Maryland Case Illustrates Risks in Drafting Agreements

blogfoto          Employers drafting non-solicitation or noncompete clauses sometimes try to raise the stakes, and thus deter violations, by requiring the loser in a proceeding to enforce the clause to pay the winner’s attorney’s fees. However, employers also face substantial financial risk if they make claims of violations but their proof falls short.

          Weichert Co. of Maryland, Inc. v. Faust, 419 Md. 306, 312-13, 19 A.3d 393, 397 (Md. 2011), is a case in point. The court described the issues:

          In this case, Petitioner, Weichert Co. of Maryland, Inc. (“Weichert”), instituted a breach of contract claim against its former employee, Respondent, Dorothy Crago Faust (“Faust”). Weichert claimed that Faust violated the terms of her employment agreement by breaching the duty of loyalty, and by breaching a non-solicitation clause which was included in the contract. Under the terms of the contract, if Weichert brought a claim under the non-solicitation clause, and did not succeed on that claim, Faust would be entitled to recover attorney’s fees incurred in defending against the claim. A jury determined that Faust breached the duty of loyalty, but did not violate the non-solicitation clause. After the trial, Faust petitioned for attorney’s fees under the terms of the non-solicitation clause. Faust was awarded attorney’s fees by the Circuit Court, and the Court of Special Appeals affirmed. We shall affirm the intermediate appellate court and hold that Faust’s breach of the duty of loyalty did not result in a forfeiture of her rights under the non-solicitation clause, and thus Faust was entitled to recover attorney’s fees.

Faust was awarded $946,014.50 in attorney’s fees, and the Court upheld the award. The Court stated that Weichert could have treated Faust’s breach of the duty of loyalty as a material breach, rescinded the contract, and cut off Faust’s ability to claim fees. Instead, it chose to treat the contract as continuing in effect and sued for damages under the non-solicitation clause. The court held that Faust’s right to fees for winning on that issue was not destroyed or undermined by the finding that Faust breached his duty of loyalty. There was no fee-shifting agreement on that claim because the fee-shifting provision only applied to the non-solicitation clause.

Judge Adkins, joined by Judge Murphy, sharply disagreed with the majority on these issues, and concluded:

          Therefore, contrary to the majority’s assertion, Weichert’s pursuit of damages under the contract and its disavowal of the attorney’s fees obligation are not mutually exclusive. See Williston on Contracts, § 63:31 (4th Ed.2002) (“[W]here the contract has merely been breached, in other words, where one party has failed or refused to perform some obligation under it, … the wronged party may be excused from further performance and recover for loss occasioned to him.”) (emphasis added).

D. Conclusion

          In this case, an employee engaged in a sophisticated scheme to deprive her employer of a large portion of its work force, dealing a stunning blow to the employer’s business. In doing so, she violated the “fundamental” duty of loyalty and materially breached her employment contract. Accordingly, as the injured party, Weichert is excused from any remaining contractual obligations, and Faust, as the materially breaching party, is not entitled to the contractual benefit of attorney’s fees. The jury’s finding that she did not breach her non-solicitation clause does not mitigate her disloyal scheme to decimate her employer’s workforce. Indeed, Faust had no need to solicit after she left Weichert, as she had already filched the other employees while still on the payroll herself. For these reasons, I cannot accede to the majority’s decision to re-ward Faust’s underhanded actions, and I respectfully dissent.

419 Md. at 342-43, 19 A.3d at 415.

Usually, of course, it is the employee who falls afoul of the agreement.  If the employee violates the agreement, the employee has to face a hefty financial sanction as well as an injunction, even if the employer cannot prove damages. Any attorney advising the employee has to point out the seriousness of the risks the employee will face for violating such clauses.  This is important, because employees frequently have an unfounded belief that these clauses are never enforceable.

           Take-Away from Weichert Co. of Maryland, Inc. v. Faust: In light of the strong disagreement between the majority and minority, and in light of the fact that this happened to an extremely capable defense attorney, it is critical to obtain sound legal advice about how to proceed in similar situations in light of this decision. It may also be a good idea to insert into the severance agreement or employment agreement provisions that will govern the options for the injured party in the event of breach, and the survival of claims for pre-rescission breach of the contract.

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