Virginia Business Litigation Lawyer Blog

The online coupon industry, led by companies such as Groupon Inc., is growing rapidly, and it's still not clear which company or companies will end up the winners. With so much money potentially at stake, it's not surprising that firms are going to court to battle over their trade secrets. On October 24, 2011, Groupon filed a lawsuit in Illinois state court in Chicago, accusing two former sales managers of taking confidential trade secrets with them when they left Groupon for Google Offers, a website that competes with Groupon. Google developed the competing website after Groupon rejected its $6 billion merger offer last year.

The two men, Michael Nolan and Brian Hanna, both left in September 2011 to join Google. "In their new positions with Google Offers and/or Google, Hanna and Nolan will provide the same or similar services as they provided at Groupon," the complaint said. The two would "employ confidential and proprietary information that they learned while employed at Groupon," according to the complaint.

Trade secrets generally consist of commercial information that (1) derives independent economic value from not being generally known to, and not being readily ascertainable by proper means by, other businesses which would benefit from its disclosure; and (2) is the subject of reasonable efforts by the business to be kept secret. As examples of the "confidential and proprietary information" that the two allegedly took with them to Google, the complaint cites Groupon's deal history with merchants, the way in which Groupon structured such deals, the way in which Groupon identified merchants to participate in the deals, and Groupon's in-house sales Wiki that provided information regarding Groupon's sales practices and strategies.

Nolan and Hanna are likely to downplay the value of the information they took with them to Google. They might argue, for example, that it is not difficult or complex to learn how to target specific merchants or types of merchants with coupon deals, or that Google already has sufficient knowledge of online markets to figure out on its own how to target merchants.

In Virginia, "non-compete" agreements are enforceable if they are narrowly drawn to protect the employer's legitimate business interests, are not unduly burdensome on the employee's ability to earn a living, and are not against public policy. While Virginia courts have recognized that from a public policy perspective, businesses should be able to protect their client base from ex-employees who may leave their employ but continue in the same line of business, what is less clear is exactly which post-employment activities can be restricted before a non-compete becomes overly broad and therefore unenforceable.

The Virginia Supreme Court shed a little more light on the answer to this question yesterday, when it disagreed with itself and overruled Paramount Termite Control Co. v. Rector, 238 Va. 171 (1989). Relying on the precedent set by that case, Home Paramount Pest Control Companies, Inc. (the successor-in-interest to Paramount Termite Control) sued a former employee for breaching the same non-compete provision that was upheld in the earlier case. This time, however, the court struck it down.

The provision at issue stated as follows:

"The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever, in any city, cities, county or counties in the state(s) in which the Employee works and/or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount]."

The court's main objection to these terms was with respect to the breadth of the activities being restricted, and that fact that it extended to activities that had nothing to do with the activity actually engaged in by the former employer. While the geographic scope and duration of the restriction and were reasonable, the clear overbreadth of the function element outweighed those elements and rendered the entire clause unenforceable.

The non-compete barred the former employee from "engaging even indirectly, or concerning himself in any manner whatsoever, in the pest control business, even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary," noted the Court. Home Paramount did not have a legitimate business interest in preventing its former employees from owning stock in such corporations, so the provision was deemed overly broad.

Non-compete law in Virginia has evolved over the years. Blanket prohibitions against working for a competitor will not be upheld automatically, and often will be found overly broad. When a former employer seeks to prohibit its former employees from working for its competitors in any capacity, it must prove a legitimate business interest for doing so. In most cases, an employer is not going to be able to restrict its former employee from finding new employment with a competitor if the new job duties are unrelated to the tasks performed in the previous job.

Virginia courts will not necessarily rule on the enforceability of a restrictive covenant in an employment agreement without first examining the facts. In a recent federal-court decision from Roanoke, Judge Wilson denied a defendant's motion for judgment on the pleadings in a case involving an alleged assignment of patent rights in violation of various contractual restrictions, finding that the factual record wasn't sufficiently developed to permit a ruling.

