Maryland Federal Court Voids Non-Compete Even After “Blue Penciling” It.

Unlike Virginia, Maryland law allows courts in that state to “blue-pencil” or selectively delete terms in a non-compete to make it enforceable.  In a July 11, 2011 decision, however, the Maryland Federal Court blue-penciled a non-compete and still found that it was facially overbroad and unenforceable because it did not define “competitors”.  The case is SNS One, Inc. v. Hage, and concerned a non-compete clause that an IT government contractor, SNS One, Inc., made its employees sign barring them from going to work forany competitor in the industry for one year after employment.

SNS One subcontracted to SAIC to staff SAIC’s IT services contract with the U.S. Army, the Geospatial Research Integration Development and Support (“GRIDS”) Contract.  SNS One hired Todd Hage as an associate to provide IT services and assigned him to the GRIDS Contract.  Within a few months, SAIC terminated its Subcontract with SNS One and hired away Todd Hage to service the Army directly.  SNS One sought to enforce its non-compete against Hage to prevent him from accepting SAIC’s offer to continue working on the contract for SAIC.

The covenant not to compete between SNS One and Hage prohibited Hage for one year from becoming “employed by, connected with, participat[ing] in, consult[ing] or otherwise associat[ing] with any other business, enterprise, or venture that is the same as, similar to, or competitive with [SNS One].”  Early in the litigation, Hage filed a motion for summary judgment, asserting that the non-compete was overly broad and unenforceable.  In response, the court used Maryland’s blue-pencil rule to delete the words “same as” and “similar to” from the non-compete, so that it only prohibited Hage from activity “competitive with [SNS One].”  The court asserted that the clause could thus only be enforced against competitors of SNS One.

During the litigation, however, SNS One repeatedly refused to name companies considered to be its competitors. This ultimately cost SNS One the enforcement of the non-compete, because it left interpretation of the clause at its broadest—applying to all competitive companies in the industry, with no direct/indirect, geographical, or market niche limitation.

When Hage again moved for summary judgment later in the case, the court granted it, refusing to enforce the clause as overly broad.  It cited Maryland law requiring that a non-compete be “narrowly tailored” to the minimum breadth necessary to protect a company. Even though the court acknowledged “that SNS One, a subcontractor, has an interest in preventing employees from jumping ship to work for prime contractors such as SAIC,” it found that SNS One failed to “identify its competitors” or otherwise present facts to the court to show that “an industry-wide restriction” was necessary. Prior cases on the scope of non-competes have upheld clauses which were “reasonably related to the interest in protecting a loss of business and of good will” by applying only to direct competitors, or only to competitors for a “specific market ‘niche.’”

The court further found that Hage’s work was not unique or otherwise specialized, and that the non-compete was not necessary to prevent the solicitation of customers or to protect proprietary information.  Had SNS One used greater specificity in its non-compete, however – even by identifying SAIC by name, for example – chances are it would have been better able to enforce the non-compete even against a lower-level employee like Hage.  When a non-compete is specific, it is much easier to show why it is needed to protect good will and prevent loss.

Here is a link to the opinion.