Editorial Advisory Board: Time to reform rules for noncompete agreements

Earlier this year, District of Columbia Mayor Muriel Bowser signed a sweeping law that would ban almost all future noncompete agreements in the district starting next year. The new statute is one of the most radical and far-reaching laws of its type in the country, but it was implemented because of a genuine concern about employer abuses limiting the right to work during an historically shifting market for labor.  Of course, those abuses are not limited to employers doing business in the District of Columbia.

By their nature, noncompete agreements are an exception to the public policy against contracts in restraint of trade. A 2019 Maryland law completely bans their use for employees with wages equal to or less than $15 per hour or $31,200 annually.

As to other employees, Maryland courts follow the general rule that covenants restricting post-termination competition may be applied and enforced only against those employees who provide unique services, and they may only protect the future misuse of trade secrets and goodwill developed with the customers. Post-termination restrictions generally are not enforceable against a departing employee whose services are not unique, and who does not misuse confidential information or attempt to divert customers, where the purpose and effect of the restriction is simply to shut the departing employee out of an entire industry altogether.

Broader post-termination restrictions may be imposed when they are given as consideration for the sale of a business, because in that situation, the employee agreeing to the restriction is more likely to be represented by counsel and engaged in an arms-length negotiation.

But it has been a generation since the Maryland Court of Appeals last decided a significant case in this area, and there are no real deterrents to curb Maryland employers who disregard the enforceability parameters set by the cases decided long ago. Consequently, employers in Maryland routinely overuse and abuse covenants not to compete.

Employers indiscriminately force rank-and-file workers whose wages are only slightly higher than the $15 statutory limit and whose services are not unique to sign harsh restrictions as a uniform, nonnegotiable condition of employment, sometimes without prior notice. It is not unusual for employees to be restricted in this way from working in a broad range of jobs over a large geographic area, even if they are engaged in low-level work for the employer, involving little to no access to confidential information or customers.

Unfair treatment

The use of overly restrictive agreements in these situations is unacceptable, particularly in a market with an acute labor shortage. It prevents the free flow of employees from job to job, and it insulates employers from market pressures by giving them an unfair club to keep their employees’ wages below market levels.

Post-termination covenants that are too broad restrain employees from the moment they are made, which is when they begin their effect on the employees’ freedom of movement. From the inception of an illegal covenant, the employer gains an unfair advantage because the employees must live under the constant threat that they will be faced with a costly legal challenge even to their legitimate right to work elsewhere.

Employees who are required to sign an illegal noncompete agreement as a condition of their employment may never know the true limits on their freedom of movement in the job market until a court or arbitrator tells them, usually years after the fact, if ever. In a suit challenging the employee’s right to work elsewhere, the onus is on the employee to convince the tribunal to nullify the contract.

Therefore, an employee who signs even an unenforceable post-termination restriction is effectively deterred from competing.

We support reforming this system for Maryland employees, although not as radically as the new District of Columbia total ban would do. Employees must be given a reasonable time to consider any proposed agreement restricting their post-termination right to work. For example, employees should not be presented for the first time with an agreement limiting their post-termination right to work as part of a morass of “onboarding” documents that they are required to sign on the first day of work, after leaving another job.

Additionally, post-termination restrictions that prohibit work in an entire industry or class of jobs should be banned, except for high-ranking employees who have sufficient access and ability to exploit confidential information or customer goodwill for the benefit of a competitor, or in the case of the sale of an ownership interest in a business. Finally, when an employer’s noncompete agreement is stricken by a court or arbitrator, that employer should be subject to penalties, including the payment of the attorneys’ fees incurred by the affected employees.

Editorial Advisory Board members James B. Astrachan, James K. Archibald and Arthur F. Fergenson did not participate in this opinion.

EDITORIAL ADVISORY BOARD MEMBERS

James B. Astrachan, Chair

James K. Archibald

Gary E. Bair

Andre M. Davis

Arthur F. Fergenson

Nancy Forster

Susan Francis

Leigh Goodmark

Roland Harris

Michael Hayes

Julie C. Janofsky

Ericka N. King

C. William Michaels

Angela W. Russell

Debra G. Schubert

H. Mark Stichel

The Daily Record Editorial Advisory Board is composed of members of the legal profession who serve voluntarily and are independent of The Daily Record. Through their ongoing exchange of views, members of the board attempt to develop consensus on issues of importance to the bench, bar and public. When their minds meet, unsigned opinions will result. When they differ, or if a conflict exists, majority views and the names of members who do not participate will appear. Members of the community are invited to contribute letters to the editor and/or columns about opinions expressed by the Editorial Advisory Board.