TEKsystems, Inc. v. Bolton (Maryland U.S.D.C.)

Filed: February 4, 2010
Opinion by Judge Richard D. Bennett

Held: A covenant not to compete is enforceable even where the competing former employee does not solicit his former employer's clients or use its confidential information if the scope of the restrictive covenant is limited to reasonable temporal and geographical limits, the employer is protecting legitimate business interests with the covenant, the employee has unique and specialized skills, there is no undue hardship on the employee to comply with the restriction and the public interest is served by enforcing the restrictive covenant; and the court held that it would extend the duration of the restrictive covenant for so long as the employee was in breach of it.

Facts: In 1999, the Defendant signed an employment agreement with Plaintiff, containing (among other provisions) a covenant not to compete against Plaintiff for 18 months after his employment terminated and within a 50-mile radius of his former office. Substantively, the covenant prohibited Defendant from engaging “in the business of recruiting or providing on a temporary or permanent basis technical service personnel, industrial personnel, or office support personnel” within these temporal and geographic limitations.

A separate covenant also prohibited Defendant from soliciting or competing for any persons or entities who were clients or customers of Plaintiff within the two years prior to the termination of the Defendant's employment. In 2008, the Defendant resigned from his employment with Plaintiff and, immediately thereafter, accepted a similar position in the IT-staffing business with one of Plaintiff's competitors and within the temporal and geographic limits of the covenant not to compete. None of the IT-staffing placements Defendant made for his new employer (Plaintiff's competitor) involved solicitation of or competition for Plaintiff's clients or customers. Plaintiff admitted at deposition that it was unaware of any such solicitation by Defendant.

Analysis: Under Maryland law, covenants not to compete may be enforced only against those employee who provide unique services or to prevent the future misuse of trade secrets, routes or lists of clients or solicitation of customers. Such covenants will be enforced if the restraint is confined within limits which are no wider as to area and duration than are reasonable for the protection of the business and do not impose undue hardship on the employee or disregard the interests of the public.

In reaching its decision, the court analyzed and concluded on the following:

(1) the 18-month temporal and 50 mile geographic scope of the covenant is facially reasonable and comports with similar limitation upheld by Maryland courts;

(2) the Plaintiff was protecting its legitimate business interests by enforcing the covenant because the employee was critical to the growth in revenue for the region, was key to building the personal relationships with clients in the area as required for the staffing industry, and had access to high level client contacts and confidential information;

(3) the employee at issue possessed unique and specialized skills because of his training and success in the banking industry in New York and had the most knowledge of each customer in the area;

(4) the employee would not suffer undue hardship by enforcing a covenant with the temporal and geographical restraints in this case because the employee was able to conduct business everywhere else in the world except for the area within 50 miles of New York City; and

(5) the public interest is protected by enforcing reasonable restrictive covenants against former employees of high technology and high-growth business.

In reaching its decision with respect to each factor, the court relied on Becker v. Bailey, 268 MD. 93, 299 A.2d 835 (1973); Ruhl v. F.A. Bartlett Tree Expert Co., 245 Md. 118, 225 A.2d 288 (1967); TEKsystems, Inc. v. Spotswood, 05-CV-1532-RDB, Memorandum Opinion (D. Md. June 28 2005); Intelus Corp. v. Barton, 7 F. Supp. 2d 635 (D. Md. 1998) and PADCO Advisors, Inc. v. Omdahl, 179 F. Supp. 2d 600 (D. Md. 2002).

The court granted summary judgment for Plaintiff, finding that Defendant breached the covenant by competing against Plaintiff in the IT-staffing business within the agreed temporal and geographic limits. The Plaintiff, however, would not be awarded monetary relief exceeding nominal damages because there was no proof that the Defendant solicited Plaintiff's customers or clients.

Injunctive relief against future violations of the covenant was warranted. The court held that the Plaintiff was entitled to an equitable extension of the entire 18-month period, running from the date of the court's opinion, because Defendant began violating the non-compete provision almost immediately after the termination of his employment with Plaintiff.

Practice Pointer: Plaintiff's affidavit, alleging that Defendant did, in fact, solicit Plaintiff's clients while working for his new employer, would not be considered on summary judgment. The affidavit contradicted Plaintiff's prior deposition testimony, and there was no showing that the facts asserted in the affidavit were unknown or inaccessible at the time of the deposition. Given this ruling, litigators are cautioned to prepare a Rule 30(b)(6) witness thoroughly. A party may not, on summary judgment, contradict its own Rule 30(b)(6) deposition testimony with evidence that was reasonably accessible at the time of the deposition.

The full opinion is available in PDF.

Saul Holdings Limited Partnership, et al. v. Raquel Sales, Inc. and Barefeet Enterprises, Inc. (Cir. Ct. for Mont. County)

Filed August 27, 2009
Opinion by Judge Durke G. Thompson

Held: When accelerated rent clauses provide for the payment to the landlord of a lump sum over a lengthy term and also allows the landlord the present possession of the leased premises with no incentive to mitigate its damages, the accelerated rent clause will be found to speculative and unenforceable as a penalty.

