U.S. - Maryland
2020.02.27 Forfeitures for Competition: What Would Maryland Do? The 4th Circuit has issued a split-decision in Allegis vs. Jordan, with Maryland law being examined in detail with respect to the circumstances under which post-employment plan benefits may be forfeited and clawed-back when executives breach their non-competition and non-solicitation covenants. The dissent favored the executives, based on a long-standing Maryland Court of Appeals decision: Food Fair Stores v. Greeley (1972). The majority found Greeley to be distinguishable. As a result, Allegis succeeded not only in being released from making any further plan payments to the executives, but also in recouping the payments previously made to them.
In particular, the court explained that the disputed benefits "more closely resembled consideration for post-employment services [indirectly through obedience to the covenants] provided to Allegis than a coercive deferred benefit" from services while actively employed. The court found it significant that the executives --
- "voluntarily participated in the Incentive Plan, and, upon separating from the company, faced the choice of (1) refraining from competitive activity for a 30-month period in exchange for the payments, and (2) competing during that period and foregoing the payments."
Because the Allegis decision involves having a federal court draw nuances when interpreting Maryland law, it is not clear how a Maryland court would rule. There are, however, two main lessons from the decision. First, courts generally favor employers when they seek to enforce clearly written forfeiture-for-competition provisions, especially when executive-level employees have specifically agreed to the controlling terms and conditions. Second, employers should be careful --
- to frame these provisions not as forfeitures of previously earned compensation, but rather as payments that are only earned if the executive satisfies post-employment conditions related to the honoring of non-competition and other restrictive covenants, and
- to document that affected executives have voluntarily agreed to the terms and conditions under which plan benefits are payable, as well as suspended and/or recoverable by the employer if the executive breaches applicable post-employment covenants.
2019.10.01 New State Law Effective - prohibits employers from requiring low-wage employees to enter into noncompete agreements. Maryland Senate Bill 328 protects employees who earn less than $15.00 per hour or $31,200 per year from being required to enter into agreements that restrict their ability to work with a new employer in the same or similar business.
2018.04.24 Overly-broad Covenants not enforced (Neitzey v. Allen, Montgomery County MD) - see discussion here.
2014.Jun.10 Allegis Group v. Jordan: A Maryland district court enforced non-competition and non-solicitation provisions supported by incentive awards. The former employee collected $1.45 million, which appears to be at risk.
2013.July TEKsystems, Inc. v. Lajiness, 2013 WL 3389062: the Northern District of Illinois applied Maryland law per a contractual choice of law provision, and upheld a 50 mile/18 month restrictive covenant in a recruiter’s employment contract.
2011.03.16 Maryland Law on Blue Pencil, Etc. Delaware Elevator v. Williams (3/16/2011, Del.Ch. applying MD law), holding as follows:
- "The Non-Compete Agreement as drafted is overly broad and unreasonable. Maryland law instructs a court to re-write an invalid restrictive covenant and enforce it to a reasonable extent. I therefore will enforce Williams’s obligation not to compete with Delaware Elevator within a 30-mile radius of the Newark, Delaware office where he worked. The ban will last until January 17, 2012, two years after the end of Williams’s employment. Otherwise, Williams is not restricted from soliciting or working for actual or potential customers of Delaware Elevator, so long as the work takes place outside the no-work zone. In soliciting customers, however, Williams may not use Delaware Elevator’s confidential customer list. Because it is undisputed that Williams has been competing with Delaware Elevator inside the no-work zone and using the customer list, further proceedings are necessary to quantify the resulting damages and address the parties’ other claims."
TEKsystems, Inc. v. Bolton (Maryland U.S.D.C.) (2/4/2010, opinion by J. Bennett) --
- "Held: A covenant not to compete is enforceable even where the competing former employee does not solicit his former employer's clients or use its confidential information if the scope of the restrictive covenant is limited to reasonable temporal and geographical limits, the employer is protecting legitimate business interests with the covenant, the employee has unique and specialized skills, there is no undue hardship on the employee to comply with the restriction and the public interest is served by enforcing the restrictive covenant; and the court held that it would extend the duration of the restrictive covenant for so long as the employee was in breach of it." (Quote from Maryland State Bar Association, Business Law Section - see blog.)
Quoting from TEKsystems above. pages 7-8:
- [General Rule] "Under Maryland law, covenants not to compete may be enforced “only against those employees who provide unique services, or to prevent the future misuse of trade secrets, routes or lists of clients, or solicitation of customers.” Becker v. Bailey, 268 Md. 93, 97, 299 A.2d 835 (1973). In determining whether a restrictive covenant in an employment contract is enforceable, courts assess “whether the particular restraint is reasonable on the specific facts.” Ruhl v. F.A.Bartlett Tree Expert Co., 245 Md. 118, 123, 225 A.2d 288 (1967). Such covenants will be enforced “if the restraint is confined within limits which are no wider as to area and duration than are reasonable for the protection of the business of the employer and do not impose undue hardship on the employee or disregard the interests of the public.” Id. (internal quotes omitted); see also Deutsche Post Global Mail, Ltd. v. Conrad, 292 F. Supp. 2d 748, 754 n.3 (D. Md. 2003) (“under Maryland law restraints in restrictive covenants must be viewed in the context of the hardship imposed on the employees and the necessity of the restraint to protect the employer’s interests”). When the scope of a restrictive covenant is considered to be reasonable on its face, courts may, in determining enforceability, assess other facts and circumstances, such as: whether the person sought to be enjoined is an unskilled worker whose services are not unique; whether the covenant is necessary to prevent the solicitation of customers or the use of trade secrets, assigned routes, or private customer lists; whether there is any exploitation of personal contacts between the employee and customer; and, whether enforcement of the clause would impose an undue hardship on the employee or disregard the interests of the public.Budget Rent A Car of Wash., Inc. v. Raab, 268 Md. 478, 482, 302 A.2d 11 (1973). ...
- [Geographic Area] This Court has previously concluded that the 50-mile prohibition at issue is facially reasonable under Maryland law. See TEKsystems, Inc. v. Derek Spotswood, Case No.RDB 05-1532, Memorandum Opinion at 10, fn. 3 (D. Md. June 28, 2005). Moreover, covenants imposing a far broader, or even unlimited, geographic limitation have been upheld by courts. See, e.g., National Instrument, LLC v. Braithwaite, 2006 Md. Cir. Ct. LEXIS 12, at *17-18 (Md.Cir. Ct. 2006) (upholding covenant restricting employee from competing in North America); Intelus Corp. v. Barton, 7 F. Supp. 2d 635, 641 (D. Md. 1998) (upholding covenant despite the absence of any geographic limitation). ...
- [Duration] The covenant is not overbroad in terms of its 18-month duration. Courts applying Maryland law have repeatedly upheld competition and solicitation restrictions that cover two years. See PADCO Advisors, Inc. v. Omdahl, 179 F. Supp. 2d 600, 606 (D. Md. 2002); Gill v. Computer Equipment Corp., 266 Md. 170, 181, 292 A.2d 54 (1972); Tuttle v. Riggs-Warfield-Roloson, 251 Md. 45, 49, 246 A.2d 588 (1968); National Instrument, 2006 Md. Cir. Ct. LEXIS 12, at *19. A two-year restriction has been upheld as “more than reasonable for it acknowledges that after a certain period of time the information with which [the employee] could depart, will become stale and significantly less disadvantageous to [the employer].” National Instrument,2006 Md. Cir. Ct. LEXIS 12, at *19. Therefore, the 18-month restriction here was clearly compliant with the norms governing the temporal scope of restrictive covenants.
2007 Ecology Services - invalid re low level employees.