Covenants Not to Compete in Maryland

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The Maryland Daily Record had an article yesterday about the Federal Trade Commission (FTC)  proposed rule to ban noncompete agreements. The rule would make noncompete agreements illegal for employers and void for employees.

Covenants not to compete, also known as non-compete agreements, are contracts between employers and employees in Maryland that prevent employees from competing with their employers for a specific period of time after termination of employment. These agreements are meant to protect the employer’s business interests, trade secrets, and confidential information.

Let’s look at Maryland covenant not to compete law and the key Maryland cases dealing with covenants not to compete.

Duration and Reasonableness

Under Maryland law, covenants not to compete are enforceable only if they are reasonable in duration, geographic scope, and type of activities restricted. The duration of the non-compete agreement must be limited to the time necessary to protect the employer’s legitimate business interests and cannot extend indefinitely.

Low Wage Employees Restricted in Maryland

Noncompetes are prohibited for low-wage employees in Maryland earning no more than $15 an hour or $31,200 per year.

Geographic Scope

The geographic scope of a covenant not to compete must also be reasonable, meaning it cannot extend to an area larger than necessary to protect the employer’s interests. For example, a non-compete agreement that restricts an employee from working within a certain radius of the employer’s business may be considered reasonable if the radius is limited to the area where the employer operates or where the employee has established customer relationships.

covenants not to compete

Type of Activities Restricted

The type of activities restricted by a covenant not to compete must also be reasonable. An agreement that restricts an employee from working in the same field as the employer for a certain period of time may be considered reasonable, but an agreement that restricts an employee from working in any field may not.

Maryland court have made clear you cannot restrict an employee just because you taught them specific skills.  “It is well-recognized that ‘skills acquired by an employee during his or her employment do not warrant enforcement of a covenant not to compete… In other words, the training that [the employee] received during his tenure at [his former employer], ‘without more, does not warrant enforcement of the covenant not to compete.”

Enforceability

Covenants not to compete are disfavored in Maryland and are strictly construed against the employer. For a non-compete agreement to be enforceable, it must be necessary to protect the employer’s legitimate business interests and cannot impose undue hardship on the employee. Additionally, the agreement must be supported by adequate consideration, meaning the employee must receive some type of benefit in exchange for signing the agreement, such as a higher salary, promotion, or continuation of employment.

So Maryland restrictive covenants or non-compete agreements may only be enforced on employees who provide unique services or to protect trade secrets, client lists, or customer solicitation. The reasonableness of the restrictive covenant will be determined based on the circumstances, including the nature of the employee’s business, the subject matter, the purposes served, and the situation of the parties.

Maryland courts may void the entire agreement if, as  a whole, it appears to have an unreasonable or oppressive impact on the employee.

Application

Employers must also ensure that covenants not to compete are reasonable in their application. An agreement that applies to all employees, regardless of position or responsibilities, may not be considered reasonable. An agreement that is applied only to certain employees or in certain circumstances may be considered reasonable.

National Labor Relations Act

Employers should also be aware that covenants not to compete cannot be used to prevent employees from exercising their rights under the National Labor Relations Act, such as the right to engage in collective bargaining or protected concerted activities.

The Frustrating Thing About Even Unenforacable Covenants Not to Compete

Employers would rather have an entirelly unenforceable covenant not to compete than no non-compete agreement. Why?  These agreements can restrict employee movement, creating a chilling effect on their ability to seek new job opportunities. While these covenants may be deemed invalid by a court due to overly broad or unreasonable terms, they can still have a psychological impact on employees.

Here are some ways that unenforceable non-compete agreements can restrict movement:

  1. Fear of litigation: New employers are often litigation adverse.  Employees too may hesitate to seek new opportunities or start their own business due to the fear of being sued by their former employer. Even if the non-compete agreement is ultimately found to be unenforceable, the legal process can be time-consuming and costly for the employee and the new employer.  Would you rather a hire an “A+” employee with potential litigation exposure or an “A” employee that comes baggage-free?  Many employers will opt for the latter.
  2. Reluctance to share expertise: An employee under a non-compete agreement may be hesitant to contribute their knowledge and skills to a new employer out of fear that doing so would violate the agreement, even if it is unenforceable.
  3. Reputation concerns: Employees may worry that violating a non-compete agreement, even an unenforceable one, could damage their reputation within their industry or professional network, potentially making it more difficult for them to secure future employment. Employers are similarly worried about doing something that looks untoward.
  4. Reduced bargaining power: Employees may not negotiate more favorable terms or seek clarification on the scope of their non-compete agreement due to concerns about jeopardizing their current job or future opportunities.

