Baltimore, MD Non-Compete Agreement Attorney
Ken C. GauveyPersonal Injury Attorney
Having the right staff is critical for the success of a small business. One of the tools in the small business owner’s toolbox to secure such critical staff is the non-compete agreement. However, the non-compete has its limitations. With a proper understanding of these limitations, the small-business owner can make effective use of a non-compete to help ensure enforceability, thereby securing its own customers and protected information.
The first issue is describing can a noncompete actually do. Noncompetes are appropriate to protect the employer from unfair competition by the former employee. To that end, the courts have upheld noncompetes to prevent the misuse of an employer’s trade secrets, routes, client lists, and established customer relationships. However, to be enforceable, the employee had to have access to this information. An employer’s good will in the marketplace is also protectable. This is especially important in industries where personal contacts between the employee and the customer are a important element for determining a business’s success. Finally, a noncompete can be used to prevent an employee who provides unique services, such as subject matter expertise critical to the employer, from competing. Drafting or seeking to enforce noncompete agreements beyond the scope of what they are designed to protect occurs at the employer’s risk.
Should You Sign a Non-Compete Agreement?
To enforce the noncompete, the employer must demonstrate that the covenant is reasonable. To demonstrate this, the employer must show that the noncompete is confined within limits no wider than necessary, in duration and scope, to protect the interests of the employer. The determination of reasonableness in this context requires a fact-intensive analysis. A small company’s noncompete may be reasonable in the city where the company’s office is. A larger company, or a company providing specific services state-wide may be able to implement a noncompete over several counties, or throughout the state.
In addition to demonstrating the reasonableness of the noncompete, the employer should also prove that the noncompete exists and is enforceable. A noncompete should be written. A noncompete provided at the inception of employment is enforceable since it is presented as part of the employment contract to provide services. Moreover, a change in terms and conditions of employment such as promotion, will result in a new noncompete being enforceable. Finally, continued employment, in Maryland, is sufficient consideration to enforce the noncompete if the employment is “at will.”
The factors that the Court considers in determining the enforceability of a noncompete have been established by prior cases.
Factors Involved in an Agreement
These factors are examined after the Court determines whether the noncompete is reasonable, as indicated above. The Court next looks to:
- Whether the employee is a skilled employee whose services are unique;
- Whether the covenant is necessary to protect the misuse of trade secrets of confidential information or to prevent the unfair solicitation of customers;
- Whether there is any unfair exploitation of contracts between the employee and the customer; and
- Whether enforcement would pose an unfair hardship on the employee or would disregard the public interest.
These elements, again, are based on the individual facts in each circumstance.
The Courts have been fairly consistent in what it determines is reasonable. In general, a two-year limitation has been considered reasonable when paired with a limited geographic limitation. In many cases, the Courts have upheld a two-year noncompete without geographic limitations when high level employees are involved.
Similarly, the Courts have been fairly consistent when determining when noncompetes are unreasonable. Poorly written noncompetes are consistently held as unreasonable. For example, a noncompete written to say that the employee is prohibited from doing anything that will negatively impact the company is unenforceable. A covenant unlimited in time and territory is unreasonable. A covenant preventing any activity in competition with the company, including solicitation of clients is unreasonable within the context of an international company having clients all over the world. Finally, a noncompete drafted to simply prohibit any competition rather than protecting the the protectable interest of the company are generally unreasonable.
If a noncompete is unenforceable as written, the Court still has some ability to make it enforceable. Unfortunately, the method the Court is permitted to use is still undetermined in Maryland. As a result, a Court may use a “blue penciling” rule, allowing the Court to essentially strike out portions of the nomcompete to make it enforceable. Another method is the “flexible approach” which would allow the Court to rewrite portions of the noncompete to make it enforceable. For example, the Court may change a time limit from five to two years under the flexible approach to make the contract enforceable. Under the “blue pencil” approach, the court would only be able to strike out the five years. If the contract was not enforceable after striking out the offending provision, the the noncompete would not be enforceable in its entirety. Unfortunately, the Maryland Court of Appeals has not ruled on which approach the Courts should follow.
When Is a Non-Compete Agreement Enforceable in Maryland?
Noncompete agreements are difficult for both parties. On the one hand, the employer must be very careful in how the noncompete is drafted for risk of having the entire agreement ruled as unenforceable. However, the employer also has a true and vested interest in protecting as much of its interests as possible. The employee, on the other hand, may find themselves beholden to a company and unable to move on without facing litigation. It is important to note that litigation still must occur, in order to determine whether the noncompete is enforceable. As such both prosecuting a breach of contract for violation of the noncompete, and defending against such an action requires a substantial amount of time and resources.