Carving Out An Enforceable Noncompete In The 4th Circuit
Employers having trouble enforcing their noncompetes may have a better chance in the United States Court of Appeals for the Fourth Circuit—at least in Maryland—by adopting a more novel approach: condition the noncompete on the receipt of incentive payments pursuant to a clear incentive plan with defined goals, instead of relying on an employment agreement.
That worked for one employer in Allegis Group, Inc. v. Jordan (“Allegis”) decided by a three-member panel of the Fourth Circuit on February 27, 2020.
Let me tell you, I am here for it. I mean, it worked out pretty well for this employer.
In this recently decided case, four former executives (highly compensated employees) of an Allegis subsidiary agreed to participate in the Allegis Incentive Investment Plan (“Plan”) whereby they would receive payments for 30 months (!!) after separation from Allegis or its subsidiaries if and only if they did not compete with Allegis, or solicit customers or employees from Allegis or any of its ten subsidiaries. The Plan’s stated goal was to promote the long-term growth of Allegis, which it measured by its stock value.
In other words, as to the condition, don’t want the 30 months of post-termination pay? No problem. Compete all you want!
What do you think happened? The court bought this argument.
Well, these four hotshots decided to form and engage in a competitive business, which violated the Plan conditions, and Allegis filed suit against them to recover the incentive payments that the employees had received. To make matters just that little bit more complicated, each of the employees had signed an employment agreement with their subsidiary employer containing restrictive covenants.
The employees argued to the Fourth Circuit panel that the terms of the Plan constituted an overly broad restrictive covenant and, therefore, was unenforceable.
But the Fourth Circuit disagreed and determined that the plain language of the Plan’s provisions contained conditions precedent, not restrictive covenants, and which should be enforced as written.
Usually, courts will enforce a noncompetition or nonsolicitation provision in an employment contract only if the provision is reasonable under the circumstances, defining “reasonable” pursuant to state case law or statute. In Maryland, if a restrictive covenant is narrowly tailored to protect an employee’s legitimate business interests, still allows an employee to earn a living, and doesn’t violate public policy, it may be considered reasonable.
BUT, the Fourth Circuit determined that even under a reasonableness standard for a condition precedent, as opposed to an employment agreement, the Plan’s restrictions were enforceable as long as the provisions were not broader than necessary “as to area and duration” to protect the business of the employer while not imposing an undue hardship on the employee or disregard of public interests. Here, the Plan explicitly named the business interests that the conditions were intended to protect — the long-term economic growth of Allegis and its subsidiaries, as measured by the value of Allegis’s stock.
Sold! At least to the Allegis court.
The Fourth Circuit acknowledged that the Plan provisions might be overly broad as to an employment agreement, but this was not about the employment agreement with Allegis’s subsidiary. The court deemed the Plan’s stated business interests to be reasonable and tailored sufficiently to protect those legitimate interests.
Unsurprisingly, the dissent argued that the Plan’s provisions were overly broad (and thereby unenforceable) because it prohibited former employees from soliciting any customer or client of any of the ten subsidiaries—not just the one for which the former employees worked.
You can read the entire case here.
With all of the recent buzz in the past few years about eradicating noncompete provisions, this organization took a novel approach by considering the provision as a condition to receiving incentive payments and not part of an employment agreement, which, I think, made it more palatable to the panel.
Is this the way to go for employers seeking to prohibit former high-level employees from running away with their clients or employees? We will see, but including restrictive covenants in an incentive plan may be a better bet than including them in your employment agreements.