When is a non-compete clause in a employment contract enforceable in Maryland?

by | Dec 8, 2023 | Firm News | 0 comments

Stewart Sutton recently represented a Maryland employer in an action to enforce a non-competition clause against a former employee.  The following is a legal analysis as to when a non-compete clause will be enforceable to prevent a former employee from working for a particular duration in a specified geographic area.

           A.   THREE MAIN CRITERIA FOR A NON-COMPETITION OR A NON-COMPETITION CLAUSE TO BE ENFORCEABLE IN MARYLAND

In Maryland, it is well-established that a non-competition clause is enforceable, as long as the “restraint is confined within limits which are no wider as to the area and duration than are reasonably necessary 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”.  Ruhl v. F.A. Bartlett Tree Co., 245 Md. 118, 123-24 (1967).

          1.    The Temporal restriction is reasonable

Maryland courts have upheld many non-compete clauses containing one and two year restrictions. Millward v. Gerstung Int’l Sports Educ., Inc., 268 Md. 483 (1973) (2 year prohibition against engaging in sports camp business upheld); Gill v. Computer Equip. Corp., 266 Md. 170 (1972) (2 year prohibition against serving customers of division of computer company upheld); Tuttle v. Riggs-Warfield-Roloson, 251 Md. 45 (1968) (2 year restriction on employee of insurance general agency upheld); Ruhl v. F.A. Bartlett Tree Expert Co., 245 Md. 118 (1967) (2 year prohibition against competition by area manager of tree care company upheld); Tolman Laundry, Inc. v. Walker, 171 Md. 7 (1936) (1 year restriction on employee of laundry business upheld).

              2.       The Geographic restriction is reasonable

A geographic restriction in a covenant not to compete is reasonable when it “is well defined and no wider than necessary to protect the legitimate interests of the employer”.  Holloway v. Faw, Casson & Co., 319 Md. 324, 327 (1990) (geographic scope of non-compete clause within forty mile radius of any of the accounting firm’s offices was not challenged).

            3.     Lack of undue hardship for the employee

A non-competition clause is enforceable, if it doesn’t impose an undue hardship on the employee.   Courts view “the burden of non-competition clauses to be minimal due to the employee’s ability to easily locate employment that is in conformity with the covenant restrictions”.  Holloway v. Faw, Casson & Co., 78 Md. 205, 219 (1990);  Warfield v. Booth, 33 Md. 63 (1870) (doctors)Tawney v. Mutual Systems of Md., Inc.,186 Md. 508, 47 A.2d 372 (1946) (manager of a loan office).  However, a non-competition clause would be unenforceable if it is against public policy, such as preventing an emergency room physician or nurse from working for 6 months during a pandemic.  

               B.   NON-COMPETITION CLAUSES ARE ONLY ENFORCEABLE AGAINST FORMER EMPLOYEES WHO DEVELOP AND ARE COMPENSTATED FOR CREATING “GOOD WILL” FOR THEIR EMPLOYERS

The interest protectable by a non-compete clause is the “good will” that the employee creates with the customers while working for the employer.  This guards against the risk that the customer will be loyal to the employee with whom he has had a relationship, rather than the relatively impersonal employer.  See Holloway v. Faw, Casson & Co., 78 Md.App. 205, 218 (1989) (“Holloway I”), rev’d in part on other grounds, 319 Md. 324 (1990) (holding that an employer has a legally protected right  “to protect the employer’s business by restraining those former employees whose duties involve the ‘creation of good will of customers and clients which [clients] are likely to follow the person of the former employ’”) (quoting Silver v. Goldberger, 231 Md. 1, 7 (1963)).                                                                                          

As such, non-compete clauses are enforceable when the success of the business depends upon the employee’s personalized services and/or personal interactions with the customers.  Tolman  Laundry, Inc. v. Walker, 171 Md. 7, 9 (1936) (upholding non-compete clause, because the “success of the enterprise depends upon keeping the good will and patronage of its customers, and obtaining new ones”); Tuttle v. Riggs-Warfield-Roloson, Inc., 251 Md. 45, 49-50 (1968) (holding that an employee’s established relationships with customers are a legitimate protectable business interests).                                                                                      

