Under Virginia law, every employment contract will be considered individually by the Court to determine whether the restrictive covenant (non-competition clause) is reasonable. This means, that the Court will have to consider the industry, the employee’s job etc., when evaluating a non-compete agreement.
As you can imagine, there have been many cases that deal with accountants who have been sued by former employers or partners, alleging breach of contract, breach of non-compete.
After all, people want to stay with an accountant that they trust and will often ask that their business be transferred with their CPA.
Although your contract and case will not likely mirror any of those previously decided in the Commonwealth, it is always interesting to learn about past cases. Here are two cases involving non-competes and accountants:
Foti v. Cook (1980, Roanoke)
In Foti v. Cook, the Supreme Court of Virginia was asked to determine whether or various clauses in an accountant partnership agreement were reasonable under Virginia law.
Upon resigning from the firm, one partner (Foti) claimed his status as a partner had been terminated involuntarily as the result of the firm’s actions. He argued that if he had been “constructively” terminated, he was no longer bound by the terms of the partnership agreement.
The Roanoke Circuit Court held on the Firm’s motion for a declaratory judgment, that Foti was indeed bound by the reasonable agreement and that he was not terminated as a matter of law.
The Supreme Court of Virginia upheld the Circuit Court, citing that as partners, Foti had equal bargaining power when he entered in to the agreement: “We are not dealing here with employer and employee but with senior partners who stood upon equal footing at the bargaining table.”
Further, the Court held that the non-competition clause of two years, also providing for a penalty if breached, was reasonable: ”We find the contract in the instant case to be clear and unambiguous, and we have no difficulty in ascertaining the intent of the parties… The restrictive covenant was placed in the contract for the benefit of Foti and the other partners. It was designed to protect the legitimate business interests of the firm and to prevent the use by a withdrawing partner of confidential information to the disadvantage of the partnership.”
HOLDING: Partners are held to a higher standard that employees and reasonable penalties in a contract will be upheld under Virginia law.
McGladrey & Pullen v. Shrader (2003, Rockingham)
Plaintiff, McGladrey was a national accounting firm with its principal place of business in Iowa. It had an office in Harrisonburg, Virginia where defendant provided services as a CPA. McGladrey terminated its presence in Harrisonburg by selling the Harrisonburg office to one if its employees. In the asset purchase agreement, McGladery assigned all client relationships and contracts, client files, as well as employment contracts including its employment agreement with Shrader to the new owner.
It is not enough however that the two businesses agree that employee contracts are transferable. Under Virginia law, the employee must also agree that his or her employment agreement can be assigned. As Shrader had not agreed his non-compete agreement was assignable, the court held the new company did not have standing to sue him for breach of contract.
HOLDING: Employment contracts are generally considered contract for personal services and cannot be assigned absent written consent of all parties.
Remember that each contract is unique and will be evaluated individually by the Courts. Let us know if we can assist you with your employment agreement with a Virginia accounting firm.