Employee Noncompete Agreements Unenforceable? Wrong!

Author: Lynn Perry Parker Date: 07/13/2010

Categories: Corporate and Business Law, Employment Law & Litigation

Noncompete Agreements – Why Bother?

So often we hear that noncompete agreements are not worth the paper they are written on. Whether that statement is true or not depends on what is written on the paper. Earlier this year, the United States District Court of Maryland unequivocally confirmed that employee noncompete agreements are enforceable in Maryland! TEK-systems, Inc. v. Jonathan Bolton, (February 4, 2010). In fact, they are enforceable in our neighboring state of Virginia and the District of Columbia as well as in numerous other jurisdictions. The reason so many employers believe otherwise is because they have witnessed the consequences of trying to enforce a one-size-fits-all agreement. By failing to customize the agreement to the specific employment situation, the employer runs the risk of having an agreement that is deemed overly restrictive and, therefore, unenforceable. This is endemic to boilerplate agreements, including those downloaded off the internet.

An enforceable noncompete agreement is one that balances the interests of the employer’s desire to protect its investment in such things as its development of client lists, employee training or marketing and advertizing, against the employee’s right to use his/her skills and experience to maximize his/her own economic interests. If the agreement is narrowly drafted to protect a legitimate business interest and not merely an attempt to eliminate competition or penalize an employee for leaving, the agreement is more likely to be enforceable. To achieve a balanced contract, it is necessary to consider the following variables: (1) the employer’s actual competitors; (2) the particulars of the employee’s job and employee’s ability to unfairly compete; (3) the industry in question; (4) the availability of meaningful alternative employment for the departing employee in the same or alternative industries; (5) the geographic scope of the restriction; and, (6) duration of the restriction.

There are no absolute rules that apply to all circumstances. While courts have ruled in certain situations, for example, that a three-year constraint or a 75-mile radius restriction is reasonable and enforceable, this does not mean a court would find such restrictions reasonable in all situations. Since the specific facts matter, so does the specific content of the agreement. A properly crafted noncompete agreement is a valuable investment for you and your business.

Agreements Prohibiting Solicitation of Customers or Employees – Do they Work?

Very often the employer’s primary concern is not that an employee will work for a competitor but that the departing employee will attempt to lure either its customers or its employees away for purposes of starting a competing business or enhancing a direct competitor at the employer’s expense. Under this scenario, the best protection for an employer is to forego a covenant not to compete and limit the agreement to prohibit unfair solicitation of customers and/or employees. The need to protect one’s customers and employees is an obvious legitimate business interest; therefore, nonsolicitation provisions are generally much easier to enforce. They are, by definition, narrowly tailored. They protect the employer’s investment in client and/or employee development but do not unfairly interfere with the employee’s right to compete.

Protection of Trade Secrets – What are Trade Secrets and Do I Need An Agreement to Protect My Property?

Even without an agreement, employers do have statutory protection against the unauthorized disclosure or misuse of a company’s trade secrets. Maryland, Virginia and the District of Columbia have all adopted a version of the Uniform Trade Secrets Act. Under the Maryland Uniform Trade Secrets Act (“MUTSA”), “trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

  1. derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and,
  2. is the subject of efforts that are reasonable under the circumstances to maintain the secrecy of the information.

Determining exactly what constitutes a trade secret under the statutory definition has been the subject of many a law suit. Law suits are expensive and should only be initiated when necessary to protect the business. Requiring employees who will have access to proprietary information to sign Confidentiality Agreements should help minimize the need for litigation and actually help inform the employee of his/her obligations to keep certain information secret. To maximize an employer’s protection, those agreements should both reference the applicable state Uniform Trade Secrets Act and specify, with particularity, the information the employer desires to keep confidential, especially the information that may not technically meet the statutory requirements. By including the additional information, the employer creates a contractual right to keep the information confidential and prevent the employee’s unauthorized use. Listing the types of damages the employer will seek in the event of a breach also helps deter employee violations. Available remedies include injunctive relief, monetary damages caused by misuse, punitive damages (for intentional violations), and attorneys’ fees. Again, carefully crafted contracts can help employers avoid costly losses.

Duty of Loyalty – Does the Employee Not Owe Me Some Obligation?

The common law does afford employers with some protection against unfair competition. In every employment relationship there is a duty of loyalty, which means the employee has a duty to act for the benefit of his employer in all matters within the scope of employment and to avoid all conflicts between his duty to the employer and his own self-interest. While the duty of loyalty does offer some protection to the employer, the protection is very limited. The duty, for example, does not prohibit an employee from making plans to compete with employer while still employed by the employer provided the employee does not solicit customers or directly compete with the employer before terminating services. The employee is also under no obligation to inform the employer of the intention to compete. Most importantly, once the employment relationship ceases, so does the duty of loyalty. Absent an enforceable contract restricting competition, solicitation, or unauthorized use of proprietary or confidential information, the employer has no recourse against the former employee who engages in such activity.

Conclusion – Employment Agreements Are Good Investments!

Employers with employees who have specialized skills, constant contact with key customers, influence with other employees or access to trade secrets and other proprietary information should invest in having the proper noncompete, nonsolicitation and/or confidentiality agreements drafted to protect their business interests.