Tabs Associates, Inc. v. Brohawn

³³² LISS, Judge. This case involves a dispute as to what is and what is not a protectable trade secret under the law of Maryland. Tabs Associates, Inc. (Tabs), the appellant herein, is in the business of presorting, by zip code, the mail of its customers so that they may receive reduced rates for mailing from the U.S. Post Office. There is nothing secret or protectable about sorting mail by zip code; the Post Office performs this procedure daily.

Tabs contends that it developed a two-pronged method which permitted it to become a profitable mail presorting business and that this method amounts to a trade secret. Historically, trade secrets have been protectable under Maryland law. In 1977, when Tabs began its operation in Baltimore, it attempted to use a mail sorting process similar to that used by the Post Office and incurred an operating loss of $15,000 in its first five months of operation. During the next several years, Tabs developed a profitable market selection process, targeting certain types of banks and local governments as customers.

Tabs also formulated an efficient system for the physical sorting of mail, known as the “kill-sort” method, which it argues is unique in the industry. Utilizing its combined system of marketing and kill-sorting, Tabs became one of the few profitable presort mail businesses in the country. Unrebutted testimony corroborated Tabs’ assertion that this system is the source of Tabs’ success, that no Tabs competitor had developed a similar process, and that many of Tabs’ competitors had failed over the same period of time because of their failure to develop a similar viable process. During 1979 and 1980, Tabs expanded its operations to fifteen cities, using the system developed in Baltimore at each new location.

In 1980, Tabs developed a Standard Operating Procedures Manual in which it committed to writing its entire system of profitable operation, from marketing through the deposit of mail. ³³³ On May 9, 1983, Tabs filed a petition in the Circuit Court for Anne Arundel County, in equity, seeking injunctive relief and damages, listing as respondents, Mary Brohawn, George Brohawn and PSM. The petition sought to prevent both the operation of PSM and its contact with Tabs’ customers. It alleged that Mr. and Mrs. Brohawn left Tabs and set up an identical business, PSM, with the same sorting system and identical customers, including one of Tabs’ actual customers, in violation of their fiduciary duties to their prior employer and Mary Brohawn’s employment contract and trade secrets agreement. In short, Tabs alleged that the appellees had appropriated the distinguishing process which Tabs alone had developed profitably and used the process for their own benefit.

On May 9, 1983, an ex parte order enjoining all three appellees from operating PSM was signed. On May 17, 1983, following a closed hearing, another judge in the Circuit Court for Anne Arundel County signed an interlocutory injunction order with respect to Mary Brohawn, only, enjoining her from further contact or communication with PSM and ordered that testimony and exhibits presented at the hearing were to be sealed, subject to further order of the court. On May 27 and 29, 1983, a final hearing was held before still another circuit court judge. At the close of Tabs’ case, appellees’ motion to dismiss was granted.

Tabs’ subsequent motion for reconsideration was denied and Tabs filed this appeal in which the following questions are raised: 1. Did the trial court err in ruling that appellants had failed to establish a prima facie case based on violation of a legally enforceable covenant not to compete? 2. Did the trial court err in ruling that appellants had failed to establish a prima facie case based on violation of a legally enforceable trade secrets agreement? 3. Did the trial court err by relying on evidence not on the record in granting appellees’ motion to dismiss? ³³⁴ During testimony, Frederick Ford, Tabs’ president, summarized the uniqueness of the Tabs process as follows: ...

Basically it is a pre-designed, pre-packaged analyzed product for certain customers. That definition and the methods in which we define that mail, first by having the marketing personnel introduce themselves to the actual customer mail operation; second, by obtaining all information concerning mail density, zip codes from the customer; third, the operations training that goes into the management and the specific design of the kill-sort bins, thereby designing a product or service for a certain type of pre-sorting customer. And the final, the movement of work flow at such a method that [is] most profitable. Once its process was developed, Tabs took steps to protect it.

Each management employee was required to sign an acknowledgement of receipt of the Standard Operating Procedures Manual, to sign a trade secret agreement and to sign an employment contract which contained a covenant not to compete. . During the mail sorting process, Tabs required that a management employee be on site at all times. Tabs’ work facilities were entirely enclosed so that competitors and the general public were prevented from observing the Tabs mail sorting process. Frederick Ford estimated that from Tabs’ beginning in 1977, until May, 1983, one hundred eighty thousand dollars in top management’s time was invested in the analysis of mail production, bin changes, and functions related to opening Tabs’ various facilities, and that an additional fifty-five or sixty thousand dollars was spent on equipment, mainly sorting bins.

During the course of Tabs’ development, Frederick Ford visited the shops of at least twenty of Tabs’ competitors, although competitors were denied access to Tabs’ facilities. Ford found few companies operating profitably and none using Tabs’ process of customer analysis. The competitors’ systems of sorting mail were similar to that used by the Post Office. ³³⁵ Appellee Mary Brohawn was hired by Tabs in 1980 as a mail clerk. Subsequently she became an assistant supervisor and signed an employment contract which contained a recitation of the proprietary and confidential nature of the Tabs business and a covenant not to compete for three years with no geographic limitation, as well as an acknowledgement of Tabs’ “trade secret security program.” Mary Brohawn had access to Tabs’ entire facilities in Baltimore and Beltsville, Maryland.

