Labor: Public Sector--Uninvited Guest or Essential Party?

No matter whom you ask, noncompetes are difficult to enforce. Despite strong interests of employers in protecting customer goodwill and other assets, enforceability is determined by courts on a state-by-state and case-by-case basis. Some courts, like those in California, refuse to enforce noncompetes altogether. Others, like those in Maryland, will enforce them only if they meet common law standards of reasonableness.

At the most basic level, to be enforceable, noncompetes must: (1) establish that the employer has a legitimate, protectable interest; (2) be drafted narrowly enough to protect that interest without overreaching; and (3) not violate the public interest. In their analysis, courts review facts relating to the former employer, the former employee, and the new employer, and normally focus heavily on the first two factors. Two recent court decisions, however, added a new player in the context of government contracting: the government itself. Furthermore, an issue that is normally given short shrift in noncompete analysis, public interest, played an important role in the outcome of both cases. Here's a look at how the courts reached their decisions.

Uncle Sam Needs (All of) You

The Maryland Court of Special Appeals recently considered whether to enforce a noncompete agreement (through reversal) on behalf of Ecology Services, Inc., against follow-on contractor, Clym Environmental Services LLC. Ecology took action after several of its employees left to work for Clym on a contract with the National Institutes of Health that Ecology had previously performed, but for which it could no longer bid because of its growth.

The court found two good reasons not to enforce the noncompete: First, the follow-on contract was awarded through competitive bidding, thereby negating a protectable interest in customer goodwill, and, second, none of the workers had unique skills, contrary to Ecology's argument, which is also a protectable interest in Maryland. The court then cited this factor to bolster its decision not to enforce the noncompete: Doing so would limit the number of qualified candidates for employment with the federal government. Specifically, the court found that the "public interest" would not be served by restricting the pool of candidates available to perform services for the federal government. This suggests that in the absence of competitive bidding, or in the presence of other protectable interests, because of their impact on the government as a customer, Maryland courts may refuse to enforce noncompetes that would restrict the ability of employees to work for competing government contractors.

More Than One Contract at Issue

A Minnesota trial court recently used the language of a government contract itself to justify dismissal of an action to enforce a noncompete by The Talus Group against follow-on contractor, Topologe, LLC. The follow-on service contract won by Topologe contained FAR Clause 52.237-3 which, pursuant to Executive Order 13594, requires follow-on contractors with covered service contracts to offer employment to the outgoing contractor's nonexempt employees. Because Minnesota law prohibits the enforcement of contract clauses that violate law or public policy, the court decided that enforcement of Talus' noncompete against Topologe would violate the public interest, because it would conflict with the Executive Order. Talus has appealed this decision. Nonetheless, parties to service contracts containing this FAR Clause should factor it in to any decision about enforcement action.

Given the courts' analyses in these cases, there is some likelihood that other courts will follow suit. Many companies have recently expanded into government contracting to stabilize revenue; however, the cost of admission may be too high if doing so puts their workforces at risk. There may be an opportunity now for employers to think creatively about employee retention. In the meantime, employers would benefit from understanding, in the broadest sense, the possible ramifications of their new business plans.

Read Melissa Calhoon Jones' previous column. Read Melissa Calhoon Jones' next column.

Contributing Author

Melissa Calhoon Jones

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