A Review of Non-Compete Agreements in Virginia

101207-robert-byrne-blogA steady line of Supreme Court of Virginia decisions have examined the permissible depth and breadth of noncompete agreements in Virginia between employers and employees. The law regarding noncompetes in Virginia has evolved and been refined, and clauses that may have been permissible in the past may not be so at the present time. This is best illustrated by the Supreme Court’s 2011 invalidation of a noncompete in Home Paramount Pest Control, Inc. v. Shaffer. There, the Court struck a verbatim covenant that the Court had declared enforceable just 22 years earlier. Although the language of the 2011 covenant mirrored that of the 1989 covenant, the court explained that the law had been “incrementally clarified” during that period and the current state of the law justified striking the noncompete.

 The incremental clarifications noted by the Court have generally cast noncompetes in an increasingly disfavored light, and a number of decisions have whittled away the acceptable boundaries of covenants not to compete. Before reviewing the grounds upon which the Court has invalidated Virginia noncompetition agreements, it is helpful to briefly review how the Court evaluates restrictive covenants in the employment context.

 Virginia Noncompete Law in a Nutshell

 As the Court often reminds, noncompetition agreements are disfavored restraints on trade.  That being the case, employers bear the burden of proving the validity of a noncompetition agreement, and the agreement will be invalid unless it is “narrowly drawn to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy.”  These three features are tested by examining the restraint’s functional, durational, and geographical limitations for scope and reasonableness.

 Generally speaking, the law recognizes two types of legitimate business interests that justify the use of noncompetes: preventing former employees who had frequent direct customer contact from poaching clients, and preventing employees from sharing confidential information, trade secrets, or proprietary information. The right to protect these business interests, however, is far from absolute—employers can only utilize restraints than are “no greater than necessary to protect the employer’s legitimate business interests.” Motion Control Sys., Inc. v. East, 262 Va. 33, 37 (2001). If the “alleged form of competition [is] too indirect and tenuous”—such as when prohibited activities constitute forms of indirect competition—the provision is likely overbroad and unenforceable as a matter of law.  Id.

 Each covenant not to compete must be analyzed in the context in which it operated.  That so, the provision must be viewed in light of “the legitimate, protectable interests of the employer, the nature of the former and subsequent employment of the employee, whether the actions of the employee actually violated the terms of the non-compete agreements,  and the nature of the restraint in light of all the circumstances of the case.” Modern Environments, Inc. v. Stinnett. These considerations are case specific, so there is not a “one-size-fits-all-approach” when testing the validity of a noncompete. 

 Reasons Why Courts Have Struck Noncompetes

 With these general parameters in mind, the following are some of the main grounds upon which the Supreme Court has invalidated Virginia noncompetes:

 1.  Forbidding an employee from working in any capacity for a competitor.  Employers certainly have legitimate business interests in preventing employees from poaching treasured clients or utilizing the employer’s valuable proprietary information, but the restrictive covenant in question must be no greater than necessary to achieve those ends.  In Home Paramount Pest Control v. Shaffer, the Court struck a noncompete that prevented a former employee from working for a competitor in “any capacity” and “in any matter whatsoever.” As phrased, these restrictions were overbroad because they prevented the employee from being a passive stockholder in a publicly traded conglomerate that happened to own a subsidiary pest control company.  The noncompete was therefore overbroad, the Court concluded, because the clause was far greater than necessary to restrict only direct competition.

 2.  Preventing an employee from working for any company that supports the employer’s customer. Perhaps the best way for employers to protect their valuable customer relationships is by preventing departing employees from providing the same services to customers.  While that may be a legitimate goal, the Supreme Court has struck provisions that prevent employees from working for any company that provides services to the employer’s customers.  As the Omniplex World Services Corp. v. U.S. Investigations Services, Inc. Court made clear, such a restriction is overbroad because it “is not limited to employment that would be in competition” with the employer’s business.

