Overview: Non-Compete Contracts
Many Virginia employers now require that all employees sign what is called a non-competition or non-solicitation agreement. The agreement can be a separate document or may be part of a larger employment agreement.
These agreements typically provide that the employee, if he or she should stop working for the company, will not solicit the previous employers’ clients or customers for a same or similar business.
The agreement is drafted by the employer’s attorneys and is designed to protect the business interests of the employer. Employers take the position that they need to be “protected” as they have trained the new employee, invested in their development, educated them to their line of business, and shared pricing and other sensitive and competitive information.
Whether or not a non-competition agreement is valid and enforceable is a matter of legal interpretation and contract law. The lawyers at Frith Law Firm have represented both employers and employees in disputes over the validity and enforceability of these provisions. This article will serve as a brief overview of the law.
In Virginia, most courts will enforce noncompetition agreements if they are reasonable in geographic scope and limited in duration.
For example, a noncompetition agreement which forbids an ex-employee from ever selling paper products would most likely not be valid since the prohibition is without a reasonable time limitation.
Further, a noncompetition agreement which provides that a window salesman could not sell windows for 5 years in any state in the United States would most likely be unenforceable due to the unlimited geographical scope of the provision. To enforce this type of agreement would prevent the ex-employee from obtaining gainful employment in the future. Whether a particular noncompetition agreement will be valid and enforceable will depend on the facts of the case and the nature of the business which is seeking protection. To be enforceable, the agreement must be reasonable from both the employer and employee’s standpoints and not in violation of public policy.
The interests at stake in these types of disputes are great! A corporate employer needs to protect its vital financial interests in a competitive business world. An ex-employee needs to earn a living and take advantage of his work experience and knowledge.
The following list contains a short discussion of some of the more significant rulings by Virginia courts on the issues of the validity and enforceability of noncompetition agreements; also know as covenants not-to-compete:
- MicroStrategy, Inc. v. Business Objects, S.A., 233 F. Supp. 2d 789 (E.D. Va. 2002). The non-competition clause at issue barred the former employees of a computer company from influencing any employees, agents, contractors or customers for one year after leaving employment. The court found ambiguous and unfairly difficult for ex-employees to determine what conduct was permitted and what conduct was prohibited by the agreement. The court held the non-solicitation clause was unenforceable.
Parikh v. Family Care Center, Inc., 2007 WL 624384 at 2, 2007 Va. LEXIS 37 (March 2, 2007). Here the Family Care Center did not have a license to practice medicine from the Board of Medicine and therefore they had no legitimate business interest in enforcing the covenant not to compete with the plaintiff.
- Muerer v. Aeroastro, Inc., 2006 WL 169815 at 1, 2006 Va. Cir. LEXIS 1 (January 18, 2006). Held that plaintiff was entitled to recover some amount for unfair competition as per the employment contract, since the employee had not breached the covenant against unfair competition contained in the employment agreement. The employee had neither violated the terms of his employment agreement, nor infringed or threatened to infringe upon the rights accorded by his former employer.
- Omniplex World Services Corp. v. U.S. Invest. Services, Inc., 270 Va. 246, (2005). Where an employment agency brought an action against their former employee, alleging breach of employment contract, tortuous interference with employment contract and conspiracy to injure agency’s business, the court held that non-competition agreement was overbroad and unenforceable. Further, the court noted that noncompetition agreements are disfavored restraints on trade, the employer bears the burden of proof and any ambiguities in the contract will be construed in favor of the employee.
- Parr v. Alderwoods Group, Inc., 268 Va. 461 (Va., 2004). Held that non-competition clause will be enforced if it does not protect employer’s legitimate business interest, against public policy and curbs employee’s ability to earn a living.
- Market Access Intern. Inc. v. KMD Media LLC, 2006 WL 3775935, 2006 Va. Cir. LEXIS 264 (December 14, 2006). Plaintiffs produced and distributed trade publications relating to homeland security. Defendant, which sold advertising space for plaintiffs’ publications, agreed not to compete with plaintiffs by selling or promoting publications that competed with plaintiffs’. Defendant argued that the lack of any geographic limitation rendered the non-competition agreement unenforceable as a matter of law because it essentially inferred a worldwide restriction. The court stated that while there was no geographic limitation, the agreement had a duration of one year and limited the prohibited activities to those in direct competition with one journal. Thus, the mere fact that there was no geographical limitation was not fatal to the enforceability of the agreement. The agreement contemplated defendant’s continued relationships with other military publications and did not prohibit it from continuing to work in its field. The terms of the non-competition agreement were narrowly tailored to protect plaintiffs’ legitimate business interests while not prohibiting defendant from competing in its chosen field. The agreement also appeared to be narrowly tailored so that it did not offend public policy.
- Motion Control Systems, Inc. v. East, 262 Va. 33, 546 S.E.2d 424 (Va., 2001). The court found the noncompetititon clause to be overbroad and therefore unenforceable. The provision would, if enforced, have prevented the ex-employee from working for businesses not in competition with the employer, thereby exceeding the restraints necessary to protect its business.
- Simmons v. Miller, 261 Va. 561 (Va. 2001). The court found a breach of non-competitive clause in this case. The Agreement stated the employee shall not directly or indirectly, own, manage, control, be employed, participate in, or be connected in any manner with ownership, management, operation, or control of any business, which is similar to the type of business conducted by the employer for a period of three years after termination or expiration. To evaluate the non-competition agreement from employers view, his business interest was covered and from employee’s standpoint, the restraint was reasonable, not harsh, oppressive and not against public policy.
- James, Ltd. V. Saks Fifth Avenue, Inc., 272 Va. 177 (2006). Held that the former employee had violated the terms of a valid non-competition covenant. The agreement prohibited the employee from . “operating or being employed by a retail men’s clothing store, or men’s clothing sales department of a store” located within a one-mile radius of store of the employer for a period of one year following the termination of the employee’s employment. The court found the employee provided his new employer with confidential information and had breached his fiduciary duty of good faith and loyalty owed to his former employer. This breach of giving information and taking proprietary client information had caused the former employer’s a loss in profits.
- Paramount Termite Control v. Rector, 238 Va. 171, 380 S.E.2d 922(1989). Multiple employees entered into a written noncompetition agreement as a condition of their continued (at-will) employment. When the employer sought to enforce the noncompetition provision against the employees after they were terminated, the employees argued that, since they were already hired when they signed the noncompetition agreement, there was no consideration for the additional requirement and therefore unenforceable as to them. The court disagreed and found the consideration given by the employer for the additional requirement of the noncompetition agreement was the continued employment of the employees.
If you are an employer who is attempting to enforce a noncompetition agreement against an ex-employee, you must move quickly to obtain an injunction from the court to prevent the violations by the employee. You may also be entitled to collect monetary damages from the employee if you are able to prove that your company lost profits as a result of the ex-employees’ violations of the agreement.
If you are an ex-employee facing an attempt by your ex-employer to unfairly limit your job opportunities and income, you must move quickly as well to obtain a court ruling that your conduct is not prohibited or that the noncompetition agreement is unenforceable.