By: Alexandria Hodge, Esquire
On August 20, 2024, a federal judge from the District Court in the Northern District of Texas blocked the Federal Trade Commission’s (FTC) ban on noncompete agreements, which was set to take effect on September 4. As a result, employers who were expecting their noncompete agreements to be automatically voided may now continue as before and may anticipate enforcing these agreements under Maryland law.
Noncompete agreements are advantageous to employers who wish to limit former employees from working for competing companies or starting a competing business after they leave a job. Employers argue such agreements are important to protect their proprietary interests and investments. However, employees argue noncompete agreements deprive them of opportunities for advancement at other companies in their field and force them to leave their industries if they wish to seek better working conditions.
On April 23, 2024, the FTC signaled favor for employees’ argument when they voted to ban noncompete agreements for all employees except senior executives. The ban would have voided existing noncompete agreements for an estimated 20% of the U.S. work force; approximately 30 million people. The suit before the District Court, brought by the U.S. Chamber of Commerce and a Texas-based tax law firm, argued the rule exceeded the FTC’s statutory authority because (1) the enabling act did not authorize the FTC to issue substantive unfair-competition rules, and (2) the FTC lacked the statutory authority to retroactively invalidate millions of existing contracts. The judge agreed saying the FTC lacked the authority to enact the ban, which she described as “unreasonably overbroad without a reasonable explanation.”
While the FTC’s new rule has been blocked, other efforts to limit noncompete agreements remain. For instance, the National Labor Relations Board (NLRB) takes the position that most noncompete agreements unlawfully chill employees from exercising their rights under Section 7 of the National Labor Relations Act, which protects employees’ rights to take collective action to improve their working conditions. They specifically argue that a noncompete interferes with an employee’s right to seek other employment to specifically engage in protected activity, including union organizing. The NLRB enforces this position through its investigations and by issuing findings against. The NLRB’s position does not apply to supervisory or management-level employees, however, employers should expect it to assertively pursue action for non-managerial employees.
Another effort to limit noncompete agreements is specific to health care employers. In the most recent legislative session, the Maryland legislature passed House Bill 1388 which will prohibit non-compete agreements for licensed healthcare employees who provide direct patient care and earn $350,000 or less. For licensed healthcare employees who earn more than the threshold limit, any noncompete will be limited to one year in duration and a radius of ten miles. This new law will go into effect July 1, 2025. Any noncompete agreements entered into before that date will be enforceable under the terms written.
Following the federal judge’s decision on the FTC’s ban, Maryland employers may continue to enter into noncompete agreements with their employees and can expect existing noncompetes to remain in place – at least for supervisory and management employees that would not be subject to the NLRB’s protections. The standard for enforcing a noncompete under state law remains unchanged. Maryland courts have traditionally looked at “whether the particular restraint is reasonable on the specific facts.” If the scope of a restrictive covenant is considered to be reasonable on its face a court may, in determining enforceability, assess other facts and circumstances, such as (1) whether the person sought to be enjoined is an unskilled worker whose services are not unique; (2) whether the noncompete is necessary to prevent the solicitation of customers or the use of trade secrets, assigned routes, or private customer lists; (3) whether there is any exploitation of personal contacts between the employee and customer; and, (4) whether enforcement of the clause would impose an undue hardship on the employee or disregard the interests of the public. A court may modify a noncompete to enforce it to a reasonable extent, or it may invalidate the agreement.
Employers should review their noncompete agreements to ensure they are limited, reasonable, narrow, and only cover truly protectable business interests rather than restraining collective action. Keeping in mind that any ambiguity in the terms of a noncompete will be construed in favor of the employee, employers should make sure the parameters of the agreement are clearly spelled out. Additionally, strong, enforceable language to protect truly confidential information is advisable since protection of confidential information and trade secrets is still allowed. Finally, employers should make sure that their employment contracts have strong severance clauses so that an invalid non-compete does not void other contract provisions.
Alexandria M. Hodge is an Associate in the Firm’s Education, Labor and Employment Group. She holds her Juris Doctor from the University of Baltimore School of Law, earned her Master’s in English Education and Curriculum from the University College London, and completed her teacher residency and earned her Master’s in Interdisciplinary Education Studies and Graduate Certificate in Urban Education Policy from the Johns Hopkins University. Prior to becoming an attorney, Ms. Hodge was an English literature and special education reading teacher in public schools. Ms. Hodge can be contacted at 410-740-3162 and ahodge@pklaw.com.
