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To Work or Not to Work – Maryland’s Senate Considers Changes To Non-Compete Law for Those on Unemployment

Posted in Legislation, Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants

On January 9th, the Maryland Senate introduced a bill which if passed would invalidate employee “noncompetition covenants” for former workers who applied for and obtained unemployment benefits. Senate Bill 51 is sponsored by Senator Ronald N. Young, Democrat, who just began his third year in the Maryland Senate. If enacted, the bill will take effect on October 1, 2013, and would not affect any noncompetition covenant entered into before then.

Theoretically, the bill’s purpose is to eliminate obstacles for workers on unemployment to return to work, thus reining in benefit payments and, by extension, unemployment taxes on employers. So far, so good. But I have to ask:

1. Will it work?

In other words, what will the bill as written really do? Will it apply to purely non-compete agreements, where an employee is barred from working for a competitor in a directly competitive capacity for a limited time? Or will they apply more broadly to other types of restrictive covenants, i.e., agreements not to solicit current employees or customers, or non-disclosure agreements? As explained below, it’s an important distinction.

As presently worded, the bill would apply to “noncompetition covenants.” But Maryland state and federal courts have used the term “restrictive covenant” and “noncompetition covenant” interchangeably, with little or no distinction between non-competes, non-solicitations, and non-disclosures. See, e.g., MCS Servs., Inc. v. Jones, No. WMN-10-1042, 2010 WL 3895380, at * 3-4 (D. Md. Oct. 1, 2010); Mansell v. Toys ‘R’ Us, Inc., 673 F.Supp.2d 407, 416-17 (D. Md. 2009); Becker v. Bailey, 268 Md. 93 (1973).

Sure, one might respond by saying of course SBI won’t apply to agreements beyond pure non-competes. After all, statutes in derogation of common law are strictly construed (Cosby v. MDHR, 425 Md. 629, 645 (2012)), and SB 51 doesn’t say anything other than noncompetition covenants. Further, Maryland’s Trade Secrets Act’s non-preemption provision, which keeps intact all breach of contract claims based on information theft (Md. Com. Law § 11-1207), is a counter-statutory basis to keep SB 51 away from employers’ breach of NDA claims. In addition, because the “inevitable disclosure” theory does not exist in Maryland, crafty employers can’t pull an end run around the non-compete bar by suing SB 51-eligible employees unless they have proof of actual trade-secret theft. LeJeune v. Coin Acceptors, Inc., 381 Md. 288 (2004).

Nevertheless, even with the non-compete-only reading, employers and their attorneys can be clever. They can call something a non-solicit or non-disclosure, but give it a non-compete’s teeth. For example, John Smith’s (fictional) non-solicit says he cannot solicit orders or sales from any of TUV’s (his former employer, also fictional) customers for two years. John is a widgets salesman, and his territory is nationwide. He knows no other customers, and knows no other trade. No competing company will hire him without a portable and sizeable book of business. He knows, he tried. On its face, therefore, his non-solicit with TUV doesn’t bar him from competing, but in reality, it does. SB 51 won’t help him.

Further, the non-solicits and non-disclosures often have the same deterrent effect as non-competes have legal effect. Betty Boop, a former software engineer for Acme, who unlike John doesn’t have a non-solicit, but who does have a non-compete and a three-page NDA with Acme which appears to cover every piece of paper she ever touched there, may nevertheless be inhibited by her NDA from taking a job with a competitor for fear of breaking that agreement. This is so even though she is not legally prohibited from working for that competitor. So, even though SB 51 would erase Betty’s non-compete when she got on unemployment, her NDA still hung over her head enough to render SB 51 meaningless.

Or consider this: Sly Stallone and his new employer could time Sly’s hire date at the day after he obtains unemployment benefits. That way, Sly’s non-compete with his former employer will be dead, and Sly and his new employer are off the hook. Now, maybe that’s not such a bad thing – an employee whose former employer laid him off on grounds other than for cause can’t turn around and enforce his non-compete. Indeed, there is some Maryland authority (albeit tenuous) which suggests that an employer which terminates the employment without cause also terminates the employee’s non-compete obligations. Jorgensen v. United Comms. Group LP, No. 8:10–CV–00429–AW, 2011 WL 3821533, at * 10 (D. Md. Aug. 25, 2011).

But two caveats to that. First, as indicated, Jorgensen by no means is settled law, but instead relied on the bland contract principle that one who materially breaches can’t also sue for breach. And Jorgensen did not actually declare the non-compete void, it merely denied summary judgment on that point. Second, many employees are terminated for something they did wrong, but out of respect for the past relationship, e.g., are allowed to call it a lay-off with the promise that the employer won’t fight unemployment. Such employees with a non-compete will have benefited under SB 51 from whatever they did wrong to get them fired. Is that fair?

Now some might say, “so what? All this happens anyway, with or without a non-non-compete law like SB 51.” I agree. Which brings me back to my original question – will SB 51 really do anything?

2. Another question – does Maryland really want SB 51?

Put differently, will anyone win? Employers may fight harder against unemployment claims, now that the stakes are higher. That is, employers are already on the hook for increased unemployment insurance taxes for each successful claimant, so the added loss of non-compete protection may cause them to oppose claims more often and with more intensity. This will lead to more backlogs in the unemployment office, and more time, effort, and expense for the office, employer, and employee.

Please also see Ken Vanko’s excellent post on the proposed legislation.

In the end, though SB 51 at first blush may seem like a good idea, in practice it may have little if any effect. Worse, it may backfire. We will keep our eye on how the bill moves through the Maryland legislature.