FTC Rule Banning Non-Competes to Become Effective But is Subject to Legal Challenge

UPDATE: A Federal Court in Texas has enjoined the FTC rule (meaning the rule cannot go into effect).

 

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   I have defended numerous employees accused by their former employers of violating non-competition agreements.  In several recent cases, I have successfully persuaded trial courts to rule that all or part of the at issue agreements be invalidated because they are overbroad.

  On April 23, 2024, the Federal Trade Commission voted to finalize a new rule to prohibit employers from enforcing noncompetes against workers.  The rule is set to become effective 120 days after its publication in the Federal Register.  There have already been several legal challenges seeking to invalidate the rule.  

   The rule defines a non-compete as an agreement that prohibits or prevents a worker from seeking or accepting a subsequent job.  Importantly, this would prohibit restrictive training repayment agreements, that often impose steep training repayment costs if an employee leaves an employer who has provided training.  These are often called "stay or pay" agreements.  The rule exempts a limited number of high level or highly compensated employees (earning over $151,164 annually).  The FTC also did not prohibit non-disclosure or non-solicitation agreements (unless they prevent a worker from subsequent employment).

   Time will tell whether the legal challenges succeed in delaying or enjoining this game-changing new rule. 

Two Maryland Non-Compete Clauses And A Magic Blue Pencil.

Aerotek filed suit in Maryland against a former employee alleging she violated a non-compete agreement.  Aerotek v. Obercian, 377 F. Supp. 3d 539 (D. Md. 2019).  The employee had significant customer contact while working for Aerotek.  The agreement contains two non-compete clauses that generally prohibit this employee, for 1 year post-termination, from:  (1) performing business similar to that which she performed at Aerotek and (2) working for any business that is engaging in a business similar to Aerotek's.

Can you guess which clause the Court found enforceable and which it found was not?

The Court found Clause 1 facially enforceable because it is plausibly directed at a legally protectable interest.  That interest, according to the Court, is ensuring that a departing employee does not steal the employer's customers.  

The Court found Clause 2 facially unenforceable because it prohibited Aerotek's former employee from working for a competitor, even if she was not doing competitive work.  This is sometimes called the, "janitor test."  Clause 2 is unenforceable because it prevents Aerotek's former employee from working as a janitor for a competitor.  

When a non-compete agreement contains two or more divisible clauses, the Court use a magic "Blue Pencil."   That means, the Court can re-write the Agreement to excise unenforceable clauses and keep the enforceable ones.  And, that is what the Court did.

But the Court also ruled that it was not clear whether the employee's work at her new job is competitive to the work she performed for Aerotek or whether she stole any Aerotek customers.  As such, the Court denied Aerotek.'s motion for summary judgment.  A jury will now decide the dispute.    (A jury will also decide whether this employee violated a non-solicitation clause and whether she is entitled to damages on a counter-claim she filed for a bonus).

(Updated to note:  this case settled before trial).

Law Limiting Non-Compete Agreements in Maryland to Take Effect October 1, 2019

The Maryland General Assembly passed a law rendering unenforceable non-compete agreement as applied to certain lower wage employees.  The law renders void non-compete agreements that attempt to restrict competition by employees earning equal to or less than $15.00 per hour or $31,200 annually.    The new law, for the most part, codifies the existing state of affairs in Maryland under decision law.  That law makes clear that only a narrow class of employees may lawfully be covered by such an agreement. 

Costs To Defend Against Alleged Non-Compete Violations Often Drive Employee Decisions (Even if the Agreement is Likely Unenforceable)

I have reviewed many, many non-compete agreements over the course of my career.  A very large portion of them are likely unenforceable under existing Maryland law.  The agreements are overbroad, do not protect a legitimate business interest, purport to apply to an employee who cannot be covered, or contain terms that are presumptively unlawful.   Employers often demand that low-wage employees sign obviously unenforceable non-compete agreements as a condition of employment.  For example, the sandwich shop, Jimmy John's, required that many of its sandwich makers sign non-compete agreements (until it recently stopped this practice). 

The costs to an employer of requiring non-compete agreements is nominal.  The agreement becomes just another form to be signed.  Many employees do not dwell on these forms -- often because they need the job.  

But the costs to the employee can be great when he or she seeks to change jobs.  The mere threat of lawsuit will often drive the employee to comply (and decline the job offer that he or she otherwise would have accepted).  That is because the costs of defending one of these agreement can be expensive.   