 3.  Preventing an employee from working for any business “similar to” the employer’s business.  The Court struck this type of provision in Motion Control Systems v. East, where the Court concluded that the language in question prevented the employee from working for companies that manufactured similar, yet different, products to the employer.  Because the provision in question would, by definition, include a large number of companies that were not direct competitors of the employer, the Court invalidated the provision on the grounds it was overbroad.

 4.  Imposing Overbroad Geographic and Durational Restraints.  Where the Court has upheld noncompetes, it has done so where the provision’s geographic scope is narrowly tied to the areas in which the employer actually competes. If the employer provides services in a certain region of the world, it may be overbroad if the provision in question contains a worldwide restraint, particularly if the durational component is a “lengthy” one.  Simmons v. Miller. While the geographic and durational components cannot be viewed in isolation from the functional limitations, overly aggressive geographic and durational aspects of the agreement can invalidate the agreement even when the functional limitation is reasonable in scope.

 5.  Unduly burdening an employee’s ability to find alternative employment.  By its very nature, a covenant not to compete exists to prevent former employees from working for a competitor. But the noncompetition clause, if too restrictive on the employee’s right to earn a livelihood, may be legally invalid on the grounds it is oppressive or unduly harsh. This will most likely be the case if the restriction is excessive in length or covers areas where the employee did not perform services for the employer.

 6.  The Restrictive Covenant is Vague. It may be the case that the boundaries of prohibited employment are not clearly defined by the noncompetition clause, meaning that a former employee has a difficult time knowing whether a potential position is forbidden. When that happens, some Virginia courts have found the restriction to be impermissibly vague, which fosters an “in terrorem” effect for employees seeking alternative employee. That means, in other words, that an employee’s fear of running afoul of the noncompete unreasonably chills their efforts to find alternative employment.

 7.  The Noncompete Violates “Public Policy.” Of all the reasons for invalidating covenants not to compete, a public policy violation is perhaps the least defined. A noncompete may violate public policy by virtue of being overbroad or because it is unduly harsh on an employee’s ability to find alternative employment. There are situations, in addition, where the mere existence of a noncompete would violate public policy. Take, for example, the legal profession, where noncompetition covenants for attorneys are barred as a matter of law.  The same will likely occur for noncompetes for vital services like medical services for physicians, especially in smaller towns.

 8.  Coming soon: prohibitions that restrict “indirect competition.”  In September 2012, the  Preferred Sys. Sols., Inc. v. GP Consulting, LLC, 284 Va. 382 (2012) decision examined the enforceability of a noncompete in the context of the government contracting industry.  There, the Court grappled with the question of whether noncompetes that bar “indirect” competition would be presumptively unenforceable. The Court declined to issue a bright-line ruling that restraints prohibiting indirect competition would always be unenforceable, but it certainly hinted that such provisions might cross the line and be greater than necessary. The Court did note that provisions that restrict direct competition by indirect means were enforceable.

 Conclusion

The evolution of noncompete law in Virginia demonstrates that the Supreme Court of Virginia is moving toward a “least restrictive means” approach to analyzing noncompetition covenants.  In other words, to be enforceable, the clauses in question must be tied to direct competition, in that the clause should be limited to areas where a former employee will directly compete with an employer.  If clauses are not limited to direct competition or if they are otherwise greater than necessary, there is a chance they are unenforceable as a matter of law.

For questions about the potential enforceability of a covenant not to compete or for thoughts about how to draft an enforceable provision, please contact Robert E. Byrne, Jr., who practices as a member of the Charlottesville Noncompetition Lawyers group at MartinWren, P.C.   Bob can be reached at (434) 817-3100 or by email at byrne@martinwrenlaw.com.  MartinWren, P.C.’s Charlottesville Employment Attorneys, Overtime Lawyers, and Virginia Whistleblower Lawyers represent both Virginia employers and employees in a wide range of employment-related and litigation matters.

 

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