Judicial Revision of Non-Competition Covenants: Drastic Change or Steady as She Goes?

By Allan P. Hillman

Neuberger, Quinn, Gielen, Rubin & Gibber, P.A.

Chair, MSBA Business Law Section

 

An issue which often arises in determining whether a post-term non-compete covenant is enforceable is whether the non-compete is held overbroad in duration or geographic area or in breadth of restraint as to customers, it nevertheless will be enforced in part. Further, if partial enforcement is permissible under state law, will the court rewrite the covenant to make it reasonable, or will it merely “blue pencil” the covenant. In blue penciling, a court may only change the covenant by crossing out words and phrases that are unnecessarily broad – but by inserting nothing and changing no existing words – and the court then enforces what remains, if anything intelligible remains. In addition, Maryland courts have indicated that, where there are a multitude of separate covenants, a court may sever an offending covenant and enforce the non-offending covenants. Deutsche Post Global Mail Ltd. v. Conrad, 292 F.Supp.2d 748, 754 (D. Md. 2003); Tawney v. Mutual System of Maryland, 186 Md. 508 (1946).

Finally, there is some point at which a covenant is so unreasonable and overreaching that a court may withhold its assistance and will decline even to enforce a more limited restraint by blue penciling. The question is to what degree a court will require parties to live by the contracts they signed and to what degree a court will assist an employer which seeks to obtain unfair advantage by foisting a vastly overbroad restraint on the ex-employee. There is a limit beyond which a Maryland court will not go. See Holloway v. Faw, Casson & Co., 78 Md. App. 205, 235-38 (1989), affirmed on other grounds, 319 Md. 324 (1990). For example, suppose a covenant states that a salesperson will not for three years after the termination of her appointment compete with her ex-employer in Baltimore, Howard, and Carroll counties. If a court decided the covenant was overbroad as to geographic area, it could blue pencil it by crossing out one or two of the counties and enforcing the remaining geographic area. If the Court found it was overbroad as to duration however, it could not change the covenant by blue penciling, since to cross out the word “three” would be to leave no duration at all. The court would have to be willing to rewrite the covenant.

If on the other hand, the employee had worked in Baltimore City and was restricted from competing in the entire United States, a court might decide that the employer had been so unreasonable as to be unjust and could refuse to enforce any covenant at all. The states differ significantly here. Some treat a covenant as enforceable only as written and refuse to rewrite or blue pencil. In those states, it is caveat emptor for the drafter. At the other end of the continuum, some states (and noted commentators) advocate full rewriting of covenants to make them reasonable, with the proviso that some covenants may be so offensive that a court will not assist the drafter. Finally, some states fall into the middle ground, in which a court will blue pencil a covenant, but will not rewrite a covenant.

Maryland has had an inconsistent history in this regard. The State is generally favorable to covenants not to compete. Some early cases indicated a willingness to blue pencil, and a 1989 Court of Special Appeals’ (“COSA’s”) decision indicated a willingness to rewrite except in limited circumstances. See Holloway, supra. (Holloway discusses in depth the history of this issue in Maryland.)

The Court of Special Appeals in Holloway explained:

Despite the several valid criticisms leveled at the flexible approach we are convinced that, on the whole, the numerous justifications underlying this method outweigh the consideration behind the formalistic strict blue pencil approach and we adopt the position taken by Professors Williston and Corbin, supra, as the law in this State….

The gist of the test applied in the cases and treatises, supra, which support the flexible approach is essentially a two part inquiry: (1) Does the restrictive covenant as a whole evidence a deliberate intent by the employer to place unreasonable and oppressive restraints on the employee/covenantee? If so, then the entire covenant is invalidated, whether severable or not. (2) If the agreement, although unreasonable, satisfies the [protectable interest] test in part 1, then the court should modify the express terms so as to align the reasonable expectations of the parties to the reasonable expectations of the law, so long as it is fair to do so.

