Non-Competition Agreements and Trade Secret Enforcement – Part 2

The previous post talked about general guidelines utilized in enforcing restrictive covenants.  While employers often invest significant time and money enforcing restrictive covenants after a breach, people often spend less time ensuring that their employment agreements are actually enforceable.  After representing both employers and employees in restrictive covenant and trade secret litigation for many years, I have noticed several recurring themes.

First, ensure that the restrictive covenants have actually been signed by the employee and a copy given to him or her.  Sounds basic, but it is often overlooked.

Second, are the restrictive covenants drawn as narrowly as possible to protect the employer’s business interests?  Judges tend to recognize when a restrictive covenant is punitive, and will be much more likely to strike down such a restriction as overbroad.  An employer should be able to articulate why the restriction is necessary and the economic effects of non-compliance. Specifically, Maryland courts have made clear that the restrictive covenant must be “confined within limits which are no wider as to [1] area and [2] 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.”  As to the time requirement, “Maryland has consistently upheld two-year limitations on employment with competitors as reasonable.”  With the proliferation of online business, employers sometimes impose a nationwide restriction.  However, unless the employer truly has a nationwide presence, it is likely that such a broad restriction will not be enforced.

In the event that a court rules that one part of a restrictive covenant is unenforceable, proper planning can sometimes salvage the remainder.  While courts may “blue pencil,” or strike out, an offending provision in order to make the overall restriction acceptable, Maryland courts have reached divergent results as to whether blue-penciling must be limited to only deleting provisions, or can extend to rewriting provisions or removing specific words from a provision (sometimes referred to as the “flexible approach”).  For example, if a court rules that a two-year restriction is too long, it then has two options: (a) strike the two-year provision entirely (blue pencil), which would result in an unworkable restriction (because there is no time limitation at all), or (b) strike the two-year provision and write into the agreement a one-year time period (flexible approach).  While one Maryland court has adopted the flexible approach, that decision has not been addressed by Maryland’s highest court, and has been called into question by the federal court in Maryland.

Given this uncertainty, I recommend addressing the issue by including in the agreement (before it is signed by the employee) a provision that specifically allows the court to insert reasonable terms into any restrictive covenant in the event that the original language is deemed unenforceable. In addition, I also recommend a tiered approach containing severable and independent restrictions so that if the court chooses not to re-write terms, it can simply strike out the offending terms while leaving in the document the less-restrictive portions.  For example, if an employer wants to preclude a departing employee from working in central Maryland, it may want to specifically and separately identify Montgomery, Howard and Anne Arundel counties, and state that if any of those three counties are overbroad, the court can excise one of the counties without affecting the other two.  Since the agreement itself makes clear that the three counties are independent and divisible, the court is not writing anything new into the agreement, but merely striking out one (of three) jurisdictions in order to render the overall restriction reasonable.

There are no guarantees what a court would do in such fact-intensive situations, but effective planning on the front end usually gives the employer (or the employee) a better chance in the event that the restrictions are ultimately tested.  Next up: litigation tips after the breach.