An employee faced with threatened enforcement of non-compete should contact a lawyer.  There are ways to leverage your way out of such agreements.    

Legislators have attempted to address this issue over the years.  Already in the Legislative Session, Al Carr, introduced HB38 (link to fiscal note).  It would render void non-compete agreements signed by employees making $15 per hour or less per hour or $31,200 or less per year.  

If you are facing threatened enforcement of a non-compete agreement, you should review this post and reach out to an attorney.  

Maryland Non-Compete Agreement Unenforceable As Applied to Salespeople Processing Competitive Bids

Here, the Maryland Court of Special Appeals held that a company's non-compete agreement was unenforceable as it applied to two salespeople.  The Court reasoned that because the sales at issue  "were won or lost on competitive bids, not sales relationships," the employer had no legally protectable interest in enforcing the agreement.    The Court relied heavily on a Ecology Services v. Clym Environmental to hold that the salespeople did not fall within the class of employees who can covered by a non-compete agreement in Maryland.

If your employer seeks to enforce a non-compete agreement, check these posts:  

What to do when you are threatened with a non-compete lawsuit.

Q: Can you leverage your way out of a Maryland Non-Compete? A: Maybe.

Vague Claims of Stolen "Pricing Knowledge" Do Not Support Maryland Uniform Trade Secret Act Claims

  I often defend employees accused of non-compete violations.  Tacked on to these claims are often alleged violations of the Maryland Uniform Trade Secrets Act (link to law review article).  The Act allows a Court to award fees to an employer if it prevails (but apparently no reported decision has ever done so according to the article.)

Proving information is truly a trade secret is no easy task. In Structural Preservation Systems v. Andrews,  the employer alleged that its former employees stole its “pricing structure, pricing knowledge and research, and established customer relationships."  The Maryland Federal District Court (Judge Marvin Garbis) ruled, however, that the employer's allegation were too vague to form a valid claim for a violation of the Act.  The Court relied on the Act's definition of trade secret.   To qualify for protection, the information must "derive independent economic value . . . from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use."  Pricing information is rarely a trade secret because it is rarely a secret (since prices are shared with customers).    Ultimately, the Court dismissed the employer's trade secret claims.      

Proposed Senate Bill Would Void Non-Competes For Employees Eligible for Unemployment

   A lot of what drives non-compete disputes (and litigation) is the unclear and fluid nature of the law that applies to such agreements.  Written agreements are not always enforced according to their letter.  Instead, non-compete agreements are measured by standards developed through case decisions.  For example, for a non-compete agreement to be enforceable it must be directed at a legitimate and protectable business interest.  The uncertainty over what is legitimate and what is protectable often becomes the center of a dispute, which can only be decided by a Court.

A proposed senate bill would change, but not necessarily make better, the above state of the law.  Senate Bill 51  would void non-compete agreements that apply to employees eligible for unemployment.  A Chicago lawyer, Kenneth J. Vanko, persuasively argues that the bill would not end the battle but move it  from the Courts to the Office of Unemployment Appeals, which is already quite crowded.

The bill recently received an unfavorable report from the Senate Finance committee.  As such, it is unlikely to become law.


 

What to do when you are threatened with a non-compete lawsuit.

I recently had two successful outcomes in a non-compete cases on behalf of employees either being sued or threatened with being sued. It got me to thinking what are the ways my clients should prepare for the first meeting with a lawyer in these circumstances. Here are my thoughts:

1. If you are served with legal papers call a lawyer immediately. Employers often ask the Court to grant immediate emergency relief in these cases. Time is of the essence. Bring the Court papers with you. Record the date you are served.  Bring the cease and desist letter if you received one.

2. Bring a copy of the non-compete agreement to your first meeting with a lawyer.

3. Bring copies of your job descriptions at your old job and your new job or be prepared to describe your job duties in detail. An employee's best defense is often that he or she is not the type of employee who can be covered by a non-compete agreement.

4. Did you advise your new employer in writing that you signed a non-compete with your previous employer? If yes, bring a copy of the document that proves this fact. If no, consult a lawyer.

5. Gather other relevant documents presented in an organized fashion, including:

• Evidence of affirmative claims you have against your former employer. Are you owed wages? Were you mistreated? Employees often can use their own claims to leverage their ways out of a non-compete agreement;
• Documents you believe your old employer might claim as evidence of your breach.
• Contact information for your new employer and any potential witnesses.

