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Non-Compete And Non-Solicitation Agreements: Employer Beware

Author: Ronald E. Lyons Date: 04/24/2018

Categories: Business Startups, Corporate and Business Law, Employment Law & Litigation

A recent case from the Circuit Court for Montgomery County, Maryland underscored the growing trend by courts across the country to limit the application of non-compete and non-solicitation agreements.   These agreements, typically referred to as “restrictive covenants”, are integral to many employment agreements. Restrictive covenants in employment contracts serve as a means of assuring the employer that its employee will not use his/her familiarity with the customers of the employer to take those customers and clients to a new employer.  Even though they constitute a restraint against trade, most courts will enforce them provided that the limitations are reasonable, both in terms of the length of the prohibition as well as the geographic scope of the limitation.

In the case of Neitzey v. Allen, et al, the restrictive covenants that the employer required the employee to sign included both a non-solicitation as well as a non-compete covenant.  As drafted, however, the non-solicitation covenant applied to any customer of the employer or its affiliates regardless of whether the employee ever had contact with them during the course of his employment.  The agreement failed to define “customer” with reference to any point in time. Accordingly, it was not limited to customers of the employer as of the date the employee terminated his employment.  Moreover, there was no geographical limit on the area covered by the covenant.

When the former employer initiated action to enforce the restrictive covenants, the former employee filed suit seeking to have them declared invalid on the basis that they were overbroad.  The employer responded by requesting to have the court revise the agreement which is known as “blue penciling”. Traditionally, Maryland courts will allow blue penciling for the limited purpose of removing an offending term or phrase but not to amend the phrase or modify the agreement.  Maryland courts use a two-part inquiry when considering whether to blue pencil: First – Does the restrictive covenant, as a whole, evidence a deliberate intent by the employer to place unreasonable and oppressive restraints on the employee. If so then the entire covenant is invalidated, whether or not it is severable.  Second – if the agreement satisfies the first part but is unreasonable, then the court can modify the terms to align the reasonable expectation of the parties to the reasonable expectations of the law so long as it is fair to do so.

Sensing that the court would conclude that the agreement was too broad to be enforced, the employer argued that the court could modify the agreement by limiting the non-solicitation and non-compete restrictions.  The employer requested that the court limit the non-solicitation to only those customers with whom the employee had personal contact and to limit the non-compete to the recovery of damages for soliciting or accepting business from customers.  In other words, the employer argued that the court could elect to partially enforce the covenants.

The court concluded that the covenant not to solicit could not be severed on a customer by customer basis thereby making the employer’s argument fatal.  The non-solicitation provision in the agreement applied to any customer of the employer and was not limited its customers as of the time the employee terminated.  Furthermore, it did not include a geographical limitation. In a further attempt to preserve some of its restrictive covenants, the employer also suggested that the court modify the restrictive covenants with the employer agreeing to waive injunctive relief.  Here again, however, the terms of the non-solicitation could not be severed on the basis of which customers are covered. Without the liquidated damages clause, it would be far too difficult to determine damages on a customer by customer basis. The court concluded that both covenants were overbroad so neither one could be enforced.

Employers and employees both have valuable rights to protect.   This can be achieved by working closely with legal counsel to draft agreements that are consistent with the reasonable needs of the parties.  The attorneys at McMillan Metro are available to work with you to identify those needs and draft agreements that protect those interests. For further information, contact Ronald Lyons Esq. at rlyons@mcmillanmetro.com or at (240) 778-2306.