RECENT VIRGINIA DECISION IN A NON-COMPETE CASE
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“RICHMOND, VA — A Fairfax judge has issued a split decision in an employment dispute, striking noncompete language in a computer services contract as overly vague but finding a nonsolicitation clause enforceable.
Fairfax Circuit Judge Michael F. Devine expressly refused to add, or “blue pencil,” acceptable language to validate the noncompete clause, an issue not yet addressed by the Supreme Court of Virginia.
The dispute involves IT professionals who provided cloud computing software services. The court’s opinion hints at the difficulty of applying traditional, geographic-based noncompete agreements to those who work in the boundless world of the Web.
The case is Daston Corp. v. MiCore Solutions, Inc., VLW 010-8-136.
Daston sued to limit the activities of two former employees, Randall Spruill and David Stout, who jumped to a competitor, MiCore. Both Daston and MiCore provided consulting and information technology work based on Google Apps software along with other services.
Spruill and Stout had signed employment contracts with Daston with both nonsolicitation and noncompete clauses. The nonsolicitation clause provided that, for two years after termination, the employee would not, “directly or indirectly, solicit, invite or by any way, manner or means, attempt to induce any of Daston’s Customers to do business with a Competitor.”
The noncompete clause provided that, for one year following termination, the employee would not “directly or indirectly, expressly or tacitly, for himself or on behalf of any Competitor, provide Services to any Client to which Employee, or any individual working under the supervision of the Employee, provided substantially similar or related Services during Employee’s employment with Daston.”
The noncompeition restrictions were to apply nationwide, “due to the nationwide presence of the Clients.”
Daston sued to enforce the agreement and the defendants, Spruill, Stout and MiCore, filed a plea in bar objecting that the restrictions were unenforceable because they were facially overbroad and vague.
Devine struck the noncompete language as unenforceable but allowed the nonsolicitation clause, finding it was no broader than necessary to meet Daston’s legitimate business interest. “The plain language of the clause applies only to a fixed universe of customers, namely those that existed during the employee’s term of employment,” Devine wrote.
He found the phrase “directly or indirectly, solicit, invite or by any way, manner or means, attempt to induce” sufficiently definite to avoid the taint of vagueness.
By contrast, Devine found the phrase “substantially similar or related” in the noncompete clause impermissibly vague. Even though that phrase was used in the noncompete agreement to identify services provided to those Daston clients deemed off limits to a terminated employee, Devine interpreted the phrase as limiting what future services could be provided. The prohibition, Devine wrote, was “broader than necessary to protect Daston’s legitimate business interest.”
Devine then turned to the blue pencil issue. In the employment agreement, the parties agreed a court could modify any provision deemed unreasonable to make it enforceable. Daston urged the judge to do so with the noncompete clause.
Devine noted the Supreme Court of Virginia has not directly addressed “blue penciling” of restrictive covenants. Pointing to negative language in a 2009 circuit court opinion, Devine turned thumbs down. “This Court, likewise, declines the invitation ‘to become the employer’s scrivener’ and modify the agreement so that it complies with law.”
Fairfax attorney Michael A. Kernbach, counsel for the former Daston employees and their new employer, said he was grateful for the decision invalidating the noncompete clause. “The noncompete was the one that caused the most heartburn,” he said. “If I had to choose between the two, I’d take the noncompete any day.”
The dispute now has resolved on confidential terms, Kernbach said.
Kernbach said traditional covenants-not-to-compete have no application in the global arena of information technology. “There was no place in the IT environment where these two individuals could work,” he said. “There was nothing they could do.”
“These noncompete agreements just don’t work anymore in a non-bricks-and-mortar environment,” Kernbach said.
Two other lawyers familiar with the case took sharply conflicting views of Devine’s conclusions.
“I totally agree with the decision on the covenant not to compete,” said Virginia Beach attorney Kevin E. Martingayle who frequently represents employees seeking relief from competitive restrictions. He decried the noncompete language as “mushy.”
Not so, countered Vienna attorney R. Mark Dare, who represents management on employment issues. “First, the court overlooks the fact that the covenant only precludes working for a client of the former employer rather than from working in the same business altogether. As a result, the restrictive impact is fairly limited, so the court should give the drafter more flexibility,” Dare wrote in an e-mail.
“Second, to refuse to enforce a covenant because the ban includes ‘related’ services is totally impractical and the wrong result, but it follows a trend in some Virginia courts of searching for a word in the covenant that might be under some possible, conceivable, theoretical, hypothetical circumstance, too broad, and then striking the covenant,” Dare said, adding, “This is not a healthy trend.”
As for the nonsolicitation clause, Martingayle offered a three-part criticism of Devine’s decision to enforce the language. First, he said, the use of the term “indirect” in proscribing solicitation would bar all advertising, which goes too far. “I think that renders it overbroad on its face,” he said.
Martingayle also took issue with including government agencies in the definition of “customer” in the nonsolicitation agreement, because the limitation arguably could restrict a government’s ability to obtain services.
He further objected to the nationwide scope of the ban on solicitation. “Generally, it’s hard to prove an employer does business in every state in the union,” he said.
Devine’s reluctance to rewrite the terms of the noncompete was no surprise to Martingayle and Dare. “Judge Devine is correct about the Virginia Supreme Court,” said Dare. “They have never done it in a covenant case, but they have never said they would not do it, either.”
“In any event,” Dare continued, “trial judges almost never do it. They want the Supreme Court to do it first.”
“I thoroughly agree with the judge’s decision not to engage in blue penciling,” Martingayle said. “Their job is to grade the paper, not rewrite it.”
Martingayle pointed to a 2007 opinion by Richmond Circuit Judge Margaret P. Spencer citing with approval court decisions that blue pencil clauses are invalid, contrary to public policy, and render restrictive agreements unenforceable. The decision is Pace v. Retirement Plan Admin. Svc., Ltd., VLW 007-8-244.”
Printed by my good friends at VA Lawyers Weekly….
And I for one think it is good news that judges are taking the time to examine these agreements – and strike down language that is overly broad… so good news for the employee!!! And thanks Va Lawyers Weekly!