Court Upholds Covenant Not to Compete


On June 4, 1998 the United States District Court for the District of Maryland decided the seminal case of Intelus Corp. v. Barton, 7 F.Supp.2d 635 (D. Md. 1998) where it upheld a covenant not to compete contained in a employment contract which contained no geographical limitations and ordered an ex-employee from working for a rival corporation for six months.

The court's willingness to enforce this broad covenant not to compete indicates that such provisions in employment contracts in Maryland can have significant consequences for employees and employers alike, particularly in the case of technology companies whose market is worldwide.

Intelus Corp. v. Barton

Bernard Barton began working for Intelus, Corp. (a Rockville corporation) as an account manager in August, 1993. Intelus is engaged in the business of developing, selling, and supporting software products for health care organizations, and sought to prevent Barton from working for a rival. As one of Intelus's most profitable account managers, Barton contacted and worked directly with potential and existing Intelus clients and was primarily responsible for the central and midwest regions of the country, an area covering approximately twelve states. In addition, Barton also played a role in developing one of Intelus's software systems.

On April 20, 1998, less than a week after Barton resigned from Intelus, MedPlus, Inc., a Cincinnati, Ohio corporation, that also sells electronic patient record systems to health care organizations, announced that it had hired Barton. Intelus immediately brought suit to enforce a covenant not to compete contained in an employment contract that Barton had signed when he was hired by Intelus.

The Employment Agreement

The employment agreement at issue provided the following:

Barton will not, either during or after his employment with Intelus, disclose or use any "confidential information"(which is defined broadly) or materials of Intelus, to any person or entity for any reason or purpose, unless Intelus has given written consent;

  1. for a period of six months following the termination of his employment, Barton will not, directly or indirectly, for himself, or on behalf of any other person or firm, engage in any business, or accept compensation in any form for services, where such business or services compete directly for the customers and accounts of Intelus;
  2. for a period of six months following the termination of his employment, Barton will not call upon or cause to be called upon, or solicit or assist in the solicitation of any person, firm, government entity, or corporate entity listed as a customer or account of Intelus for the purpose of selling, renting, or supplying any product competitive with the products of Intelus; and
  3. for a period of six months following the termination of his employment, Barton will not employ or on behalf of any other person or entity seek to employ any person who is employed by Intelus.

Although according to the two defendants, Barton's work for MedPlus was limited to servicing clients already under contract with MedPlus, shortly after Barton resigned from Intelus, an employee of MedPlus allegedly contacted an Intelus client and informed the client that Barton had joined MedPlus. Barton denied having anything to do with the contact, but Intelus was unconvinced and filed suit to enforce Barton's covenant not to compete.

Intelus' Request for Injunctive Relief

First the court dealt with the issue of granting injunctive relief. Despite noting that injunctive relief is an "extraordinary remedy," the court concluded that Intelus's risk of irreparable harm from the violation of the agreement outweighed any harm to the defendants and that the public has a strong interest in the enforcement of reasonable restrictive covenants.

The court noted that Maryland courts recognize that employers have an interest in preventing an employee from using his contacts with clients to recruit those clients after his employment has ended, particularly in businesses in which the personal contacts between the employee and the customer are an important element determining the business's success.

Thus, because Barton was unable to demonstrate that he would suffer more than the usual stress and economic inconvenience that accompanies a change in employment, the court found that the balance of hardships favored Intelus and forbid Barton from working for MedPlus for six months.

Enforceability of Non-Compete Agreements

Turning to the covenant itself, the court read "engage in any business" as preventing Barton from getting involved in any business, either directly or indirectly, that competes for Intelus's clients. The court stated that the traditional test for determining the enforceability of a covenant not to compete is "whether the particular restraint is reasonable on the specific facts."

The court noted that a covenant not to compete is enforceable:

  1. If its duration and geographic area are only so broad as is reasonably necessary to protect the employer's, and
  2. If the covenant does not impose undue hardships on the employee or the public.

The focal point of the court's analysis was the fact that the restriction contained no limit on geographical scope. After finding no Maryland case law specifically addressing the viability of restrictive covenants containing no geographic limitation, the court felt that a fact-based analysis of the overall "reasonableness"of the covenant would suffice.

The court first found it significant that Intelus competes for clients on a national, if not global basis, and that where the nature of the business concerns computer software and the ability to process information, it is reasonable to expect that its competition is unlimited by geography. Thus, the court concluded that a restrictive covenant limited to a narrow geographic area would render the restriction meaningless. It noted that the restriction only applied to direct competitors; thus Barton presumably could still find work in the field.

Finally, the court held that there is a public interest in protecting businesses that depend upon the development of good will through effective customer service. The Court stated that it "anticipates that restrictive covenants will grow in importance with the continued emergence of technology driven and information based industry" due to the ease at which employees can work through computers with modems. So long as fair competition is not impeded, the courts will be unwilling to strike down covenants not to compete.

Summary

This case is part of a growing trend in Maryland towards the enforcement of covenants not to compete. As businesses increasingly use technology to compete on a national and global scale, the importance of protecting confidential materials such as business strategies, customer lists and development plans will undoubtedly become more prevalent. The willingness of courts to enforce broader restrictions must be seen as a useful tool as well as a possible hazard when hiring an individual who has recently worked for a competitor.