So, maddeningly, while unenforceable non-compete agreements may not have legal standing, they can still create barriers to employee movement and career advancement. Employees should consider consulting with an attorney to better understand the enforceability of their non-compete agreement and explore options for protecting their rights and career prospects.

Key Maryland Cases

Maryland had a good run of covenant not to compete cases but really has not decided a meaningful case in a generation.

TEKsystems, Inc. v. Bolton (MD USDC 1991). This case involved a former director for the company, who was enjoined from violating the restrictive covenants in his Employment Agreement. The agreement prohibited the employee from competing within a 50-mile radius of his former office for 18 months after termination of employment. The court found that the restrictive covenant was reasonable and protected the company’s legitimate business interests. The court awarded a permanent injunction against the former employee and declined to rule on damages. This case demonstrates that Maryland is a favorable forum for enforcing non-compete agreements as long as they are reasonable in scope, geographic area and duration, do not unduly restrict the employee from earning a living, and do not limit fair competition.

Fowler v. Printers II, 89 Md. App. 448 (1991): Maryland court enforced a non-solicitation covenant against a salesperson. The salesperson was responsible for generating over $4 million in sales in 1989, had recently renegotiated her employment agreement to include a non-solicitation covenant, received a $15,000 salary increase which brought her base salary to $110,000 per year, and immediately upon leaving her former employer, used their customer list to solicit business for her new employer. Given these circumstances, the highly compensated former employee and her new employer were not allowed to evade the non-solicitation covenant in question.

Becker v. Bailey, 268 Md. 93 (1973): This Prince George’s County case case dealt with the enforceability of restrictive covenants or non-compete agreements. In the case, the court ruled a non-compete agreement would not survive in a case against an ex-employee who started his own business in competition with his former employer. The court considered several factors in reaching this decision, including the lack of evidence that the employee had obtained trade secrets, the absence of unique services provided by the employee, and the absence of customer lists or assigned routes. Additionally, the court found that the employee’s actions were not significantly different from his prior employment.

Millward v. Gerstung Int’l Sport Educ., Inc., 268 Md. 483 (1973). The court ordered the enforcement of a non-competition agreement against the former director of operations for Gerstung summer camp. Millward was known in the Baltimore area for his accomplishments as the coach of the championship Baltimore Blast professional soccer team, and he had gained a reputation and strong connections with the campers, students, and their families through his teaching and coaching at Gerstung. Despite being promoted to the position of director of operations, Millward left Gerstung to start a competing children’s camp. Given Millward’s unique reputation, extensive accomplishments, and close connections with Gerstung’s campers, students, and families, it was deemed appropriate to enforce the non-competition agreement against him.

Budget Rent A Car of Wash., Inc. v. Raab, 268 Md. 478, 482 (1973). Budget sought to enjoin a man from renting automobiles in Bethesda, Maryland, claiming that he was in violation of a non-competition clause in their sub-franchise license agreement. The non-competition clause required the to refrain from engaging in any other vehicle rental or leasing business in Bethesda for two years after the termination of their agreement.  The Circuit Court for Montgomery County denied the requested injunction and dismissed the complaint, concluding that the evidence was not convincing that Raab was engaged in the rental of automobiles in violation of the agreement. On appeal, Budget argued that Raab was in violation of the covenant by conducting the business through his agents. However, the court concluded that the restrictive covenant was unenforceable based on the general rule in Maryland, which states that a restrictive covenant in an employment contract will be upheld if it is supported by adequate consideration, is ancillary to the employment contract, and is confined to the limits necessary for the protection of the employer’s business, without imposing undue hardship on the employee or disregarding the interests of the public. In this case, Raab was an unskilled worker whose services were not unique and there was no solicitation of customers, use of trade secrets, or exploitation of personal contacts.  In determining the reasonableness, and finding the unreasonableness, of Appellant’s non competition agreements, the Lower Court looked to the following factors:

  1. whether the person sought to be enjoined is an unskilled worker whose services are not unique;
  2. whether the covenant is necessary to prevent the solicitation of customers or the use of trade secrets, assigned routes, or private customer lists;
  3. whether there is any exploitation of personal contacts between the employee and customer; and
  4. whether enforcement of the clause would impose an undue hardship on the employee or disregard the interests of the public.