E-Alert Case Updates

Non-Competition and Non-Solicitation Clauses in Employment Contract Held Unenforceable

Seneca One Finance, Inc. v. Kris Bloshuk
(October 5, 2016) United States District Court for the District of Maryland
by Matthew J. McCloskey, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.mdd.uscourts.gov/Opinions/Opinions/SenecaOneFinance_v_
Bloshuk_MemoOpinionandOrder_1016.pdf

In a recent opinion, the United States District Court for the District of Maryland concluded that certain non-competition and non-solicitation clauses in an employment contract were facially overbroad and thus unenforceable.

Plaintiff conducts what is describes as the “highly competitive business” of purchasing structured settlement payment rights in exchange for lump sums. It alleges that an essential part of its business was ensuring that its customers have a positive experience throughout their transactions, and that it strives to build goodwill with customers in order to establish future business relationships. Beginning in September 2013, Plaintiff employed Defendant as an “Annuity Specialist” to “manage day-to-day relationships with structured settlement annuitants, and create and build relationships with customers and prospective customers.” As a condition of her employment, Defendant executed a confidentiality, non-solicitation, and non-competition agreement (the “Contract”). Under the terms of the Contract, Defendant agreed that “she would neither compete against [Plaintiff] nor contact or solicit any potential or existing customer of Seneca One during her employment and for one year thereafter.”

Defendant resigned from her position with Plaintiff on January 7, 2016, and immediately went to work for one of Plaintiff’s competitors. Plaintiff alleged that, shortly thereafter, Defendant discouraged a potential customer of Plaintiff from making a deal with Plaintiff, and solicited that customer’s business for her new employer. Furthermore, Plaintiff alleged that Defendant “leveraged [Plaintiff’s] goodwill” to obtain business from another of Plaintiff’s clients. Upon learning of this information, Plaintiff sued Defendant for breach of the non-competition and non-solicitation provisions of the Contract, as well as for civil conspiracy related to a purported conspiracy with her new employer to breach their fiduciary duties to Plaintiff. Defendant moved to dismiss Plaintiff’s complaint for failure to state a claim.

Judge Roger W. Titus, writing for the Court, granted Defendant’s motion. Addressing first the non-competition provision, the Court noted that, “[i]n 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 5 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.’” The Court concluded that the non-competition clause was not reasonably necessary to protect Plaintiff’s business. As written, “[t]he non-competition provision in the Contract [was] designed more to prevent former employees from working for any competitor of [Plaintiff] than to prevent the employees from taking advantage of customer goodwill created while employed at [Plaintiff].” Because non-competition clauses may not flatly prohibit a former employee from competing with their former employer, the Court concluded that the non-competition clause was facially overbroad and thus unenforceable. As a further matter, the Court also concluded that the non-competition provision was also geographically overbroad, as Plaintiff did business nationwide and the provision therefore operated to bar Defendant from doing business anywhere in the country.

As to the non-solicitation clause, the Court similarly concluded that the provision was overbroad and unenforceable. The non-solicitation clause essentially prohibited Defendant from ever contacting any individual with whom Plaintiff conducted business. Such clauses, however, may only permissibly bar former employees from utilizing the goodwill that they themselves create with customers of their former employer. Because the clause in the Contract went well beyond that permissible purpose, the Court concluded the non-solicitation provision was unenforceable.

Finally, as to the civil conspiracy claim, the Court concluded that Plaintiff had failed to state a claim. The Court succinctly noted that: (1) Defendant’s new employer owed no fiduciary duty to Plaintiff; and (2) Defendant could not tortiously interfere with her own Contract with Plaintiff. Accordingly, Plaintiff had failed to allege sufficient tortious conduct to establish the existence of a civil conspiracy. The Court therefore dismissed Plaintiff’s complaint.