Fourth Circuit Upholds Strict Non-Compete-Style Agreement

Fourth Circuit Upholds Strict Non-Compete-Style Agreement

| May 13, 2020 | Employment Issues For Employers |

Non-compete agreements keep employees from competing with the company for a period of time after their employment ends. Non-solicitation agreements can prohibit soliciting former co-workers or former clients on behalf of a new company for a specified period.

In general, these agreements (called “restrictive covenants”) need to be drafted carefully because courts see them as restraints on trade. They can materially affect a former employee’s job prospects for at least some period of time, and this can only be done with care. When determining whether such agreements are valid, courts typically consider factors such as:

  • Whether the agreement is narrowly tailored to the company’s legitimate business interests, as opposed to an effort merely to restrict competition
  • Whether the agreement is reasonable in scope, geographic reach and time period

When restrictive covenants are not narrowly tailored to a legitimate business interest, such as the need to protect proprietary information, courts may find them overbroad and thus invalid. Similarly, if the agreement restricts the employee too much, in too wide of an area or for too long, the agreement may be found unenforceable.

So, it was of some interest recently when a Maryland company and its subsidiaries attempted to enforce a strict incentive plan in connection with non-compete and non-solicitation agreements.

Company paid former employees to continue being loyal

A staffing company called Allegis Group, Inc., and its subsidiaries TEKsystems and Aerotek, provide staffing for the Defense Department and other government agencies and contractors. Employees of the three companies work in close collaboration, with access to each other’s proprietary information.

To protect that information, Allegis and the subsidiaries put in place an incentive plan that, in exchange for certain post-separation payments, required continuing loyalty to the companies’ interests for 30 months following separation. This incentive plan was offered to select management and highly compensated employees.

Four Aerotek executives had signed non-competes and non-solicitation agreements in connection with the incentive plan. However, they allegedly breached the restrictive covenants while accepting the incentive payments. One executive, for example, set up competing staffing companies and solicited former co-workers to work there. The three companies sued the executives for breach of the non-compete and non-solicitation agreements and sought to have the incentive payments returned.

In their defense, the executives claimed that the agreements and incentive plan were not narrowly tailored to their former employers’ legitimate business interests and were therefore unenforceable. The trial court disagreed and ordered the executives to return their incentive payments with interest.

The executives appealed to the Fourth Circuit, which found not only that the plan’s terms were reasonable but also that the incentive plan did not have to satisfy the legal requirements of a restrictive covenant. The incentive plan itself, as opposed to the restrictive covenants, did not have to be narrowly tailored to the company’s legitimate business interests.

This ruling could have significant implications on what restrictive covenants are allowed in the Fourth Circuit, which contains Maryland, Virginia, West Virginia, North Carolina and South Carolina.

If you have questions about whether your own non-compete or non-solicitation agreements would be enforceable, contact an experienced employment law attorney.