Tawney v. Mut. Sys. of Md. - 186 Md. 508, 47 A.2d 372 (1946)

Rule:

A bargain in restraint of trade is illegal if the restraint is unreasonable. A restraint of trade is unreasonable if it (a) is greater than is required for the protection of the person for whose benefit the restraint is imposed, or (b) imposes undue hardships upon the person restricted, or (e) is based on a promise to refrain from competition and is not ancillary to an existing employment or contract of employment. Conversely, a bargain not to compete within such territory and during such time as may be reasonably necessary for the protection of the employer or principal, without imposing undue hardship on the employee or agent, is reasonable.

Facts:

Appellees the Mutual System of Maryland Inc., a small loan company, and Management Service Inc., a holding company, filed a bill for an injunction and accounting against appellants Chester W. Tawney, Marian V. Brewer and others. As a brief background, prior to his employment by the appellee, appellant had been engaged in the small loan business. There was testimony that he brought with him from his former employer a list of its customers and solicited them by letter, and by advertisement. In this case, appellees alleged that appellants entered into employment contracts with them, whereby they agreed to keep secret the names of or any information relative to any past, present or prospective borrowers from and customers of their employers (clause J), to refrain from using any information relative to such borrowers and customers and not to persuade any such borrowers or customers to do anything that might be to the disadvantage of their employers (clause K), to keep secret and to refrain for a period of three years from the date of termination of the employment (clause L), and to refrain from engaging directly or indirectly in any business competitive with that of their employers in the City trading area for a period of two years from the date of termination of the employment (clause M). The contracts were on printed forms and of indefinite duration, each contained a clause permitting termination by either party upon five days written notice, and a severability clause. The bill further alleged that appellants, who was employed as manager and cashier, were the principal points of contact between appellee employer and its customers. However, appellants resigned and immediately engaged in a competing business. It was likewise alleged that appellants systematically solicited borrowers and customers of appellee. The lower court ruled in favor of appellees when it learned that appellants signed employment contracts that required that they keep appellees' client information secret following their employment. Appellants sought review contending that the contracts contained restrictive covenants, hence invalid for being against public policy, and even if the covenants were valid, appellees were only entitled to the relief necessary for the protection of its business.

Issue:

Were the restriction contained in the contract reasonable?

Answer:

Yes, the court ruled that clauses J, K, and L were reasonable. However, the court found that clause M was unreasonable as it would stifle competition.

Conclusion:

The court affirmed in part and reversed in part finding several terms reasonable and valid. The court explained that in this case, since the restriction was sought to enforce beyond the time when appellants, as new employees, might reasonably become acquainted with existing customers, and apply it to the whole trading area of the City and environs, wherein there were several hundred thousand people with whom the appellee had no contact whatever, and to a business where the occasional financial need of the customer, rather than the recurrent calls of the supplier, was the prime incentive. Hence, the court was of the opinion that this went beyond what was necessary to protect the good will of the appellee employer. Also, it worked an undue hardship upon the appellant employees, who would be excluded from engaging in the business for which they were specially fitted by long training and experience. Moreover, the effect of enforcing the clause M which refrained appellants from engaging directly or indirectly in any business competitive with that of their employers in the trading area for a period of two years from the date of termination of the employment, would be to stifle competition in a field where the existence of competition was clearly in the public interest. However, the court held that the covenants contained in clauses J, K, and L of the contracts were severable and enforceable in terms. Therefore, the court held that the relief should not exceed what was called for since such covenants must be strictly construed. Accordingly, the court remanded the case in order that the decree may be modified in order to enforce the covenants contained in clauses J, K, and L of the contracts, in the exclusion of clause M. Likewise, the court sustained that portion of the decree that directed an accounting.