Travis Mickle, President of KemPharm, Inc., a small early-phase biopharmaceutical company, was working as a senior research scientist for Lotus Biochemical Corporation (which became New River Pharmaceuticals ("NRP")) in 2001. At that time, he entered into an employment agreement with Lotus. In 2005, he left the company and entered into a settlement agreement governing various post-employment responsibilities.

Shire LLC, a subsidiary of NRP, sued Mickle for breach of both the original employment agreement and the settlement agreement. Shire pointed to paragraphs in the employment agreement that make all discoveries or inventions made by Mickle the property of the company; that prohibit Mickle from disclosing company confidential information for his own benefit; and that require that all patents and other intellectual property developed by Mickle be assigned to the company.

Shire asserted that Mickle breached all these provisions by developing new intellectual property based on the assigned patents after he left NRP and by assigning his interests in those new patents to KemPharm, his new company, rather than to NRP.

Mickle and KemPharm, which was also a defendant, moved for judgment on the pleadings, contending that the contract provisions in question were restrictive covenants which, on their face, were unenforceable under Virginia law. Their lawyers argued that restrictive covenants will be enforced in Virginia only if they are narrowly drawn to protect the employer's legitimate business interest, if they are not unduly burdensome on the employee's ability to earn a living, and if they are not against public policy.

Judge Wilson held, however, that ruling on the case at this early stage would be premature. He found that the determination of whether such an agreement should be enforced in equity depends on the specific facts of the case. He also noted that while courts have found broadly worded noncompete agreements without express geographic limitations facially invalid, the Virginia Supreme Court has not held that the absence of those express limitations renders confidentiality clauses or assignment agreements invalid per se.

In Virginia, non-compete agreements will be enforced if they are narrowly drawn to protect the employer's business interests, if they are not unduly restrictive of the employee's ability to earn a living, and if they are not against public policy. While noncompetes are often struck down as disfavored restraints on trade, a recent Fairfax County decision demonstrates that, when properly drafted, a non-compete or non-solicitation agreement can be a valuable tool for any business wanting to protect its competitive position in the marketplace.

Preferred Systems Solutions, Inc. v. GP Consulting, LLC, involved a dispute between a government IT contractor, Preferred Systems Solutions ("PSS") and GP Consulting, an IT consulting firm. On October 1, 2003, PSS and GP entered into an agreement in which GP would provide certain consulting services to PSS in connection with a project for the Defense Logistics Agency involving Enterprise Resource Planning software. The agreement included a non-compete provision prohibiting GP from competing with PSS for 12 months after the completion or termination of the agreement.

On February 1, 2010, GP terminated the agreement. Its last day working for PSS was February 12, 2010. Four days later, its sole member and manager, Sreenath Gajulapalli, started working for Accenture, a direct competitor of PSS, performing the same duties that he had performed for PSS. Judge R. Terrence Ney ruled that Mr. Gajulapalli's conduct was in direct violation of the non-compete agreement, which provided (in pertinent part) that:

"During the term of this Agreement and for twelve (12) months thereafter, [GP] hereby covenants and agrees that [it] will not, either directly or indirectly: (a) enter into a contract as a subcontractor with Accenture, LLP and or DLA to provide the same or similar support that PSS is providing to Accenture, LLP and/or DLA and in support of the DLA Business Systems Modernization (BSM) program."

Judge Ney noted that the noncompete was "very narrowly drawn" in that it provided specifically that GP was barred from working as a consultant for only two entities - Accenture, a private company; and directly for DLA, a government agency. Also, it proscribed the competitive conduct for only one year, and was very specific as to what sorts of activities would be prohibited; namely, work done in support of the DLA Business Systems Modernization program.

At trial, Gajulapalli admitted upon cross-examination that after he left PSS for Accenture, he worked for Accenture on the same project, at the same desk, at the same computer, and on the same problems that he used while working at PSS - just three days after leaving PSS. The court was also persuaded by the testimony of a senior vice president of PSS that there were 400-500 SAP programmer jobs in the metro D.C. area when GP entered into its contract with Accenture. Therefore, the non-compete didn't harm Gajulapalli's ability to earn a living as a SAP programmer.

