Whenever an employee in the Maryland or Washington, D.C., area is asked to sign a covenant not to compete, it is very important that he or she fully understands the legal ramifications of the contract. Employers generally use non-compete agreements in order to limit their employees’ abilities to work elsewhere after leaving the company. Non-compete agreements are also sometimes involved when someone sells his or her business to another entity.

Although many non-compete agreements are not even legally enforceable, by signing one you may be waiving very important rights. A veteran banker and his deputy were recently penalized $20 million each for violating a non-compete agreement related to the banker’s sale of a business to the Virginia-based Capital One Financial in 2006.

When the man sold his institution to Capital One, he signed an agreement that stated that neither he nor the vice chairman of that business would do business in New York until the summer of 2012.

The two stayed out of the New York market until 2009, but then the banker and a group of investors acquired a bank that went on to acquire a smaller New York bank itself. Soon, these two men were reportedly involved in opening bank branches throughout New York.

Last summer, Capital One sued the two men for breaking the non-compete agreement. Before the case went to trial, they settled out of court and each man agreed to pay Capital One $20 million and cease competing in the New York market until January.

Before entering into a non-compete agreement, it is wise for employees and business owners to have an experienced employment and business and commercial law attorney review the document. And, those who are already in an agreement but are planning to open a business or join a competing organization may want to talk to a lawyer about voiding the agreement.

Source: Crain’s New York Business, “Former North Fork execs dinged $20M,” Aaron Elstein, June 19, 2012