Facts: On or about January 23, 2006, Raquel Sales, Inc. (“RSI”) entered into a 10-year shopping center retail lease with Saul Holdings Limited Partnership for space in the South Dekalb Plaza Shopping Center in Decatur, Georgia and a 10-year shopping center retail lease with Briggs Chaney Plaza, LLC for space in the Briggs Chaney Shopping Center in Silver Spring, Maryland. Barefeet Enterprises, Inc. (“BFI”) executed a guaranty for each of the 10-year shopping center retail leases, whereby BFI guaranteed RSI’s performance under the terms of each of the leases, including payment of all obligations and liabilities under the terms of the leases.

On or about August 1, 2007, RSI abandoned the leased space in the shopping center in Georgia and failed to pay the rent and other fees due under the lease since October of 2007. RSI also abandoned the leased space located in Maryland in October of 2008 and ceased paying the rent and other fees due under the lease beginning in November of 2008. Saul and Briggs Chaney filed suit in the Circuit Court for Montgomery County for breach of lease against RSI and breach of guaranty against BFI seeking damages for unpaid rent and accelerated rent due under Section 29(c) of each lease.

The Court ruled that the accelerated rent due under Section 29(c) of the Georgia lease upon the breach of the lease was not permitted under Georgia law as liquidated damages, but was considered a penalty because the damages were too speculative and uncertain. The Court also found that Saul was entitled to any deficiency resulting from its re-letting of the leased space under its new 5-year lease with a replacement tenant.

With regard to Briggs Chaney, the Court similarly ruled that the accelerated rent due under Section 29(c) of the Maryland lease upon breach of the lease was not permitted under Maryland law as liquidated damages but was considered a penalty because it would disincentivize Briggs Chaney from mitigating its damages. Moreover, the Court determined that the length of the remaining lease term was far too long to fairly calculate Briggs Chaney’s damages resulting from RSI’s default. Thus it concluded that RSI was liable only for those damages resulting from Briggs Chaney’s inability to re-let the premises despite it using commercially reasonable efforts.

The Court also found BFI liable to each of Saul and Briggs Chaney for RSI’s default in accordance with the terms of the damage provisions set forth in each respective guaranty.

Analysis: In determining whether the accelerated rent due under Section 29(c) of the Georgia lease was liquidated damages or a penalty under Georgia law, the Court reviewed previous opinions of the Georgia Court of Appeals. Specifically, the Court applied the precedent set by the Georgia Court of Appeals in Peterson v. P.C. Towers, L.P., 206 Ga. App. 591 (1992), where the Georgia Court of Appeals held that accelerated rent provisions were enforceable liquidated damage clauses if the injury caused by the breach was difficult or impossible to accurately estimate, the parties to the lease intended to provide for damages rather than a penalty, and the sum stipulated in the accelerated rent provision was a reasonable pre-estimate of probable loss. This lead the Court to conclude that the damages provided for in Section 29(c) of the Georgia lease were too uncertain and speculative and, therefore, a penalty. Moreover, because Section 29(c) of the Georgia lease did not either require Saul to mitigate its damages by re-letting the premises or account for the possibility that Saul would re-let the premises, the Court found that awarding Saul the accelerated rent would provide Saul with present possession of the premises and a lump sum award for the lengthy 7 years remaining in the term, even though the awarded damages bore no relation to the actual damages suffered by Saul.

Although Maryland case law allows parties to a lease agreement to impose liability for rent, damages or any deficiency arising after re-letting premises, the question of whether accelerated rent provisions were permitted as liquidated damages had not been addressed by Maryland Courts. Because Maryland courts have generally enforced liquidated damages provisions that provide for a fair estimate of potential damages at the time that the parties entered into the contract and if the damages were incapable of being estimated at the time the parties entered into the contract, for Section 29(c) of the Maryland lease to be enforceable as a liquidated damages clause it would have to meet that standard. Briggs Chaney argued that Section 29(c) was enforceable as liquidated damages because it provided a reasonable estimate of potential damages by calculating the monthly rent at the amount due at the time of default and not at the increased amounts due in future months. Moreover, it contended that lease alleviated any concerns regarding awarding a lump sum payment of future rent for the remainder of the lease term because Maryland law required Briggs Chaney to mitigate its damages.

The Court ultimately held that Section 29(c) of the Maryland lease was a penalty and not enforceable as liquidated damages because it did not provide a fair estimate of the potential damages that would arise out of RSI’s breach of the lease. Rather, the lease provided for damages that were disproportionate to the damages that might be reasonably expected to result from RSI’s breach. As with Saul, the Court found that by awarding the lump sum provided for under Section 29(c), the Court would be providing Briggs Chaney a lump sum award for payment of rent for the remainder of the lengthy term and, at the same time, would allow the landlord present possession of the premises. As a result, Briggs Chaney would have no incentive to re-let the premises during the remainder of the term.

The Court also awarded the plaintiffs attorneys' fees and there is a brief discussion of the procedure and standards to be followed in awarding such fees.

The full opinion is available in PDF.

On November 2, 2009, the Court entered a judgment against RSI in the amount of $704,365.45 and against BFI in the amount of $402,970.53.