Non-Competition Agreements and Trade Secret Enforcement – Part 1

This is the first of several posts about non-competition agreements and trade secret enforcement. In the past few years, litigation seeking to stop a departing employee from competing has been on the rise. This is especially so for employers in the technology field, and those businesses that invest significant time and money into developing proprietary customer information and industry data. However, non-competition agreements are neither interpreted nor enforced like other contracts because they usually seek to restrict free competition and employee mobility – two important public policies.

Before examining Maryland standards for non-competition agreements, it is important to define what a non-competition agreement is. In its most common form, it is simply an agreement restricting a departing employee from doing certain things. It can be part of an employment agreement, or a separate collateral contract signed by the employee. Usually, these restrictions seek to prevent one or more of the following actions:

• The former employee working in the industry for a defined time period (usually between six months and two years);

• The former employee soliciting the former employer’s customers or employees;

• The former employee working with former employer’s customers (regardless of how those customers came to the employee); and

• The former employee taking and/or using the former employer’s confidential information and trade secrets.

Because restrictive covenants implicate important public policies, courts will only enforce them if they are reasonable on their face and in their scope, and are related to a legitimate business interest. One factor is whether the former employee provided unique services. However, this a high hurdle to establish inasmuch as most jobs simply do not rise to the level needed to uphold a general prohibition against employee mobility.

Instead, most restrictive covenant litigation centers on whether the restrictive covenant would prevent (a) the future misuse of trade secrets, routes or lists of clients, or (b) the solicitation of customers. In practice, the former employee usually (but not always) needs to do something more than simply compete. The Maryland Court of Appeals has specifically noted the following factors when determining whether a restrictive covenant is enforceable:

“whether the covenant is necessary to prevent the solicitation of customers or the use of trade secrets, assigned routes, or private customer lists; whether there is any exploitation of personal contacts between the employee and customer; and, whether enforcement of the clause would impose an undue hardship on the employee or disregard the interests of the public.”

Budget Rent A Car, Inc. v. Raab, 268 Md. 478, 482 (1973) (emphasis added). A key issue is often whether customers are leaving the prior employer and following the departing employee to his or her new position.

Some examples that would likely support the enforcement of a restrictive covenant are as follows:

• A former employee taking or emailing himself or herself customer lists and data developed by the former employer;

• A former employee soliciting the former employer’s employees or clients; and

• A former employee simply working with the former employer’s customers with whom the former employee had a significant relationship, regardless of who started the post-separation relationship.

Some examples that would likely not support the enforcement of any restriction are as follows:

• A former low-level employee who had no customer contact;

• A former employee who had no access to confidential data or trade secrets; and

• A former employee who subsequently services the former employer’s customers with whom the employee had no contact (although this is more of a gray area).

A good rule of thumb to remember is that a court will usually be more inclined to enforce a restrictive covenant against a prior employee if that employee took with him, or is working with, the prior employer’s customers or using the prior employer’s data. The next post will address drafting tips that will help ensure that the courts enforce the agreed-to terms.