Monday, January 14, 2013

Maryland Legislation Would Ban Certain Non-Competes

Many of you likely have been clamoring for an update on what's happening in the Maryland legislature. So here goes...

As luck would have it, there is pending legislation relevant to non-competes! And it's yet another of example of unneeded legislative meddling, in this author's opinion.

The text of Senate Bill 51 is provided below, but the essence is pretty easy to distill. The bill was introduced last week and states that a non-compete is not enforceable if an individual is found eligible to receive unemployment insurance benefits. If passed, the law would apply prospectively so it's not of immediate concern to any employers. For now, at least, folks in Maryland can concentrate on Ravens football.

There are obvious problems, both from the face of the statutory language and the incentives it creates.

First, the Senate has not seen fit to define "noncompetition covenant", so it's unclear if the bill applies to customer or employee non-solicitation clauses, forfeiture-for-competition provisions, or other types of activity restraints that may impair, but not bar, competitive conduct.

Second, the bill encourages employers to challenge unemployment appeals by laid-off workers when they otherwise might not. Suppose an employer discharges a sales employee for not meeting sales quota. If the employee files for unemployment (which he almost certainly would), the employer would not necessarily feel compelled to challenge that determination if there were no law like SB 51. However, if the employer is faced with an automatic trigger that would invalidate the non-compete, it has every incentive to mount a challenge to an employee's rights to receive unemployment benefits.

The bill is set up to cause employers to spend unnecessary resources fighting unemployment claims they might not otherwise think to contest. That adds transaction costs and brings down wages and benefits for other employees. It also ends up hurting employees who ultimately could lose their unemployment claims if an employer mounts a successful challenge whose real purpose is to save the underlying covenant. It's hard to see how this is a win for anyone. And it's just impossible to believe that unemployment hearing officers - not normally known as the world's most sage arbiters of justice - are left with, essentially, deciding the validity of non-competes for a certain class of employees.

Courts are equipped to handle this, because they can always determine under the prevailing reasonableness test that a non-compete should not be enforced. Creating bright-line rules like SB 51 proposes undermines this well-established balancing test.

In the event this legislation goes anywhere, and it clearly shouldn't, there is one obvious fix in order for employers. They'll need to make sure their employment contracts adequately define "good cause" for termination. If they can fit a reason for termination into a specific contractual definition of "good cause" (e.g., failure to meet established sales goals), then it would seem to be much more difficult for an unemployment officer to determine eligibility.

Senate Bill 51 by Ken Vanko

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