Employers often make the mistake of drafting overly broad non-compete agreements. Courts in Maryland have found broad non-compete agreements unenforceable unless they are specifically tailored to protect the company’s legitimate business interests.
As a good rule of thumb, non-compete and non-solicitation agreements need to focus on what is reasonably necessary to protect the company’s goodwill. Specifically, a non-compete agreement should only be as broad as necessary to ensure a former employee does not exploit the previous knowledge he or she obtained against the company in a competing role. A non-solicitation agreement should only be as broad as necessary to prevent a former employee from using its contacts established during employment to pirate customers.
Under the law, non-compete and non-solicitation clauses are referred to as “restrictive covenants.” In Maryland, a restrictive covenant is enforceable when:
(1) The employer has a legally protected interest;
(2) The restrictive covenant is no wider in scope and duration than is reasonably necessary to protect the employer’s interest;
(3) The covenant does not impose an undue hardship on the employee; and
(4) The covenant does not violate public policy.
An employer generally has a “legally protected interest” in its customer goodwill. Customer goodwill is essentially a shorthand description for the advantage or benefit acquired by a company beyond the mere value of its capital, stock, and property that attract customers to the business. A non-compete or non-solicitation agreement that is broader than necessary to protect the loss of customer goodwill is deemed unenforceable in violation of public policy in Maryland.
A couple of general drafting lessons can be discerned from a recent Federal Court decision (Paul v. ImpactOffice, LLC, Case No. TDC-16-2686, 2017 WL 2462492 (D.Md. June 6, 2017)):
- Non-Compete Agreement:
- A blanket prohibition of all employment in any capacity at a competitor is too broad.
- Limit to employment in positions similar to what the employee did in the previous Position. Focus on the specific work performed, and not just the nature of the competitor.
- Non-Solicitation Agreement:
- Limit to the former employee’s actual customer base, and not simply “all” customers. A solicitation ban on customers that the former employee never established personal relationships is disfavored.
- Cannot bar “acceptance” of unsolicited business. Barring passive unsolicited business, such as a former employee receiving an unsolicited telephone order, is unreasonable because it does not involve a former employee using the employer’s contacts to pirate customers.
- Cannot bar solicitation of “prospective customers.” A prospective customer, has not previously done business with the former employer, and would not have the same customer goodwill with the prior employer.
The ultimate question is whether the language in the agreement is tailored to protect the employer’s real interests, or aimed at merely preventing competition.
Thatcher Law Firm represents both Businesses and Employees in Non-Compete Agreement disputes. Please contact us for assistance.