Baltimore Business Journal Article on Non-compete Agreements (Subscription Required)

The Baltimore Business Journal recently published a pro-non-compete piece directed at small businesses.  No surprise there:  the BBJ is a business oriented publication.  The reporter, Jack Lambert, called me for the employee perspective on non-competes.  Here is the part of the interview that made it into the article:

When drafting non-compete contracts, employers should consider how great of a burden to put on their employees, said Jim Rubin, a principal of the Rubin Employment law Firm in Rockville. He said some businesses include jury waivers. Those are clauses that dictate where the case can be litigated. They also include requirements that employees pay the company's legal fees if they lose the case."All sorts of provisions are put in there that are really unfair," said Rubin, who represents employees in non-compete contract matters.

I wrote about unfair non-compete contract provisions in my last post.

What to look for (and avoid) in a Maryland Non-Compete Agreement

Employers often use their economic leverage to force one-sided non-compete agreements on employees.  Below is a list of the top 5 unfavorable contract terms I  look for when I review non-compete agreements.

1.    One-sided attorney fee-shifting.  In a normal breach of contract lawsuit, each side pays its own fees.  Employers often get around this rule by including in a non-compete agreement, a clause that states the employee will pay for the employer's attorneys fees if the employer is successful in enforcing the agreement.  

2.   Over-broad restrictions on working.  An Employer  can only enforce non-compete agreement against a narrow class of employees and only when it can state a legally protectable interest.   Employers nevertheless  often define competition so broadly that, if enforced, the employer could not work in an  entire industry (even if the employee is not competing).   

3. Liquidated damages.  It is often very difficult to prove damages when an employee is accused of violating a non-compete agreement.  Employers sometimes attempt do away with the necessity of proving actual damages by stating  that amount of liquidated damages is presumed.  A Maryland Court decision suggests that liquidated damages provision are  invalid in most situations involving non-compete agreements.   

4. Court Selection and Choice of Law.   Parties to a contact are generally allowed to choose the Court that will hear their dispute and the law that applies to those disputes.  Employers often use their leverage to pick the Court and the Law believed to be the most favorable to them.   

5.  Jury-Waivers and Arbitration Clauses.  In non-compete litigation, employers generally prefer to be in front of judges (not juries).  As such, employers often use their leverage to make employees waive their right to a jury or require that all disputes be resolved in arbitration (and not Court).

 Here are a few articles that discuss  ways to combat one-sided contract terms:

What to do if you are threatened with a non-compete lawsuit.

Maryland Non-Competes: Things to Consider Before You Sign One.

Q: Can you leverage your way out a Maryland Non-Compete? A: Maybe.

A Non-compete Success Story.

  

Legal Jujutsu: Compelling Arbitration When Sued For Alleged Breach of a Non-Compete

I have mentioned forced arbitration often on this blog.  That is, when an employer requires its employees to sign an arbitration clause and waive their right to a jury trial as a condition of employment. 

But, what happens when at the end of the relationship, it is the employer that sues the employee in Court for a non-compete violation?  With a bit of legal jujutsu, I have had some success getting the matter dismissed from Court based on a motion to compel and to dismiss using the employer-drafted forced arbitration clause.  Dismissal may or may not be the end of the story as the employer may still pursue the matter in arbitration.

You May Not Be Within the Class of Employees That Can Be Covered by a Non-Compete Agreement.

  Maryland Employers often require employees to sign non-compete agreements as a condition of employment.  But just because you signed a non-compete agreement does not mean that it is enforceable as to you.  Only a narrow class of employee may lawfully be covered by such an agreement. 

  The case, Ecology Services, Inc. v. Clym Environmental Services, LLC, illustrates the point.  There, the Maryland Court of Special Appeal refused to enforce a non-compete agreement applied to “Radioactive Waste Specialists” and “Radioactive Waste Technicians.”  The Employer bringing the action could not prove that the employees possessed (a) any truly unique skills or (b) exploited any specialized personal contact at their new job. Truly unique skills are those that would make it difficult to find a substitute employee with the same skills.  Specialized personal contacts are generally limited to proprietary sales opportunities.

  In sum, an employer can only enforce non-compete agreement against a narrow class of employees and only when it can state a legally protectable interest. 

