Maryland Court Holds Agreement to Pay Deferred Compensation to Terminated Employee was not Conditioned on the Employee's Agreement not to Compete.

Posted: Friday, November 14, 2008

By: Joshua C. Dickinson

Topic: Compensation Agreements

Maryland Court Holds Agreement to Pay Deferred Compensation to Terminated Employee was not Conditioned on the Employee's Agreement not to Compete.

By:      Joshua C. Dickinson

            Mick Messbarger

The Maryland Court of Special Appeals recently held that an employer's agreement to pay deferred compensation to a terminated employee was not conditioned on the employee's agreement not to compete for three years where both agreements were within the same employment agreement which provided only a right to set off amounts owed to the employer against amounts owed to the employee.  Aronson & Co. v. Fetridge, 957 A.2d 125 (Md Ct. Spec.App. 2008).  The Maryland Court noted that, "the right to offset in the Employment Agreement . . . . merely established the [employer's] right to reduce the amount of termination compensation owed to [the former employee] by the amount [the former employee] owed the [employer] for his compensation received from former clients in violation of the covenant not to compete."  Aronson, 957 A.2d at 136.  The Court found the termination compensation was "not a disqualifying quid pro quo for a promise to refrain from competing with the employer, but was instead, a wage due for work performed before the termination of employment, subject to the employer's right to collect what it was independently owed under [the non-compete clause] of the Employment Agreement."  Id.

In Aronson, the employer (the "Firm") and employee ("Fetridge") entered into a written Employment Agreement ("Agreement") which stated Fetridge, "shall be entitled to receive . . . . an amount equal to [his] Deferred Compensation Account [("Deferred Comp Agreement")]."  Id. at 130.  The Agreement also contained a covenant not to compete which specified that Fetridge, "shall not provide essentially the same services to the [Firm's] clients as those being provided by the [Firm] . . . during the twelve month period immediately preceding [Fetridge's] departure."  Id. at 131.  The Agreement specified that Fetridge would only be deemed to have violated the non-compete if he received compensation of $25,000 or more for competing services.  Id.  The Agreement provided the Firm a right of set-off against the amount owed to Fetridge under the Deferred Comp Agreement if Fetridge violated the non-compete.  Id.

In 2001, the Firm terminated Fetridge triggering payment under the Deferred Comp Agreement.  Id.  The Firm never made any payments to Fetridge under the Deferred Comp Agreement.  Id.  At trial, a jury found that the Firm violated the Deferred Comp Agreement and that Fetridge did not owe any set off to the Firm because of any non-compete violation.  Id. at 133.  The jury awarded Fetridge treble damages finding "there was an absence of a bona fide dispute between the parties as to any payment of terminating employee compensation that may have been due to Fetridge," under Maryland's Wage Law.  Id. (internal quotation marks omitted).

On appeal, the Maryland Court of Special Appeals, (Maryland's Intermediate Appellate Court), affirmed the trial court's verdict, finding the Agreement established the Firm's right to reduce the amount paid under the Deferred Comp Agreement by the amount Fetridge owed the Firm for compensation he received from the Firm's clients in violation of his non-compete, but that the Agreement did not condition payment under the Deferred Comp Agreement on Fetridge's agreement not to compete.  Id. at 136.  Instead, the Agreement merely allowed the Firm to set off the amount owed to Fetridge under the Deferred Comp Agreement against the amount independently owed to the Firm under the Agreement's non-compete clause.  Id.  In other words, payment of the amount owed under the Deferred Comp Agreement was not conditioned on Fetridge's non-violation of the non-compete agreement.

The lesson learned is if your intention is to make payments of monies previously earned contingent on an employee fulfilling an obligation under a non-compete agreement, this contingency must be clear and explicit to have any chance of success.

This issue will vary from state to state.