New Competition for Non-Compete Agreements
In October 2016, the White House issued a “State Call to Action on Non-Compete Agreements.” The Call to Action notes that nearly one in five US workers have entered into a non-compete agreement, and roughly one in six of those workers are without a college degree. The Call to Action urges state legislatures to pass laws that curb the use of non-compete agreements because research revealed that “states that strictly enforce noncompete agreements have lower wage growth and lower mobility than states that do not enforce them.”
The White House proposed three different ways that legislatures can reduce misuse of noncompete agreements. First, the White House proposed that certain categories of workers should not be eligible for non-compete agreements, such as workers who are unlikely to possess trade secrets or workers who were laid off or terminated without cause. Second, the White House encouraged greater transparency by only upholding non-competes that were proposed prior to the acceptance of a job offer or promotion. Finally, the White House proposed policies that would make agreements that contain unenforceable provisions entirely void, in order to incentivize employers to draft more reasonable non-compete agreements.
In Maryland, a non-compete agreement will only be enforced if it meets the following four requirements: “(1) the employer must have a legally protected interest, (2) the restrictive covenant must be no wider in scope and duration than is reasonably necessary to protect the employer’s interest, (3) the covenant cannot impose an undue hardship on the employee, and (4) the covenant cannot violate public policy.” Recently, in Seneca One Finance, Inc. v. Bloshuk, No. RWT 16-cv-1848, 2016 WL 5851626, (D. Md. 2016), the United States District Court for Maryland held that provisions of a non-compete agreement for an employee who had worked as a purchasing manager for a company involved in purchasing structured settlement annuities and deferred payment plans for lump sum payments was overbroad. In the Bloshuk case, a purchasing manager was responsible for managing the day-to-day relationships with structured settlement annuitants and building relationships with prospective customers. It was alleged that prior to her resignation, Ms. Bloshuk discouraged a potential customer of Seneca One, and once Ms. Bloshuk began working at her subsequent employer, she solicited the business of the customer she discouraged from engaging with Seneca One. The non-compete agreement in the Bloshuk case read as follows: “While [employee is] employed by Seneca One and for 12 months after the termination of [her] employment for any reason, [she] will not directly or indirectly, for [herself] or on behalf of any other person or entity, engage in the same or similar business as Seneca One in any of the markets in which Seneca One has provided products or services or formulated a plan to provide products or services.”
The Court found the non-compete agreement to be overbroad for a number of reasons. First, it noted that the agreement prevented Ms. Bloshuk from engaging directly or indirectly in the same or similar business as Seneca One. The Court noted that Seneca One conducted business across the United States, and by preventing her from working for similar businesses or competing indirectly, Seneca One’s non-compete clause was overbroad. In fact, the Court stated, “the provision at issue here is not reasonably necessary to protect any goodwill that Ms. Bloshuk created with customers and serves only to limit her potential employers.” The Court also found the non-competition agreement to be overbroad in geographic scope. The Court stated that “Any attempt to enforce a non-competition provision that prohibits a former employee from pursuing her chosen career anywhere in the country is legally troublesome at best.” The Court further noted that “Courts interpreting Maryland law have at times found non-competition provisions lacking a geographic limitation to be reasonable. But these provisions have generally been more narrowly tailored as to the scope of activities prohibited.” The Court ultimately dismissed Seneca One’s claims that Ms. Bloshuk breached her non-competition agreement.
In light of the White House’s Call to Action and the Bloshuk opinion, it would be prudent for employers that utilize non-compete agreements to consider revisiting the procedures for entering into non-compete agreements (i.e. making the agreements available to new hires when the offer of employment is made) as well as narrowly tailoring non-compete language to protect the goodwill created with customers or to dissuade the misuse of trade secrets, in order to strengthen the chances of the non-compete agreement being held as valid. There certainly remain scenarios in which non-compete clauses are necessary to protect the interests of the employer. However, employers should be aware of recent movements and decisions that reduce the enforceability of such contracts.