   See this post and contact an attorney if you are threatened with enforcement of a non-compete in Maryland.

How Employment Lawyers Charge Their Clients

Employment lawyers work to earn money. When an employment lawyer is evaluating a case his or her eyes are on the bottom line. "Can I service my client while making a profit?" is the question we are asking. Many cases come with laudable rewards in addition to money, including working to attain a measure justice for our clients. But do not kid yourself: lawyers work for money.

There are four ways a lawyer can charge: by the hour, on a flat rate, on a contingency-fee basis, or some combination therof. Choosing how to charge involves an evaluation of risk for both the attorney and the client.

Hourly billing -Most risky for client; Least risky for attorney.

The attorney keeps track of his or her time and send the client a bill for the hours worked. Because liability often is not readily apparent in employment law cases, many employment law attorneys require that the initial phase of the attorney-client relationship be based on hourly billing. In purely defensive cases, such as when an employer is claiming my client is violating a non-competition agreement, hourly billing is often the most rational choice. (Much has been written about hourly billing variants, such as value-based billing. I am keeping it simple for this article.)

Flat Rate -- Moderately risky to the client; Moderately risky to attorney.

Employment lawyers bill a flat rate for certain discrete tasks. For example, I have processed federal employee disability retirement applications on a flat rate. The client pays a set fee and does not need to worry about the amount of time I am spending on his or her matter.

Contingency Fee -- least risky to the client; most risky to attorney.

The attorney only recovers a fee if the client wins. For this reason, most employment attorneys will not consider a pure contingency fee relationship unless the employer's liability and ability to pay are clear. I generally only consider pure contingency fee arrangements in overtime, unpaid commissions, and accrued vacation pay cases.

Combination of Hourly, Flat Rate, and/or Contingency Fee.

The lawyer and client and agree to any combination of the above. For example, the lawyer and client may agree to hourly billing until the bills reach a certain dollar amount and then agree to convert the matter to a contingency fee relationship. The possibilities are infinite and require careful analysis of the merits of the claim and the possibility for settlement or success at trial.

A Non-Compete Success Story

I recently defended an individual salesperson accused of violating a non-compete agreement. (The individual, the companies involved, and the result are confidential.) What I believe played a major role in the favorable result was establishing who can and who cannot be subject to a non-compete in Maryland. Here are two paragraphs (slightly modified) from the papers in the case:

Because non-compete agreements by their nature conflict with the “natural and inherent” right of individuals to pursue their livelihoods and with the right of the “general public . . . to have the energy, industry, skill and talents of all individuals freely offered upon the market,” they are closely scrutinized and narrowly enforced by Maryland's courts . . .

Furthermore, to be enforceable a non-compete agreement must protect a legitimate interest. With regard to salespeople generally the only legitimate interest is preventing a former employee from using a list of unique customers. Non-competition agreements are not enforceable against a relatively unskilled worker who does not actually solicit his or her former employer’s customers. . .

Even Written Employment Contracts Can be At Will

Maryland is an "at will employment" state. With limited exception, an employer or an employee can terminate the relationship without notice for any reason. One familiar exception is that an employer cannot terminate an employee because of his or her protected status, i.e., because of his or her race, color, religion, gender, age, disability status, etc. Another familiar exception is if the parties have entered into a written agreement altering the at will relationship. The parties usually do this by agreeing in writing to an employment term (i.e., a year) and limiting the employer right to terminate to very specific reasons (often referred to in shorthand as limiting the right to terminate only "for cause").

But, what if the employees and the employer enter a written agreement without specifying an employment term. United States District Judge Blake ruled in this case that the absence of a term means that the relationship is "at will." How does this affect you? If you are an employee and are going through the trouble of negotiating an employment agreement make sure it has a term (and make sure you have an employment attorney review that agreement).

Two sidenotes:

• I wrote here that under Maryland law a written at will employment agreement can contain a arbitration provision (waiving the employee's right to a jury trial).

• Under Maryland law a written at will employment agreement can contain a non-compete provision (limiting the employee's ability to earn a living after the relationship ends).

Two more reasons to get expert advice when asked to sign an employment agreement.

