Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained.  In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.

The Law In Maryland

Maryland courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect certain business interests of the employer such as customer relationships or trade secrets. Factors considered when determining reasonableness include the hardship an agreement puts on the former employee, its effect on the general public and the restrictions placed on time, territory and activity of the former employee.  Such agreements may be used “as a shield to protect the employer from the unfair competition by the former employee, but … [not] as a sword to defeat the efficient competitor.” (Maryland Appeals Court, 1989)

Consideration

With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Maryland courts have determined that the offer of initial or continued employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate.

Reasonableness in Time and Geographic Scope

Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. The first test is whether there is evidence of a deliberate intent on the part of the employer to impose unreasonable or oppressive restraints on the employee. If not, then the court may “blue pencil” or delete specific words in the agreement so that it does not unduly infringe on the former employee’s ability to work.

Examples of non-compete agreements that Maryland courts have found to be reasonable include:

• A 2-year restriction against a regional sales manager of a mutual fund company from accepting employment with two specific mutual fund companies that offer unique funds in direct competition with the former employer.
• A 6-county restriction against the former employee of a tree service business because the employee actively worked in those six counties.
• A restriction against an accountant without a geographic limitation because it specified he was not to work for any of the former employer’s customers.

The courts have found the following restrictive covenants unreasonable:

• A 2-year restriction against a sales manager of an international mail services company from engaging in any competitive activity with any of the employer’s customers because it was much broader than necessary to protect the employer’s interest in the good will created by the employee.
• A nationwide restriction against the former salesman of a bowling equipment distributor.
• A restriction against a former employee of a grocery store chain where the employee would forfeit his pension benefits if he competed with the former employer because there was no limits on either the duration or geographic scope in the agreement.

Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.