78 Md. App. at 237-38 (emphasis added).

However, the Court of Appeals expressly did not have to “reach the question of partial enforcement, in the sense in which the panel majority used and applied it, [because] the invalidity [was] severable.” Holloway, 319 Md. at 353. It expressly declined to reach the issue of whether a Maryland court could rewrite a covenant. From the above, and later decisions, there is no doubt that blue penciling is permitted. See Fowler v. Printers II, Inc., 89 Md. App. 443, 465-66 (1991). It appeared that the COSA’s language in Holloway, unless subsequently rejected, when considered in a different case by the Court of Appeals, might permit rewriting unreasonable covenants under circumstances in which the employer has dealt in good faith. Holloway, 319 Md. at 353.

However in 2003, the United States District Court for the District of Maryland held squarely that Maryland law permitted blue penciling but not rewriting of a covenant. The Court refused to redraft a covenant (refusing to supplement or rearrange language), and when the Court merely blue penciled it, the resulting covenant was still held overbroad and unenforceable. The court expressed special concern over allowing employers to draft overbroad covenants as an in terrorem tactic, and then to rely on the courts to enforce whatever was lawful. In fact, the Court expressly criticized even blue penciling at all. Deutsche Post Global Mail, Ltd. v. Gerard Conrad, 292 F.Supp.2d 748 (D. Md. 2003). Judge Motz’ comments are instructive:

In my view to permit blue penciling encourages an employer to impose an overly broad restrictive covenant, knowing that if the covenant is challenged by an employee, the only consequence suffered by the employer will be to have a court write a narrower restriction for it. This appears to me to be extremely unfair and contrary to sound public policy. Cf. Trailer Leasing Co. v. Associates Commercial Corp., 1996 WL 392135 at *4 (N.D. Ill., July 10, 1996); Telxon Corp. v. Hoffman, 720 F.Supp. 657, 666 (N.D. Ill. 1989).

[Nevertheless,] Maryland law permits courts to remove unnecessarily broad language from restrictive covenants to make them enforceable, as long as the remaining language need not be reorganized or rewritten.

In the present case, the strict divisibility approach permits me to strike section 5(a)(iii) of Conrad and Gemmill’s restrictive covenants and the overbroad portions of section 5(a)(ii), as described in Section III supra. However, it does not allow me to add words limiting the solicitation provision so as to apply only to those customers that Conrad and Gemmill had contact with, or alternatively, to customers within the United States. Accordingly, Defendants are entitled to the summary judgment they seek.

Id. at 754 n.3, 756-58.

Judge Motz reviewed the COSA’s Holloway opinion and the approache it took to blue penciling. He said that the alternatives available to him to avoid blanket restrictions “prohibiting the direct or indirect solicitation or diversion of DGM customers, as well as attempted solicitation or diversion” would require him to rewrite the agreement. Id. at 757. The suggestion to limit the restriction to customers “with whom Conrad and Gemmill had contact” would be an impermissible rewriting. Pointing out that the COSA’s Holloway opinion explained two theories and the Court of Appeals did not reach the issue, Judge Motz said opinions prior to the COSA’s Holloway decision “persuade me that blue penciling must be limited to the removal of offending language and cannot include the addition of words or phrases in an effort to make the restrictive covenant reasonable.” Id. at 757-58. (emphasis added.)

As a result, the safe rule is to have carefully drafted covenants, limited in duration to two years or less, and limited in area limited to the area where customers with whom a salesperson interacted. In some limited cases, much broader restrictions may be justified, see, e.g., Intelus Corp. v. Barton, 7 F.Supp.2d 635 (D. Md. 1998); but, if so, it is best to have several separate restrictions which are expressly divisible so that the whole edifice does not fall if one restraint falls.

In the end, the essential test of lawfulness is whether the scope of a restriction is reasonable from the employer point of view while not unduly prejudicing the ex-employee. Holloway, 319 Md. 324, 334 (1990); Tabs Associates Inc. v. Brohawn, 59 Md. App. 330 (1984); see Becker v. Barley, 268 Md. 93 (1973); Ruhl v. Bartlett Tree Expert Co., 245 Md. 118 (1967). Ask your clients what protection they really need – and why – and draft for the real world, not the world in which they wish existed. It is the real world you will confront in court.