What Is a Non-Compete Agreement?
At the most basic level, non-compete agreements are contracts between an employee and employer that restrict the employee from competing with the employer’s business during or after the employee’s time at that particular business. While many people associate non-compete agreements specifically with employment contracts, they are also sometimes referred to as restrictive covenants and are sometimes also placed in other types of contracts. More importantly, they are an important tool used by employers to protect certain business interests and confidentiality. For example, if a business’ trade secrets, certain business contacts, or other confidential information would be useful to a competitor of that business and the employee has had access to that information, an employer will want to avoid that employee using that information to gain a competitive advantage for himself and his new employer. As such , non-compete agreements like any contract are typically negotiated into pay agreements so that both parties can mutually agree to terms that are appropriate for their situation. Most non-compete agreements will include terms that directly relate to the purposes stated above, such as preventing the employee from working for a competitor, starting a similar business, taking business contacts with him, soliciting the employees of the company, or soliciting the company’s clients or customers. Depending on the scope and nature of the employee’s role in the business, these restrictions could either be excessive or passable because courts generally do not allow a business to place more restrictions on a former employee than is necessary to protect business interests.
Noncompete Laws Under Maryland Code
The cornerstone of Maryland Law on Non-Compete Agreements is found in the 2005 Court of Appeals decision in the Trademarks Holdings, Inc. v, Laurel Highlands Audubon Society and Brenda Sacknoff. A private non-competition agreement does not have to meet the common law test of being supported by consideration in exchange for the restraint. "The Court of Appeals of Maryland held that for a covenant not to compete to be enforceable under Maryland law, the consideration does not have to be given in exchange for the covenant not to compete; it is sufficient if it is given in exchange for other things. Under the general rule that, as long as there is a valid contract, all of its terms are enforceable, absent illegality or unconscionability." (Emphasis Added)
For "blue pencil" type reforms, the availability of such modifications depends on the wording of the covenant. Where revision is feasible automatically, subsection (c) of the Model Act permits the court to say whether it is appropriate to give effect to the covenant, with either a suggested modification or without modification. The Maryland Court held that "[t]he Model Act is a guide on "developing the law toward a more transparent and predictable application of the rule of reason. See Model Act Sec. 4.0(a). The Model Act’s judicial disposition clause is a mechanism for judicial review of non-compete agreements." Model Act Sec. 4.0(b).
For a covenant to survive a presumptive threshold review, it must be narrow in geographic scope and temporal duration, and it must be necessary to protect the employer’s legitimate interests. Although Maryland does not recognize an independent cause of action for tortuous interference with a non-compete agreement, parties seeking to enforce a non-compete agreement must sue for breach of contract. As of October 1, 2019 Maryland prohibits non-competition agreements.
Enforcement of Non-Compete Agreements
Enforceability of Non-Compete Agreements in Maryland depends on a number of factors, including the length of time the non-compete is to be in force, the geographical area the non-compete is to cover, and whether the employee was given consideration for signing at all. For Maryland to enforce the non-compete, the length of time can only extend for as much time as is reasonably necessary for the employer to secure its interest. This means that if an employer has employees sign a non-compete that prohibits competition for a period of 5 years after termination of employment and the employer only needs a year to train that employee properly, then a 5-year non-compete is way too long and the Maryland court will not enforce it. Baltimore Circuit Court has even held that a 2-year non-compete is reasonable.
The geographical area the non-compete covers has to fall within a reasonable area where your employer does most of its business. For example, if you live in Baltimore, but work for an oil company that services contracts within the state of Maryland and Virginia, a non-compete that prohibits you from working for an oil company anywhere in the United States could be seen as overreaching, rendering it unenforceable by a Maryland court.
Finally, the employee must have been provided with some type of consideration for the non-compete agreement. A few Maryland courts have held that continuing employment constitutes adequate consideration for a non-compete. However, these courts have held that additional consideration, such as a raise or promotion, is necessary prior to enforcing a non-compete agreement.
Recent Developments and Case Law Updates
Recent years have seen significant changes pertaining to non-compete agreements in Maryland, particularly with the passage of the Maryland Work as Needed Act (MCLEAN) in October 2019. This law applied a bright line rule to the non-compete status of physicians, which were not to be used unless they formed a "specialty practice group" and there was an ownership interest by the employer or the arrangement was a "professional service agreement" approved by the Board of Physicians. Failure to comply with MCLEAN meant that the terms of the non-compete would be null and void.
While MCLEAN applied only to physician agreements, in August of 2021, the Maryland legislature passed two new laws that extended MCLEAN-style restrictions to non-physician healthcare professionals, such as nurse practitioners and physician assistants.
The "Compromise to Establish Professional Standards for Access to Quality Healthcare" (Coalesce) Act, Maryland Code Ann., Health-General § 19-1801 established that a "noncompete agreement" means "a covenant, consistent with applicable state and federal law, between an employer and a healthcare employee entering into an employment agreement that restricts either the healthcare employee from engaging in the practice of that healthcare employee’s profession or the employer from competing with a competing healthcare employer to provide patient care services." (emphasis added).
