         In discussing the incentive program, McMurray explained that the employees who were invited to receive incentive stock options were "top performing associates," who had "the greatest understanding about [ADP's] products, about how [ADP is] unique in the market," about what made ADP "more competitive," and who had "strong relationships with [ADP's] clients." McMurray stated that a strong relationship with a client led to greater sales. She believed the second-tier RCAs were broader because the employees receiving the incentive stock options cultivated "insight[, ] . . . information, and relationships" that could be "very damaging from a brand perspective and a loss of accounts, and referrals."

         ADP alleged that Kusins breached the SRA and RCAs by: (1) asking a coworker at USG to solicit business from an ADP client that Kusins had worked with at ADP; (2) advising his sales representatives at USG to "attack" ADP's clients; (3) preparing a business plan at USG, which listed four of ADP's prospective clients that he had been in contact with while at ADP; (4) soliciting business from several clients he dealt with at ADP; and (6) disclosing ADP's confidential information to salespeople at USG.

         McMurray further attested to the harm Kusins had caused ADP, specifically with regard to his solicitation of a particular ADP client. She explained that ADP was engaged in contract renewal with the client and had to use "a significant amount of resources" to keep the business. Kusins's conduct in soliciting ADP's client had damaged ADP's relationship with the client, diminished ADP's reputation, and made it more difficult to "sell new products and services" to its former client. ADP had also lost revenue from its reduced business with the client.

         After hearing testimony, and considering the proofs submitted on the summary judgment record, the trial judge[9] concluded in a written opinion that Kusins had breached the terms of the initial SRA by soliciting both prospective and actual clients of ADP after leaving to work for USG.

         Therefore, the judge equitably tolled the restrictive covenants in the SRA and, for a period of twelve months from the date of the order, enjoined Kusins from soliciting any actual or prospective ADP client that he worked with while employed at ADP and from soliciting or recruiting any ADP employee. The judge also prohibited Kusins from ever using or disclosing ADP's confidential, proprietary or trade secret business information.

         In considering the RCAs, however, the judge came to a different conclusion. He determined the RCAs to be overbroad, "anti-competitive and unenforceable," as they were "designed to stifle competition rather than protect [ADP's] legitimate business interest." The judge found that ADP offered "no legitimate business reason for imposing these covenants only on their best sales people."

         In its June 29, 2017 order, the judge also denied ADP's claims for monetary damages, counsel fees, and contractual tolling, because those provisions were only contained in the unenforceable RCAs.

         B.

         Upon commencing employment with ADP in 2009, defendant Ryan Hopper signed an NDA. The NDA contained general provisions prohibiting Hopper from using or disclosing ADP's confidential information, trade secrets, or proprietary information, except as required to fulfil his duties as an employee. The NDA did not contain any non-compete or non-solicitation provisions.

         Hopper initially worked in the small business sales division at ADP. In that role, he sold payroll products and services to employers with one to forty-nine employees in the Minneapolis, Minnesota area. After approximately two years in that position, Hopper was promoted to associate district manager, and assigned to the downtown Minneapolis and North Minneapolis sales territory. In that position, Hooper had his "own client list and [his] own prospect list." Over the next six years, Hopper received several promotions, culminating in his role as a sales executive in the Minneapolis and St. Paul territories.

         Hopper met his sales targets and accepted ADP's stock award incentives from 2012 to 2014, requiring him to execute the "click-wrap" RCAs in each of those years. Although the 2012 RCA was similar to the NDA Hopper signed upon his hiring, it also included provisions that prevented him, for a period of twelve months after termination, from soliciting any of ADP's clients he had worked with at the company or hiring or soliciting ADP's employees. The more expansive 2013 and 2014 RCAs prevented Hopper from soliciting any of ADP's clients, regardless of his prior interaction with the client, and contained tolling and attorney's fees provisions.

         After Hopper resigned from ADP in 2015, he began employment at USG, where he sold human resources software to employers with 200 to 500 employees in the sales territory of North Dakota, South Dakota, Iowa, Nebraska, Wyoming, Montana, and Idaho. He did not sell any USG products in the territories where he had worked while at ADP.

         Following discovery, the parties filed competing summary judgment motions. ADP argued that Hopper violated the terms of the NDA and RCAs by soliciting four of ADP's clients and an ADP employee. ADP contended the RCA was enforceable because it served to protect its legitimate business interests.

         The deposition testimony of Sean Burns, an ADP division vice-president, supported ADP's motion.[10] Burns discussed ADP's "price book," an internal electronic system that contains ADP's "[p]ricing services" and other confidential information. He explained that ADP's salespeople in small business sales would use the price book to generate quotes and proposals for prospective clients. The salespeople were instructed to inform their "potential prospects" that the pricing information was "confidential and proprietary" and should not be shared with third parties. When ...


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