She ran the shop in the evenings, scheduled employees, communicated with customers and monitored production and mail flow. On July 7, 1982, Mary Brohawn was demoted and she immediately resigned her employment with Tabs. Mary Brohawn’s husband, George Brohawn, was also an employee of Tabs, working with his wife first as a mail clerk, then as a driver, and later as a group leader for the evening shift. As group leader, Mr. Brohawn monitored the work flow, assigned mail to clerks and substituted for Mrs. Brohawn in performing various other tasks.

George Brohawn left Tabs’ employment the same day his wife resigned, in July, 1982. There is no evidence that Mr. Brohawn signed either an employment contract or a trade secrets agreement. Earlier in his career, Mr. Brohawn had been employed with the United States Post Office, where he had seen the presorted mail come into the Post Office, and learned about presort mail requirements. In the fall of 1982, PSM Associates (PSM), a competing mail presort business, was begun by George and Mary Brohawn.

Their customers were all banks and local governments 1 with high density zip code mailings, which were the identical target business for the Tabs service. ³³⁶ Furthermore, PSM had contacted First National Bank, a customer of Tabs, and was doing business with Maryland National Bank, one of Tabs’ principal customers. Tabs first learned that the Brohawns had set up a competing business when Maryland National Bank and First National Bank of Maryland informed a Tabs vice-president that George Brohawn, representing PSM, was offering a competing presort mail service. Tabs hired the Laughlin Security Agency to observe the operations of PSM, Mary Brohawn, and George Brohawn in order to determine whether the trade secrets of Tabs were being used at PSM and whether Mary Brohawn was violating her employment contract covenant not to compete. At trial, Carl James Hoffman, a licensed private investigator, testified that for several months in early 1983 he observed Mr. Brohawn and Mrs. Brohawn inside the PSM office directing or participating in the presorting of mail.

On one occasion he went into the PSM shop and asked to see the manager. An employee of PSM, who was sorting mail, identified Mrs. Brohawn as the manager and then Mrs. Brohawn identified herself as the owner of PSM. Mr. Hoffman further testified that during his visit inside the PSM shop, he saw boxes of Maryland National Bank’s mail being sorted by PSM. When her deposition was taken in May of 1983, Mary Brohawn stated that her only “employment” since leaving Tabs was going to school to learn to sell insurance.

When his deposition was taken in May, 1983, George Brohawn testified that he was involved in a business called PSM Associates, presorting first class mail. These depositions were admitted into evidence as part of the plaintiff’s case. 1. Maryland law generally divides covenants not to compete between employer and employee into three categories: (1) restrictive covenants in cases of the sale of goodwill in a business; (2) restrictive covenants contained in an employ ³³⁷ ment agreement to protect customer lists and customer contact; and (3) restrictive covenants contained in employment agreements that protect trade secrets. 2 With respect to the covenant in the instant case, the trial judge ruled that there was no evidence of competition between Tabs and PSM, despite unrebutted testimony that a customer of Tabs, Maryland National Bank, had informed Tabs of PSM’s request to sort the bank’s mail, that Maryland National Bank had had mail sorted at the PSM location, and an admission on the record by George Brohawn that Maryland National Bank was one of PSM’s customers. The court inferred, sua sponte, that there was no competition since PSM and Tabs probably were dealing with different branches of the same bank, although such an inference on the state of the record was not available to the court in its consideration of the motion for dismissal.

The covenant in the agreement not to compete created a statewide obligation. A balancing test is generally used in which the need for protection of the employer is balanced against the hardship imposed on the employee in cases other than trade secret cases. Tuttle v. Riggs-Warfield-Roloson, Inc., 251 Md. 45 , 246 A.2d 588 (1968); Tolman Laundry v. Walker, 171 Md. 7 , 187 A. 836 (1936). In this case the former employee’s skills are primarily managerial and may be used in any other business so that no hardship would seem to be created by enforcement of the agreement.

Tabs contends, therefore, that an injunction against Mary Brohawn is proper for at least the three-year period to which she herself agreed to in her employment contract, since Tabs established that she had violated the agreement, as well as all elements which support the enforcement of such a restrictive covenant. The appellees contend that no injunction is warranted in that no significant past nor likely future damages to Tabs ³³⁸ have resulted from the alleged competition of Mary Brohawn. The Maryland cases dealing with restrictive covenants all refer to and attempt to determine whether the restraint is reasonably necessary for the protection of the employer’s business. This Court at this point in the proceedings is called upon to determine only whether Tabs established a prima facie case which was improperly dismissed by the trial court at the close of the plaintiffs’ case.