The Coalesce Act further restricted non-competes among non-physicians by prohibiting them from being entered into or adopted as part of an employment agreement unless the healthcare employee receives an ownership interest in the employer or is recruited in the contiguous United States pursuant to a professional services agreement approved by the Board of Professional Counselors. Recent legislation passed during the 2022 session reiterated the prohibition against non-compete agreements for employer organizations such as physician organizations, clinics or similar entities. See SB 205/CH 486, § 14-601(c) (1)-(2).
The recent case of ZipLoan, Inc. v. its founders illustrates how far reaching (and costly) a non-compete agreement can extend when implemented into an employment agreement. In ZipLoan, the founder of an Indian bank challenged his non-compete agreement as being unenforceable in India, which subsequently cancelled his employment and pursued litigation against him for $3 million damages. Despite the lack of any similar Indian laws to Maryland’s MCLEAN provisions, the court found that ZipLoan’s non-compete was enforceable under Maryland law because the employment agreement had a choice of law provision identifying Maryland as its governing law and a forum selection clause requiring all disputes to be pursued in the state of Maryland.
Intimately tied to the question of non-competes is the notion of confidentiality or non-disclosure clauses present in employment agreements. While confidentiality agreements to keep confidential and proprietary business information such as client lists or trade secrets are generally permissible and more likely to be enforced, recent Maryland case law has upheld the idea that a confidentiality agreement that reflects a non-compete also may be struck down if the agreement both fails to meet the necessary required "reasonableness" standards as described in the preceding sections, and gives the employer rights beyond that required to protect business interests.
Employers’ and Employees’ Views
Non-compete agreements can have wide-ranging implications for both the employer and the employee. A non-compete agreement can often be the difference between realizing the full economic potential of a successful business and stifling any potential for growth. For the employee, it can mean the difference between the ability to establish a career in an industry and having to move on to a new field in order to pursue the same career path.
Employers often cite some combination of the following interests as justification for the imposition of non-compete restrictions: protection of the employer’s significant investment in training the employee, the employer’s need to protect confidential information, and the preservation of customer relations. Any restrictions that an employer places on his employees must be no greater than is necessary to protect these interests. Why such a high bar? While we think it has a lot to do with the history of restraint of trade doctrine and how it developed in English common law, the simple answer is that imposing stringent restrictions on an employee’s ability to change jobs benefits the employer, not the public good. The law can change to impose restrictions on an employee which would be unenforceable if the shoe were on the other foot. At the same time, there’s a legitimate balancing process involved. Take, for example, a doctor who is being wooed by a competing hospital . The hospital invests significant money and care in the training of a doctor. When the doctor moves to a competitor, the hospital loses the benefits of its training. This is a matter of general public policy. Doctors don’t just go to medical school, make their bones and then have a career waiting at the end of the rainbow regardless of whether they have relevant relationships. Likewise, an engineer is not guaranteed a job when changing from one manufacturing company to another. Does this justify a five year non-compete? Well, that depends on the importance of the investment to the employer’s bottom line. For employees, the issues are a bit more complicated. First and foremost, the employee may face time and financial pressures in changing jobs. On the one hand, the employee faces the challenge of obtaining training and skills to compete for the next job. At the same time, the employee has to build his or her own reputation. An employee who only does good work when his boss watches, for example, or engages in sloppy project management will face challenges in meeting the demands of a new employer. Non-compete agreements can force the employee to change jobs during a constrained economic period, limiting the employee’s options particularly if there are spousal or parental concerns. Finally, the non-compete limits the employee’s ability to enjoy the long-term benefits of word-of-mouth referrals and a solid reputation among customers and clients.
Options Besides Noncompete Agreements
Unfortunately, non-compete agreements have been declared illegal in Maryland and are not available as a tool for use in these negotiations, which is why we see non-compete agreements used less and less as of late. Companies will still try and push for these agreements sometimes to retain their talent better, but many of them are learning the hard way that these restrictions are illegal in the state.
Rather, businesses can turn their focus toward non-disclosure agreements, non-solicitation agreements, and confidentiality clauses within employment contracts, although often what can be more impactful is reviewing the current incentives structure, core values, and culture within a company. A walling off of trade secrets likely will eventually lead to the employee having a need to sell that information elsewhere, especially if the rates of compensation and other incentives to stay are not on par for what the marketplace demands.
Therefore, it is often smarter and simpler to look for ways to retain talent through training and opportunities instead of through legal agreements. By investing in those employees so that they remain engaged with the company and can clearly see a path forward in their employment, many of the concerns about keeping that talent can be alleviated without any legal agreements.
What to do if you Have Been Presented with A Non-Compete
If you are faced with a non-compete agreement, there are some steps that you can take before and after termination. Employees should consider the following steps:
1. Review the Covenant
Review the terms of the restriction to determine whether it is reasonable. If it is not, you may be able to argue that legally it is considered null and void.
2. Weigh the Options Carefully
Your employer may ask you to sign an agreement that contains a non-compete. If you are approached to do so, consider the pros and cons of your options .
3. Negotiate with Your Employer
If you feel that the restrictions placed on you by the covenant are too harsh, try to negotiate with your employer.
4. Consult an Attorney
An attorney will be able to help you understand and interpret the covenant that your employer has asked you to sign.
If you are terminated and your former employer attempts to initiate a violation of its covenant, you should proceed carefully. Do not sign anything or say anything without first reviewing it with an attorney.