For breach of the non-compete agreement, Judge Ney entered judgment against GP Consulting in the amount of $172,395.96, the damages incurred by PSS during the 12-month non-compete period.

Not all noncompete agreements in Virginia are subject to the restrictive rules governing noncompete agreements formed between employers and employees. Noncompete agreements entered into between two sophisticated parties outside of the employment context may be governed by the less-restrictive standards that govern ordinary contracts. A federal court in Virginia recently denied a motion to dismiss a breach-of-contract claim on this basis, rejecting the argument that the noncompete agreement was unenforceable as a matter of law.

In McClain v. Carucci, a construction and engineering company sued a former employee for allegedly violating a noncompete agreement by forming a competitive company. The noncompete agreement was not entered into as part of the employment relationship, but was part of a larger settlement agreement the parties signed to resolve the company's allegations that the former employee had embezzled nearly $286,000 of the company's funds.

The court found that the justification for exercising heightened scrutiny of noncompete covenants in employment agreements does not apply where the noncompete covenant is part of a post-employment settlement contract. Virginia courts have already held that where a contract for the sale of a business between a vendor and buyer contains a covenant not to compete, greater latitude is allowed in determining the reasonableness of the noncompete than when the covenant arises out of an employment contract. A different standard applies because employees usually have comparatively little bargaining power, whereas the sale of a business usually involves sophisticated parties capable of negotiating at arm's length for a fair deal.

Similarly, since McClain and Carucci negotiated the terms of the noncompete after the employment relationship had ended, the usual concerns about unequal bargaining power were absent. Here, the court reasoned, the parties negotiated at arm's length; it was not a "take it or leave it" situation imposed by an employer. Therefore, the court applied a mere "reasonableness" standard to evaluate the noncompete and did not apply the more rigorous test requiring consideration of the duration of the restraint, the geographic scope of the restraint, and the extent of the activity being restricted.

In Virginia, employers who wish to restrict their employees from competing with them in a new job need to write restrictive covenants tightly and narrowly and should define all the key terms in their noncompete and nonsolicitation agreements carefully - or the courts will not enforce the covenants and former employees will be free to disregard the restrictions. That's one of the messages of a ruling handed down recently by Judge Frederick B. Lowe of the Virginia Beach Circuit Court in a case involving a nurse practitioner who left a medical group to set up her own competing practice.

Ameanthea Blanco was a family nurse practitioner employed by Patient First Richmond Medical Group, LLC, which provided primary and urgent care to patients. She signed an employment agreement in January 2010 that contained non-competition and non-solicitation provisions. In August 2010, she resigned from Patient First, and a little over a month later, she opened her own practice nearby. Patient First sued Blanco for an injunction to enforce the non-competition and non-solicitation provisions, but the circuit judge declined to issue an injunction, finding the relevant portions of the agreement to be unenforceable.

The noncompete agreement barred Blanco, for two years after she left the company, from performing medical services of the type that she performed at Patient First in the previous 12 months, anywhere within a seven-mile radius of any Patient First center at which she "regularly provided medical services." She was restricted from doing so as an "agent, officer, director, member, partner, shareholder, independent contractor, owner or employee," and the prohibition applied if she did so "directly or indirectly."

In his ruling, Judge Lowe summarized Virginia case law on covenants not to compete and concluded that they must be reasonable from the standpoint of the employer, the employee, and sound public policy, and that the employer bears the burden of proof and that any ambiguities are to be construed against the employer. The judge noted that the "critical issue" in examining cases of this type is "whether the functional reach of the covenant is overbroad." In this case, he found that it was overbroad for several reasons. First, it was not limited to businesses that actually compete against Patient First, because it bars even "indirect" involvement and even involvement as a shareholder. That would mean that Blanco could not even own shares in a public company if the company provided the same services as Patient First at any location within seven miles of where Blanco "regularly provided medical services." Many such public companies, the judge noted, do not compete with Patient First.

