Employer-Employee Non-Compete Agreements
Generally speaking there are two kinds of non-compete agreements; those between companies and those between an employer and employee. Agreements between companies (including contractor-subcontractor con-competes) are subject to heightened scrutiny under the antitrust laws and the complexities of those laws make any simple generalized explanation dangerous to rely upon. In this note we will focus on non-compete agreements between an employer and an employee.
General Considerations Regarding Competition by a Former Employee.
Maryland, Virginia and the District of Columbia are “right to work” jurisdictions. This article focuses on Maryland. The rules in the other jurisdictions are similar but not the same, and the differences can be important.
At common law, and certainly in the absence of a non-compete agreements to the contrary, Maryland courts recognize:
a privilege in favor of employees which enables them to prepare or make arrangements to compete with their employers prior to leaving the employ of their prospective rivals without fear of incurring liability for breach of their fiduciary duty of loyalty…
Maryland Metals, Inc. v. Metzner, 382 A.2d 564, 569 (Md. 1978). The law is also quite clear that once an employee has moved on he (or she) is free to compete against his or her former employer, as could any stranger, subject to certain qualifications.
The first qualification concerns the scope of the “arrangements” an employee can make in anticipation of leaving. Even without a non-compete agreement, consider the difference, for example, between taking a copy of your personal business address book on the one hand and calling each client of your employer on your employer’s business phone line (or taking them to lunch on your former employer’s expense account) prior to leaving and asking them to follow you to your new business. Or the difference between signing a lease for your new competing company before you resign and actually stocking the new facility and opening up shop before you resign.
Another issue, even without a non-compete agreement, concerns confidential business information. The clearest case of “confidential business information” concerns trade secrets, but information not amounting to a trade secret may still be subject to a right of confidentiality, depending on the circumstances in which the information was acquired and with what understandings it was given. For example, information given subject to a signed confidentiality agreement may not be used in derogation of the agreement.
In a Nutshell
To establish an enforceable right to restrict a former employee’s right to compete, the employer must show that the underlying agreement strikes a fair balance between the public policy favoring people being able to work and the public policy favoring protection of the company’s economic interests.
Non-compete agreements “tighten-up” the rules here and can further restrict a former employee’s actions during employment and after employment ends . Such agreement are rarely bulletproof because, notwithstanding legitimate employer interests in avoiding competition from those who they have nurtured and trained, and who have intimate knowledge of the employer’s practices and clientele, the trend of the law is not to favor such agreements. However, non-compete agreements will be enforced in almost all jurisdictions, if they are “reasonably” limited in time and subject matter.
In the words of a recent well-reasoned decision, a covenant not to compete is to be assessed on a case-by-case basis and will be enforced “so long as [its] terms are reasonable in light of the interests of the employer, the employee, and the general public.” Maryland Courts look at three factors in determining a covenant’s reasonableness:
- whether restraint is necessary for the protection of the business or goodwill of the employer,
- whether it imposes upon the employee any greater restraint than is reasonably necessary to secure the employer’s business or goodwill, and
- whether the degree of injury to the public is such loss of the service and skill of the employee as to warrant non-enforcement of the covenant.
The variables and subtleties as to what makes a non-compete agreement enforceable are complex. You should neither enter into, seek to interpret the meaning of, or draw conclusions as to the enforceability of a non-compete clause or agreement without consulting counsel.
In considering whether a particular agreement’s geography and time limitation is enforceable. a court may consider the nature of the market (urban vs. rural), the nature of the business (are there many similar businesses located virtually everywhere or is the business fairly unique with few competitors?), the scope of the exclusion (if you are an executive for Company A, no non-compete can prevent your working as a janitor for Company B), the nature of the consideration given for the agreement, and the practical effect of the agreement on an alleged breacher’s ability to work in a given field.
Our lawyers have drafted many non-compete agreements and we regularly counsel businesses and individuals on the meaning and enforceability of agreements to which they have bound themselves or are considering entering into. We can efficiently help you when the need arises.