The Federal court in Maryland has provided a very encouraging roadmap for the law of noncompetes in the state. In fact, the court’s decision is great for an employee who may face an employer who attempts to prohibit him or her from working for another employer who may be a competitor — but the employee is not competing against the former employer.
The Maryland Federal court Seneca One Finance Inc. v. Bloshuk recently dismissed an employer’s lawsuit against a former employee for claimed breaches of a restrictive covenant, specifically breaches of noncompete and nonsolicitation provisions.
Test for Enforceability of Restrictive Covenants in Maryland
Citing several other Maryland federal court cases, the Court stated that test for enforceability of restrictive covenants:
In Maryland, a restrictive employment covenant will only be enforced if it meets 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.” Medispec, Ltd. v. Chouinard, 133 F. Supp.3d 771, 773-74 (D. Md. 2015) (quoting Deutsche Post Global Mail, Ltd v. Conrad, 116 Fed. App’x 435, 438 (4th Cir. 2004) (“DPGM II”)). In assessing the reasonableness of a particular restrictive covenant, the court must first make a determination “on the scope of each particular covenant itself.” Medispec, Ltd., 133 F. Supp.3d at 774 (quoting DPGM II, 116 Fed. App’x at 438). If the covenant is not overbroad on its face, “the facts and circumstances of each case must be examined.” Id. at 774-75.
The Court stated the policy reasons for when a noncompete can be enforced:
It is well established that employers have a legally protected interest in “preventing departing employees from taking with them the customer goodwill they helped to create for the employer.” DPGM II, 116 Fed. App’x at 438; see also Holloway v. Faw, Casson & Co., 572 A.2d 510, 515 (Md. 1990) (“Holloway II”) (“Persons in business have a protectable interest in preventing an employee from using the contacts established during employment to pirate the employer’s customers.”) (citations omitted). A restrictive covenant is overbroad if it exceeds the limits of what is reasonably necessary to protect the employer’s legally protected interest. See DPGM II, 116 Fed. App’x at 438.
Unlimited, Not Targeted, Nationwide Noncompete Not Enforceable
The noncompete that the Court struck down as unenforceable prohibited the employee, for 12 moths after the termination of employment for any reason, from working “in the same or similar business” as the employer. There was no geographic limitation on the noncompete.
The Court, relying on Maryland precedent, held the unenforceable first because it was not aimed at prohibiting the employee from working in the same capacity she did for the former employer. The Court had no problem voiding the noncompete:
Such a sweeping nationwide restriction cannot be enforced. This provision is not limited to the work that Ms. Bloshuk performed at Seneca One and is far wider in scope than is reasonably necessary to protect the goodwill that Ms. Bloshuk may have created with Seneca One customers.
In MCS Services, Inc. v. Jones, Civ. A. No. WMN-10-1042, 2010 WL 3895380, at *4 (D. Md. Oct. 1, 2010), Judge Nickerson of this Court granted a motion to dismiss the plaintiff’s breach of contract claims on the grounds that the non-competition agreement, substantially similar to the one at issue here, was facially overbroad. The non-competition agreement in MCS Services prohibited the employee, for one year following the end of employment and in “any geographic area where the Company does business,” from “directly or indirectly” owning, managing, operating, joining, being employed by, controlling, or participating in “any other entity engaged in a business in competition with, or similar in nature to, the Company’s Business.” Id. at *3. The Court found that while the duration and geographic scope were reasonable, “the scope of the proscribed activity [was] not properly bounded” because it “prohibit[ed] [the employee] from working in any capacity with any company that competes or may compete in any way with MCS.” Id. As a result, the covenant was “not reasonably necessary to protect the customer goodwill [the defendant] created, and it [was] not narrowly tailored to that end.” Rather, it “constrain[ed] the list of [the defendant’s] potential employers instead of targeting possible goodwill-thieving activities.” Id. Like in MCS Services, 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 non-compete provision at issue here likewise targets only the similarity of any future employers to Seneca One, without targeting future employment that would enable Ms. Bloshuk to use any contact she had with actual customers to Seneca One’s detriment.
