Non-Competes Are Unenforceable, Right? Recent VA and MD Cases Provide Some Insight
I can't even tell you the number of times I get into a discussion with a friend or ex-colleague who has just been terminated about non-competes. And almost every time, the conclusion ends this way: "I've heard that non-competes are unenforceable, so I'm not that concerned." It always peeves me when non-lawyers make their own legal conclusions, and it irks me even more when they're completely wrong. I wanted to spend a little time focusing on two this year in Virginia and Maryland that highlight the fact that the answer is not all that simple.
But right off the bat, I want to clarify what I mean when I use the term "non-compete." Most non-compete agreements usually have three different components to them: (1) the "non-competition" provision, which prohibits an employee from engaging in activities that may, or actually do, compete with the employer (e.g., working for a competitor or starting your own competing business); (2) the "non-solicitation" provision, which restricts the employee from soliciting the company's other employees or clients; and (3) the "non-disclosure" provision, which limits the employee's unauthorized use of proprietary, trade secret or confidential information. I am going to discuss the "non-competition" provision here.
On July 30, 2010, the Fairfax Circuit Court issued a decision in Daston Corp. v. MiCore Solutions, Inc. (Case No. CL-2010-9318). In that case, Judge Devine struck down a non-compete agreement as enforceable, but it is his analysis that is most helpful for our purposes. The lawsuit was brought by Daston Corp., an IT company that provides a number of services based on Google Apps software, against two former employees who went to work for a competitor, MiCore Solutions. Both of the employees had signed employment agreements containing a non-compete (as well as a non-solicitation clause).
In his opinion granting defendants' motion to dismiss as to the non-compete (he upheld the non-solicitation clause), Judge Devine aptly summarizes the controlling law in Virginia, and also provides some advice to employers and employees:
--"A non-competition agreement between an employer and employee will be enforced if the contract is narrowly drawn to protect the employer's legitimate business interest, is not unduly burdensome on the employee's ability to earn a living, and is not against public policy."
--"Because these restrictive covenants are disfavored restraints on trade, the employer bears the burden of proof and any ambiguities in the contract will be construed in favor of the employee."
--There are no legal guarantees in drafting these agreements. Nothing is foolproof, and case law precedent will usually be "unhelpful or confusing." Why? Because "language deemed enforceable in a case may be overbroad and unenforceable in a different factual context." Every case will be decided on its "unique facts and circumstances."
In granting the former employees' motion to dismiss, the Court pointed out that employers must be careful to keep the agreement narrow, and the language clear and simple.
In this case, the non-compete provision barred the employees from providing to any Daston client services that are "substantially similar or related" to services that were provided to that client by the employees, or any Daston employee working under their supervision. The court determined that the phrase "substantially similar or related" rendered the clause unenforceable because it was vague and prohibited not only direct competition with Daston (OK), but also the provision of services that are merely "related" to the services provided by Daston (not OK).
The Employment Agreement was therefore, partly unenforceable. What does a court do when part of an agreement is fine, but some parts are not?
The Court notes that in Virginia, "unforceable provisions may be severed from a contract and the remainder of the contract enforced." In determining whether the contract provisions may be severed, the court "looks to the intention of the parties."
Here, the Employment Agreement contained a "severability" clause that provided for the severance of the unenforceable provisions and for the continued effect of the enforceable ones. Thus, concluded the Court, because it was clearly the parties' intent, the invalidity of the non-compete would not preclude enforcement of the non-solicitation and other enforceable provisions.
But the Employment Agreement also stated that the parties were giving their consent to the court to modify the Agreement to make the non-compete enforceable, also known as "blue-penciling." Judge Levine declined to do so. He acknowledged that the Virginia Supreme Court had yet to directly address the propriety of "blue-penciling" restrictive covenants. However, he emphasized that "it is clear from the restrictive covenant jurisprudence in Virginia that judicial reformation of such agreements is discouraged."
A recent Maryland case is the other side of the coin. In February of this year, the Federal District Court in Maryland in TEKsystems, Inc. v. Bolton (Civ. Action No. RDB-08-3099) (D. Md. Feb. 4, 2010) enjoined a former executive from violating a non-compete provision in his Employment Agreement.
Pursuant to the Agreement, Jonathan Bolton, the former Director of Strategic Accounts for TEKsystems, a techincal staffing and services company, was barred from competing with the company within a 50 mile radius of the office in which he worked at the time his employment was terminated, for a period of 18 months following termination. Less than two weeks after resigning, Bolton began working for another IT-staffing company as their Managing Director in NYC. He worked out of his home in NJ, which was less than 50 miles from his prior office at TEK. TEK issued a cease and desist letter, never received a response, and subsequently filed a lawsuit to enforce the non-compete and sought damages.
The Court's analysis began with a recitation of controlling Maryland law:
--Covenants not to compete may be enforced "only against those employees who provide unique services, or to prevent the future misuse of trade secrets, routes or lists of clients, or solicitation of customers."
--In determining whether a restrictive covenant in an employment contract is enforceable, courts assess "whether the specific restraint is reasonable on the specific facts." Such covenants will be enforced "if the restraint is confined within limits which are no wider as to area and duration than are reasonable for the protection of the business of the employer and do not impose undue hardship on the employee or disregard the interests of the public."
The Court then applied the facts to these factors, and concluded that balancing of the interests favored enforcement of the non-compete.
--According to the Court, the covenant was reasonable in both scope and duration. First, the Court noted that broader limitations than 50 miles had been previously upheld by Maryland courts, especially where, as in this case, the company operated on a national and international level. The Court also recognized that the 18-month restriction was well within the normal bounds for such agreements.
--The Court found that non-compete protected TEK's legitimate business interest, since TEK's success in the industry was heavily dependent on the ability of its employees to make personal connections with clients, and Bolton had privy to these connections and contacts while employed at TEK. Next, the Court noted that while inconvenient for Bolton, the non-compete did not create an undue hardship. Finally, the Court considered the public interest implicated and determined that "the public benefits from the enforcement of reasonable restrictive covenants" which serve to "facilitate and protect business growth, especially in technology-related and information-based fields."
It is interesting that the Court enforced the non-compete, even though there was no evidence that TEK had suffered any loss of profits as a result of Bolton's actions.
District of Columbia
Although there wasn't a lot of activity on the non-compete front in DC (like most DC law, non-compete law here is pretty underdeveloped), I wanted to bring to your attention the key case in the jurisdiction, Deutsch v. Barsky, 795 A.2d 669 (D.C. 2002). I won't go into detail about the facts, but the standard for the enforceability of non-competes is strikingly similar to that for Virginia and Maryland: the reasonableness of the restriction, and a balancing of the hardship claimed by the employee against any legitimate interest in enforcement of the employer.
This seminal case, however, has never been cited by any Federal or DC court.
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As you can gather from the case law, there is simply no per se rule that non-competes are unenforceable. Assume otherwise at your peril.
Footnote: I do think that one big issue that courts will have to confront, not only here in the Mid-Atlantic region but all over the country, is whether the never-ending recession warrants a more lenient standard for employees. Given the current employment situation, you could argue that almost any significant restraint on getting a new job is unreasonable, or at least against public policy. We'll see.