When entering into a contract—whether between employer and employee, contractor and subcontractor, or two companies— there will often be a provision called “a covenant not to compete.” A covenant to not compete is a promise made by the employee that will prevent them from competing with their former employer. Omniplex World Services Corp. v. U.S. Investigations Services, Inc., 270 Va. 246 (2005).
These covenants usually take the form of a non-competition or non-solicitation agreement. Non-solicitation agreements can fall into two different categories—an agreement to not solicit employees and an agreement not to solicit clients. Mary L. Mikva, Drafting Confidentiality, Non-Compete and Non-Solicitation Agreements: the employee’s wish list, 50 No. 3 PRAC. LAW 11 (2004). An agreement not to solicit clients, however, falls into the category of a non-compete agreement. In addition to the non-solicitation of clients, a non-compete can limit the activities the departing employee can engage in or the employers they can work for.
In general, covenants to not compete are enforced differently among the states. One commonality among the states is the court’s evaluation of the provisions through scope, geography and duration. This article will focus on the laws pertaining to covenants not to compete in the following jurisdictions: Virginia, Maryland, and the District of Columbia.
In Virginia, these covenants to not compete are “enforced if the covenant is narrowly written to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to earn a living and does not violate public policy.” Omniplex World Services, Corp. v. U.S. Invest. Services, Inc., 270 Va. 246, 249 (2005). Because trade restraints are not favored in Virginia, the employer has the burden of proving these factors. Preferred Systems Solutions, Inc. v. GP Consulting LLC, 284 Va. 382 (2012).
In Preferred Systems Solutions, Inc. v. GP Consulting LLC, an agreement was made between a contractor and subcontractor. The non-competition clause was as follows:
During the term of this Agreement and for twelve (12) months thereafter, [GP] hereby covenants and agrees that they will not, either directly or indirectly:
(a) enter into a contract as a subcontractor with Accenture, LLP and or [sic] DLA to provide the same or similar support that PSS is providing to Accenture, LLP and/or DLA and in support of the DLA Business Systems Modernization (BSM) program.
(b) enter into an agreement with a competing business and provide the same or similar support that PSS is providing to Accenture, LLP and/or DLA and in support of the DLA Business Systems Modernization (BSM) program.
The Court found that a lack of specific geographic limitation was not detrimental to the enforcement of the covenant because the clause was “so narrowly drawn to [a] particular project and [a] handful of companies in direct competition with Preferred Systems Solutions. In part (a) only two companies were listed as competitors. In part (b) the “competing business” was taken by the court to mean the eight other companies who have successfully bid with DLA to work on the project.” The Court then found that as there were 400-500 jobs that used the same programming system as Preferred Systems Solutions, therefore, the employee would not be unduly burdened to earn a living.
Under Maryland law, non-competition covenants are enforceable if the covenant satisfies 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.” Aerotek Inc. v. Obercian, 377 F.Supp.3d 539 (D. Md. 2019). In Aerotek Inc. v. Obercian, the covenant stated:
(1) Obercian may not “directly or indirectly engage in or prepare to engage in . any aspect of AEROTEK's Business for which [Obercian] performed services or about which [Obercian] obtained Confidential Information” during the last two years of her employment at Aerotek; and (2) Obercian may not be “employed by [ ] any business that is engaging in or preparing to engage in any aspect of AEROTEK's Business for which [Obercian] performed services or about which [Obercian] obtained Confidential Information” during the last two years of her employment at Aerotek.
The Court in this case found that the second part of the provision was not enforceable “[b]ecause this proscription [was] not tailored to the positions or activities at a competitor that would allow Obercian to draw upon the goodwill that she generated for Aerotek.” It merely said “any business” engaging in “any aspect” that the company performed services for. The company provided recruiting and staffing services to companies across the U.S. The provision was not tailored to exactly what type of work Obercian performed for the company and thus was “overbroad and not reasonably necessary to protect Aerotek’s interest in preventing loss of goodwill.”
Under Maryland law, the second part of the provision was excised because the Court is allowed to excise offending provisions if they do not form a “single indivisible promise.” D.C. has only mentioned the blue pencil rule in Ellis v. James V. Hurson Associates, Inc. The blue pencil rule holds that parts of these covenants may be enforced if “the part enforced is divisible” from the whole. Ellis v. James V. Hurson Associates, Inc., 565 A.2d 615 (D.C. 1989). While the Court in this case allowed for the enforceable and unenforceable portions to be separated, it stated that it was because it was allowed in the contract itself. The blue pencil rule was not specifically adopted in D.C. and has not been addressed in case law since this case.
Similar to Virginia law, Maryland law also states that a lack of geographical area in a restraining covenant is not problematic. In Hebb v. Stump, Harvey and Cook, Inc., the Court found the lack of geographic location in the provision non-problematic because the “appellant [was] not prevented generally from doing business but prevented only from doing business with former employer’s clients.” Hebb v. Stump, Harvey and Cook, Inc., 25 Md.App. 478, 487-90 (1975).
D.C. has adopted the Restatement (Second) of Contracts with regard to covenants not to compete. A D.C. Court will find a “promise unenforceable on the grounds of public policy if it is unreasonably in restraint of trade. A promise is in restraint of trade if its performance would . . . restrict the promisor in the exercise of a gainful occupation.” Ellis v. James V. Hurson Associates, Inc., 565 A.2d 615 (D.C 1989). Promises will be considered “unreasonably in restraint of trade” if: (a) the restraint is greater than is needed to protect the promisee’s legitimate interest, or (b) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.” Restatement § 188 requires balancing of these two factors to determine if the covenant is enforceable.
Non-solicitation clauses, while different from non-competition clauses, are often grouped together in case law. Soliciting clients from previous employers, as mentioned above, fit into non-competition clauses. Specificity is key, again, in whether or not the court will enforce an employee’s non-solicitation clause with regard to other employees. In ManTech Int’l Corp. v. Analex Corp., the Court did not enforce a non-solicitation clause stating the employee “shall not directly or indirectly solicit or induce any employees” of the employer to leave the employer. ManTech Int’l Corp. v. Analex Corp., 75 Va. Cir. 354 (Va. Cir. Ct. 2008). The Court found this provision did not protect the employer’s legitimate business interests because it would also include “circumstances in which one employee convinces another to retire early, join the military, or move to another state.”
The Fourth Circuit, applying Maryland law, also finds that the “plain meaning of ‘solicit’ requires the initiation of contact.” Mona Elec. Group, Inc. v. Truland Serv. Corp., 56 F. App’x 108 (4th Cir. 2003). The Court found that submitting estimates to their previous employer’s customers did not fall within the plain meaning of “solicit” in the covenant signed. The Court then hinted that if the agreement stated the promise was prevented from conducting business with its customers, like in a non-competition agreement, then the outcome would be different.
When drafting non-competition and non-solicitation clauses, narrowly construed provisions are more likely to be enforceable as they will be considered reasonable. The three most common areas to narrow a non-compete are geography, time, and scope. Reasonableness of the duration of the covenant to limit competition is more likely to be in the one year to two-year range. However, in Maryland, three, five and ten years for limiting competition were upheld as reasonable. Ellis v. James V. Hurson Associates, Inc., 565 A.2d 615 (D.C. 1989). Also, as mentioned above, limiting non-competition clauses to specific competitors would likely to be enforceable if there are plenty of other avenues for employment. Lastly, some non-competes include a provision that if the promisor is terminated without cause or by the promisor for good reason, the non-compete will not apply.