Introduction- Contractual Provisions that Protect Businesses from Unfair Competition
Protecting Businesses from Unfair Competition in Maryland: Companies transacting business must often disclose confidential or proprietary business information developed through hard work and monetary investment. For example, client contact lists, business plans, supplier information, marketing strategies, business opportunities, employee identities and skills, manufacturing processes, ingredients, source code, proprietary technology, software and other intellectual property and trade secrets. If not protected, such information can be misappropriated by employees, subcontractors and others to start their own competing business.
Companies doing business in Maryland have a legal right to protect or restrict the use of such information when transacting business by entering into contractual agreements that: (1) prohibit solicitation of employees and customers; (2) require that disclosed information be kept confidential; and (3) restricting certain types of competition in a specified geographic area for a specified period of time. Such provisions are often used in employment agreements, subcontracts, business purchase agreements, service contracts, technology teaming agreements and other agreements that involve the disclosure of valuable business information to third parties.
If breached, these contractual provisions can be enforced in court through emergency injunctive relief (e.g., temporary restraining and cease and desist orders) or monetary damages or both. Attorneys fees and litigation expenses can also be recovered. Enforceability, however, will depend on the reasonableness of the restrictions in the context of the circumstances and the particular type of business or industry involved. Therefore, this article should not be relied upon as legal advice. Consultation with a Maryland business law attorney is essential when entering into or seeking to enforce any agreement containing such contractual provisions.
Below is a brief overview of these contractual provisions commonly referred to as Non-solicitation, Non-disclosure and Non-competition Agreements.
A Non-solicitation Agreement is an agreement that contains a contractual provisions under which a party to the agreement promises not to solicit the other parties’ employees or customers by hiring them away or seeking out their business.
Non-solicitation provisions are used in employment agreements to prevent employees from soliciting customers of a business after the termination of employment. These provisions are also used by businesses to prevent contract partners and clients from luring away skilled company employees or interfering with valued customer relationships.
A Non-solicitation provision is typically limited in time to the duration of agreement and for an additional period of time after the agreement has ended. There are many direct and indirect ways to solicit a businesses’ employees and clients so the meaning of the terms “solicitation,” “employee” and “customer” as used in a non-solicitation provision should be carefully defined to meet the circumstances the business in question.
Non-disclosure or Confidentiality Agreements
A non-disclosure agreement (also known as a “confidentiality agreement”) is an agreement that contains a contractual provision where one party promises not to disclose or otherwise use information received from the other party, except as specifically permitted under the agreement.
Non-disclosure agreements are entered into when two companies are considering doing business and need to have access to each other’s business information and technology for the purpose of evaluating potential business relationships or working together to pursue a joint business opportunity. Non-disclosure provisions are also utilized in employment agreements to restrict employees’ use and dissemination of disclosed confidential information.
In order to be enforceable in court, a non-disclosure agreement should: (1) identify the confidential material, knowledge or other information that is to be disclosed and/or kept confidential; (2) define the limited manner in which that information can be used, if at all; and (3) describe how the information should be handled / protected, including the identify which individual employees can have access to that information and under what circumstances
A non-competition agreement (also known as a “non-compete agreement”) is an agreement that contains a contractual provision under which one party agrees not to enter into business competition with the other party for a period of time in a specific geographical area. Non-competition provisions are best known for their use in employment agreements to prevent employees from leaving to start up competing companies or to work for competitors. Employers justify these agreements because they invest time and money in teaching employees the company business, and, in some cases, entrusting them with confidential proprietary information, only to have them use that knowledge to start an identical business in direct competition with them.
Non-competition contractual provisions are also used outside the employer-employee context. For example these provisions are useful in connection with the purchase of a business where the business seller agrees not to start a new business that competes with the business being purchased.
Where employment agreements are concerned, non-competition agreements must not be overly broad so as to unreasonably retrain trade and the ability to earn a livelihood. Generally, courts will enforce non-compete agreements against employees who provide unique services, or to prevent a former employee’s misuse of trade secrets and client lists, or solicitation of customers. In such cases the restriction on completion must be reasonably limited in geographic scope and duration as reasonably necessary for the protection of the employer’s justifiable legitimate business interest without imposing undue hardship on the employee or disregard of the public interests in having citizens be able to earn a living. Nonetheless, even overly broad non-competition agreement may be enforceable under Maryland’s “blue pencil rule,” which allows a Judge to strike the overbroad portion of a non-competition agreement and, in some cases, still enforce remaining provisions.
For more information about legal agreements that protect Maryland businesses from unfair competition, contact the Maryland lawters at the business law firm of Cowie & Mott, P.A.