Maryland appellate courts have ruled that when ruling, on a motion to dismiss, pursuant to Maryland Rule 535, the trial judge must consider all of the evidence and all logical and reasonable inferences deducible therefrom in the light most favorable to the plaintiff. Washington Suburban Sanitary Commission v. TKU Associates, 281 Md. 1 , 376 A.2d 505 (1977); Moy v. Bell, 46 Md.App. 364 , 416 A.2d 289 (1980). The trial judge must determine if such evidence and inferences set forth a prima facie case for the cause of action alleged. Snider Bros., Inc. v. Heft, 271 Md. 409 , 317 A.2d 848 (1974).

The elements required for the establishment of a prima facie case for violation of a restrictive covenant in an employment contract which prohibits competition with a former employer are contained variously in Gill v. Computer Equipment Corp., 266 Md. 170 , 292 A.2d 54 (1972); Western Maryland Dairy v. Chenowith, 180 Md. 236 , 23 A.2d 660 (1942); Hebb v. Stump, Harvey & Cook, Inc., 25 Md.App. 478 , 334 A.2d 563 (1975). In summary, Maryland courts have sustained such covenants on a case-by-case basis as long as the provisions were a reasonable effort to protect the business of the employer. Ruhl v. F.A. Bartlett Tree Expert Co., 245 Md. 118, 125 , 225 A.2d 288 (1967). In Becker v. Bailey, 268 Md. 93, 96 , 299 A.2d 835 (1973), the Court of Appeals said: The general rule in Maryland is that if a restrictive covenant in an employment contract is supported by adequate consideration and is ancillary to the employment ³³⁹ contract, an employee’s agreement not to compete with his employer upon leaving the employment will be upheld if the restraint is confined within limits which are no wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose undue hardship on the employee or disregard the interests of the public. [Citations omitted].

Evidence presented by Tabs regarding the nature of its business and of Mary Brohawn’s employment, with the extent of her involvement in the Tabs process, 3 and the content of the restrictive covenant she executed was sufficient to establish a prima facie case. The trial judge, however, determined that there was no competition between Mary Brohawn and Tabs since “[t]here’s no bar to a similar business in a different location or one that’s not competitive with the TABS ASSOCIATES operation.” He concluded that there was no “overlapping clientele except for Maryland National” at a different location, and no violation of the covenant because there was no “trade secret in the first place” nor any “testimony [that] she used the list of clients or used the pricing information after she left Tabs.” In Becker v. Bailey, supra, at 97, 299 A.2d 835 , it was noted that “... a comparative examination of the cases in this State ... demonstrate^] that Maryland follows the general rule that restrictive covenants may be applied and enforced only against those employees who provide unique services, or to prevent the future misuse of trade secrets, routes or lists of clients, or solicitation of customers.” [Citations and footnote omitted]. [Emphasis supplied]. In the instant case, there was evidence that, despite the trial judge’s reference to Mary Brohawn’s having “a possi ³⁴⁰ ble chance of seeing lists of clients,” Mary Brohawn had access to and contact with the names of Tabs’ clients throughout her employment by Tabs. In addition, there was testimony that George Brohawn, representing PSM, had actually contacted at least one of Tabs’ customers.

The trial court’s dismissal of Tabs’ claim that Mary Brohawn had violated the covenant not to compete, based on its conclusion that Tabs failed to present a prima facie case, was, therefore, clearly erroneous. The appellees’ argument that, rather than legitimate protection, the purpose of the • restriction against Mary Brohawn for three years with no geographic limitation was purely anticompetitive, is unconvincing. The covenant attempts to restrict communication with potential clients or present customers. In Hebb v. Stump, Harvey & Cook, Inc., supra, where a similar contention was raised against enforcement of a covenant not to compete with no geographic limitation, this Court found that the lack of a specified geographic area was not crucial, where the covenant provided a reasonable protection of the employer’s right without unduly burdening the employee.

In Hebb we did not intend to foreclose all competition, but rather to foreclose competition from former employees who seek to profit from the developmental efforts expended by the employers with whom they then compete. In Silver v. Goldberger, 231 Md. 1, 6-8 , 188 A.2d 155 (1963), the Court of Appeals said: While a person may not be restrained from engaging in any business or vocation (useful to the community) which he is qualified to conduct or perform, the general rule is that restrictive covenants in a contract of employment, by which an employee as a part of his agreement undertakes not to engage in a competing business or vocation with that of his employer on leaving the employment, will be sustained if the restraint is confined within limits which are no wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose undue hardship on the- employee ³⁴¹ or disregard the interests of the public. [Citations omitted]. Contracts (containing restrictive covenants) of agents, salesmen, deliverymen and other employees, who, in operating a regular route, or in serving the same customers constantly, come into personal contact with the customers of the employer, usually come within the class or type of cases in which justification does exist. Such contracts have been held by this Court to be valid and enforceable in cases of a bakery route operator, Deuerling v. City Bakery Co., supra, a laundry route operator, Tolman Laundry v. Walker, supra, and milk and dairy products