Dive Brief:

• An employee who resigned from his role as ADP’s chief strategy officer in spring 2021 to take a position as president and CEO of Benefitfocus will not be subject to a preliminary injunction as requested by ADP, the 3rd Circuit Court ruled (ADP Inc. v. Matthew Levin, No. 21-2187 (3rd Cir. April 21, 2022)). 
• The employee signed various restrictive covenant agreements when he accepted the role at ADP. They prohibited him from providing “the same or substantially similar services” as “those which [he] provided at ADP while employed” to a “Competing Business” for 12 months following his employment at the company, according to the opinion. 
• The 3rd Circuit affirmed the U.S. District Court of New Jersey's order, which denied ADP’s motion for a preliminary injunction against the employee. While the court agreed with ADP that the district court “erred in certain respects” in its analysis, it ultimately found no reversal or remand was warranted because ADP failed to demonstrate “irreparable harm,” which the court said it required before proceeding. Instead, ADP offered only “conclusory allegations that it may lose clients, goodwill, or referral business” due to the employee’s career move.

Dive Insight:

Employers often ask employees, particularly those in leadership positions and with access to sensitive or strategic information, to sign restrictive covenant agreements. These agreements may seek to prevent departing employees from working for competitors, among other restrictions.

The law regarding restrictive covenants “varies significantly state by state,” according to a guidance document created by Stephen L. Brodsky of Moritt Hock & Hamroff LLP.  In Oregon, for example, such agreements are voidable if the employer does not inform the employee of the requirement at least two weeks prior to the employee’s start date; in Missouri, covenants of one year are presumed to be “reasonable” — a factor that courts consider in whether the agreements are enforceable. 

The 3rd Circuit’s analysis in this case, however, hinged not on the validity of the restrictive covenant, but rather on the employer’s entitlement to a preliminary injunction — an early-lawsuit court order that requires a person to “do or cease doing a specific action,” according to Cornell Law School. In this case, the order would have prevented the employee from working at Benefitfocus. But ADP failed to demonstrate it would suffer “irreparable harm” as a result of the employee’s move, the 3rd Circuit found. 

In the Supreme Court’s 2008 decision Winter v. Natural Resources Defense Council, the court held that “the test for whether a preliminary injunction is appropriate requires determining whether the plaintiff is likely to succeed on the merits, whether the plaintiff is likely to suffer irreparable harm without the injunction, whether the balance of equities and hardships is in the plaintiff's favor, and whether an injunction is in the public interest.”

Cornell defines irreparable harm as “harm that would not be adequately compensated by monetary damages or an award of damages that cannot be provided with adequate compensation months later,” listing “injury to reputation or goodwill” and “deprivation of constitutional rights” among potential examples.  

The examples ADP provided failed to meet that definition in court, according to the 3rd Circuit. The court noted the speculative nature of the company’s complaints in its opinion, pointing to statements like “[W]e may not know the full extent of the harm that [the plaintiff] could cause in his position at Benefitfocus until many years down the road,” and “[W]e don’t really know what [the plaintiff] has been doing in his, I guess just over two weeks on the job, at Benefitfocus.”