In Ruhl v. F.A. Bartlett Tree Co., 245 Md. 118, 123-24 (1967), the non-competition clause was found enforceable against the former employee, because his personal contacts and interactions with customers were an essential part of his work.  The rationale is that the “employer has a stronger need for protection against diversion of his business to the former employee who has had personal contacts with customers which the employer lacks”.  Millward v. Gerstung Int’l Sport Educ., Inc. 268, Md. 483, 488-89 (1973).   The same is true with any skilled or professional service employee who generates repeat patronage based upon their personal relationship and interactions with patients or customers, such as physicians, dentists, accountants, hair dressers and barbers, stock brokers, insurance agents, and loan officers[1].                                                           

Restraint of a former employee pursuant to a non-competition clause is also justified when “a part of the compensated services of the former employee consisted in the creation of the good will of customers and clients which is likely to follow the person of the former employee”.  Silver v. Goldberger, 231 Md. 1, 7 (1963).

       C.    EMPLOYEE’S DEFENSES TO A NON-COMPETITION CLAUSE

          Employees have three main defenses to the enforcement of a non-competition clause.

       1.     OVERBREADTH

   First, the restriction may not be overbroad in its duration and/or geographic scope.  If the employer only conducts business in Montgomery County, then restricting the employee for working for a competitor across the entire metropolitan region would be overbroad and unenforceable.

        2.     UNSKILLED WORKERS AND WORKERS WHO DO NOT    INTERACT WITH CUSTOMERS

Non-competition clauses are unenforceable against unskilled workers and workers who do not interact with the customers of a business.  In Ecology Services, Inc. v. Clym Environmental Services, LLC, 181 Md.App. 1 (2008), the former employees were hired to work in a similar capacity by a competitor.  However, non-competition clause was not enforceable, because (1) the former employers were unskilled workers whose services were not unique; and (2) the former employees had not interacted with customers and had not created “good will” for their former employer.  Id. at 18-20.

An identical result was reached in Becker v. Bailey, 269 Md. 93 (1973).  The Maryland Supreme Court found that the non-compete clause was not enforceable against Mr. Bailey, because Mr. Bailey was “an unskilled worker whose serves are not unique”.  Id. at 99.  The Supreme Court also emphasized that Mr. Bailey had not been compensated for the creation of good will (i.e., repeat patronage) by the former employer, especially when it would only take a few days for a new employee to become acquainted with the employer’s customers, consisting of various automobile dealerships.  Id. at 100-101.            

However, non-competition clauses are enforceable against employees who have regular contact with customers or patients and generate good will (repeat patronage) for the business.  Such employees include salespersons, physicians, dentists, accountants, and other skilled professionals who work directly with clients.  Holloway v. Faw, Casson & Co., 319 Md. 324, 335 (1990) (“Persons in business have a protectable interest in preventing an employee from using the contacts established during employment to pirate the employer’s customers”).

      3.   PREVENTING FORMER EMPLOYEE FROM WORKING IN     ANY CAPACITY FOR A COMPETITOR

          Many non-competition clauses state that the worker is prohibited from working in any capacity for a competitor for a certain duration and within a geographic area.  Although no Maryland state appellate court has issued a definitive ruling on whether the use of the term “in any capacity” constitutes overbreadth, there is a line of reported cases of the U.S. District Court from Maryland holding such language makes the entire non-competition clause facially overbroad and, therefore, unenforceable.  See Bindagraphics, Inc. v. Fox Grp, Inc. F. Supp. 565, 575 (D.MD 2019) & Seneca One Finance, Incv v. Bloshuck, 214 F.Supp.3rd (D.MD 2016).

 [1] Unlike other professions, law firms are expressly prohibited from preventing former employees from competing.  See Maryland Attorneys’ Rules of Professional Conduct at Maryland Rule 19-305.6 (Restrictions on Right to Practice).

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