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Liquidated Damages in Employee Non-compete

Maryland Court refuses to enforce liquidated damages provision of non-compete

On June 1, 2006, Maryland's Court of Special Appeals in Willard Packaging Co. v. Javier issued an opinion declining to enforce a liquidated damages provision in an employment contract.

Javier was a salesman for Willard Packaging. Shortly after hiring him, Willard Packaging called its employees to a meeting where the employees were requested to sign the subject agreement which contained a non-compete provision. The provision barred Javier from working for a competitor for one (1) year after he left Willard Packaging. If he violated the terms of the agreement, he agreed to a pre-set damage amount (liquidated damage) due to Willard Packaging of fifty-thousand dollars ($50,000). Javier later left the company and went to work for a direct competitor.

Willard Packaging filed suit for monetary damages based upon breach of the agreement and sought the liquidated damages. At trial, Willard Packaging relied on the liquidated damages provision and presented no evidence of actual harm to the company. The company had "borrowed" the document from a friendly competitor and placed a price tag of fifty-thousand dollars on violation of the agreement based upon Willard Packaging's costs of previous litigation against an employee over similar issues.

In its ruling, the appellate court held that the damage provision was a penalty, not based upon any reasonable expectation of actual damages to Willard Packaging, and was therefore void. The court noted: the unequal bargaining power of Javier, (an employee who was essentially forced to sign the contract), the lack of arms-length negotiations between the parties, the punitive nature of the liquidated damages provision (punished Javier, not compensated Willard Packaging), the lack of evidence of actual damages to Willard Packaging, and the lack of a calculation method for the liquidated damage amount.

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