The non-competition provision in the Contract is designed more to prevent former employees from working for any competitor of Seneca One than to prevent the employees from taking advantage of customer goodwill created while employed at Seneca One. This is not a legally protected interest.
Seneca One also claims that the broad scope of the non-competition provision is necessary to protect its Confidential Information. However, the Contract already has a separate provision addressing the employee’s confidentiality obligations, so the non-competition provision is unnecessary for the protection of this interest. See ECF No. 2-2, at 2. Because the provision is not reasonably necessary to protect the goodwill that Ms. Bloshuk created with customers or Seneca One’s Confidential Information, the provision is facially overbroad.
The second reason the Maryland Federal court found the noncompete unenforceable was because it was not limited in geographic scope:
The non-competition provision of the Contract does not include a specific geographic scope. Rather, it prohibits employees from “engag[ing] or attempt[ing] to 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 during the last 12 months” of employment with Seneca One. ECF No. 2-2, at 5 (emphasis added). Seneca One averred in its Complaint, and its counsel confirmed at oral argument, that Seneca One engages in its business “throughout the United States.” ECF No. 2 ¶ 6.
… 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.
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. Unlike here, where the employee is completely prohibited from working in the “same or similar Business” as Seneca One, the provisions found reasonable were generally narrowly tailored to prohibit employment only with direct competitors doing the same type of work that the employee did for the former employer. …
Ban On Soliciting “Potential” Customers With Whom Employee Had No Contact Unenforceable
The Court also next turned to the employer’s nonsolicitation provision which prohibited its former employee from soliciting or attempt to solicit “Customers” and “Customers was defined to include “potential” customers.
The Court, citing several Maryland cases, ruled the nonsolicitation provision way overbroad:
The ordinary definition of the word “customer” contemplates that the individual has already entered into an agreement with the business to buy goods or services. See, e.g., Customer, Black’s Law Dictionary (10th Ed. 2014) (“buyer or purchaser of goods or services”). Seneca One has identified no authority that would support a right to protection of potential customers, and its inclusion of all individuals who have “been in contact with Seneca One” in its definition of “Customers” is breathtaking in scope. This, combined with the fact that the non-solicitation provision also prohibits Ms. Bloshuk from soliciting business even from individuals with whom she had no direct contact (thus eliminating any concerns regarding potential competitive advantage), makes the non-solicit provision of the Contract facially overbroad. See Holloway v. Faw, Casson & Co., 552 A.2d 1311, 1319 (Md. Ct. Spec. App. 1989) (“Holloway I”), rev’d in part on other grounds, 572 A.2d 510 (Md. 1990) (court found unreasonable the portion of an employment agreement that restricted former employee “from engaging any former clients of the firm, regardless of whether [employee] himself actually dealt with those clients during his employment with Faw, Casson”). …
And even if the assertion that Ms. Bloshuk “leveraged Seneca One’s goodwill” was sufficient to state a claim, Seneca One misstates the legally protected interest. The interest protectable by a non-compete provision is the goodwill that the employee creates with the customer while working for the employer. This guards against the risk that the customer will be loyal to the employee with whom he has a relationship, rather than the relatively impersonal employer. See Holloway I, 552 A.2d at 1317 (the legally protectable interest is “to protect the employer’s business by restraining those former employees whose duties involved ‘the creation of the good will of customers and clients which [clients] are likely to follow the person of the former employee’”) (quoting Silver v. Goldberger, 188 A.2d 155 (1963)). If Ms. Bloshuk had no contact or communication with the potential customers, it is not possible for her to create goodwill with them on Seneca’s behalf. The non-solicit provision is therefore facially overbroad and cannot be enforced.
Conclusion & Cautionary Note
While this is no doubt a very good decision for employees, noncompetes and nonsolicitations are enforceable, to the extent they are reasonable in scope. Further, each restrictive covenant case is decided based on its facts and the Court’s interpretation of Maryland law.
Therefore, if you are subject to a noncompete and/or nonsolicitation agreement, you should consult with an attorney, if there is any possibility that your new employment would conflict with the agreement.
Please contact Lebau & Neuworth for advice and counsel on noncompete and/or nonsolicitation issues at (410) 296-3030 or lebauneuworth.com/contact-us.