Non-Competes Are Only Enforceable if Directed at a Legally Protected Interest

Not all employees can be covered by non-compete agreements. For example, if you are an administrator with little contact with customers or your employer's secrets, a court is unlikely to enforce any non-compete you signed. Non-compete agreements generally can only be enforced if directed at a legally protectable interest. Maryland Courts have found there to be a only a few (perhaps only two) legally protectable interests. Foremost among those interests are an employer's relationship with its customers and an employer's trade secrets.

No access to customers or secrets = no non-compete.

The Maryland Court of Appeals summarized the concept of what is a protectable interest forty years ago in Silver v. Goldberger. The concepts stands to this day. The Court stated:

There is a line of cases which holds that restraint is justified if a part of the compensated services of the former employee consisted in the creation of the good will of customers and clients which is likely to follow the person of the former employee. And there is another line of cases which holds that restraint is not justified if the harm caused by service to another consists merely in the fact that the former employee becomes a more efficient competitor just as the former employer did through having a competent and efficient employee.

Q: Are You Entitled to Severance? A: It depends.

No Maryland law guarantees an employee's right to severance. Unless an employer promises severance, there is nothing that requires an employer to offer it. However, there are three main ways an employee may obtain severance.


1. As part of an employment contract or severance plan. Some employees negotiate a severance at the outset of their employment. Severance is used as a carrot to entice the employee to accept a job offer. For example, an employer could agree to pay one week of severance for every year of employment. In such case, severance might constitute earned wages under the Maryland Wage Payment and Collection Law. This is important because the MWPCL provides an employee with the opportunity to file suit for earned but unpaid wages, treble damages and attorney's fees.


2. As part of a non compete agreement. Severance can be used to entice an employee to agree not to compete for a period after his or her employment terminates. The Maryland Court of Appeals has suggested that this type of severance is not earned and therefore not covered by the Maryland Wage Payment and Collection Law. (An employee could still recover unpaid severance, but would need to do so by alleging breach of contract.)


3. In exchange for a waiver of claims. When an individual's employment terminates, the employee and employer often want a clean break. They can accomplish this goal by entering into a settlement agreement. Often the employee agrees not to sue in exchange for severance.

Maryland Non-Competes: Things to consider before you sign one.

Starting with the assumption that reasonable non-compete agreements are enforceable in Maryland, what should you do if your employer asks you to sign one? If possible, you should do the following:

1. Try to get out of signing the agreement in the first place.

2. Try to narrow the agreement's terms. Find out which competitors and geographic ares your employer really cares about. Limit the agreement's reach to those terms.

3. Suggest that what your employer really wants is a non-solicitation agreement, i.e., your promise not t0 raid the company of its key employees.

4. Demand compensation. If your employer wants you to get out the industry for a period, your employer should pay for it.

5. Hire a lawyer to review your agreement and meet with you before signing away your right to a livelihood. Employers get legal advice -- so should you. Employers often put highly unfavorable terms -- such as attorney-fee shifting provisions -- in non compete agreements. Consult counsel to know your rights.

Q: Can you leverage your way out of a Maryland Non-Compete? A: Maybe.

As shown by my posts about non-competes in Maryland, reasonable non-compete agreements are generally enforceable. (Further, even if a non-compete agreement is overbroad, many Maryland Judges believe they have the power to re-write such an agreement to make it enforceable). So, can you get out of them or limit them? Maybe. Just as you and your employee can agree to enter a non-compete; you and your employer can agree to modify a non-compete. The more leverage you have, the more likely you can modify a non-compete to your liking. How can you generate leverage? Here are a few ideas:

1. It can be a very expensive proposition for an employer and an employee to litigate to determine if a non-compete is really enforceable. You may convince your employer to reduce your non-compete obligations by agreeing not to initiate litigation.
2. Find out what your employer's real interests are. It may not want you working for its established competitors and may not care if you are working for a start up.
3. Give a little. Do you have something the employer wants, like money it owes you for severance? You might offer something of value in exchange for a release from any non-compete obligations.

Court Enforces Agreement Barring Employee from Working for a Competitor in North America and Mexico for Two Years

The Baltimore Circuit Court permanently enjoined James Braithwaite from working a competitor of his former employer in this decision. Braithwaite signed a non-competition agreement that forbade him from working for any employer in liquid filling system industry located in the United States or Mexico for a period of two years. The Court characterized the industry as "highly specialized" and "relatively small." As such, the Court ruled that the non-competition agreement was reasonable in duration and geographic scope.