Furthermore, the agreement did not define the "medical services" that are barred, nor did it define the term "indirectly." Accordingly, the judge ruled that the covenant not to compete "is overbroad and uncertain in its functional reach, and is unenforceable." He reached the same conclusion, for the same reasons, regarding the covenant prohibiting the solicitation of staff.

It's clear, therefore, that in Virginia, a non-compete clause must be fairly precisely tailored to the employer's needs and must act only against activities or businesses that compete directly with the employer. Does your noncompete prohibit the former employee from owning stock in a publicly-traded competing company? If it does, regardless of whatever other terms it contains, most Virginia courts would likely strike it as unenforceable.

Non-competition and non-solicitation clauses found in employment agreements often do not provide employers with the protection the employers assume they are getting. Virginia courts will refuse to enforce such "noncompetes" if they are written in vague terms or if they are broader than necessary to meet the employer's legitimate business interests. As restraints on trade, restrictive covenants are disfavored by the courts. Consequently, any ambiguities in the contract will be construed in the employee's favor. Fairfax Circuit Court Judge Michael F. Devine recently illustrated these principles in Daston Corp. v. MiCore Solutions, Inc., in which he upheld a nonsolicitation clause but struck down a noncompete agreement as unenforceable.

The case was brought by Daston Corporation, an information technology company that provides, among other things, a range of services based on Google Apps software, against two former employees who went to work for MiCore Solutions, a business offering similar services. Both employees had signed identical employment agreements with Daston containing both a noncompete clause and a nonsolicitation clause. The employees sought to dismiss Daston's claims, arguing that the employment agreement's restrictions were unenforceable. Judge Devine agreed in part and disagreed in part.

The court began its analysis by noting that, in Virginia, non-competition agreements will be enforced only "if the contract 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."

The non-solicitation clause in question provided that, for a period of two years after the termination of employment, "Employee will 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 court upheld the clause as enforceable, finding that the plain language is no broader than necessary to meet Daston's legitimate interest and because it only applied to solicitations for services in direct competition with Daston's services, or services developed by Daston with the employee's assistance. The court observed that the non-solicitation clause did not unduly burden the employee's ability to earn a living in his chosen field because it allowed the employee to solicit customers to provide them with services that do not directly compete with Daston's services. The court rejected arguments that the language was impermissibly vague.

The noncompete, however, was deemed overbroad and unenforceable. The relevant language provided that, for one year after the termination of employment, "Employee will not...provide Services to any Client to which Employee...provided substantially similar or related Services during Employee's employment was Daston." The court found the phrase "substantially similar or related" to be both vague and overbroad in the sense that it appeared to restrict more than was necessary to protect Daston's legitimate business interests. Therefore, the court struck the clause and severed it from the rest of the employment agreement (as permitted by the contract's severability clause).

There are no guarantees when drafting noncompete agreements. As expressly noted by Judge Devine, language deemed enforceable in one case may be found overbroad and unenforceable in a different factual context. Each case will be decided on its unique facts. Still, there are certain considerations to keep in mind. First, do not make the noncompete broader than it really needs to be, either in terms of duration, geography, or scope. If the noncompete is overly broad, most Virginia judges will strike the clause in its entirety. They are not going to blue-pencil it to conform it to Virginia law. Similarly, ensure the language is not unduly burdensome on the employee's ability to earn a living in his chosen field. The language should focus on restricting activities that directly compete with the employer's services. Finally, write in plain English that is easy to understand. If the noncompete does not fairly apprise the employee of the prohibitions on his conduct, the clause will be stricken as impermissibly vague.

In the consolidated cases of Bank of America Investment Services, Inc. v. Michael A. Byrd and Gregory F. Harris, Judge Davis of the Eastern District of Virginia (Norfolk division) denied Bank of America's motion for a preliminary injunction or temporary restraining order seeking to enjoin its former brokers from contacting clients with whom they had established personal relationships.

Both defendants were financial advisors in Norfolk who left Bank of America in March to join Wells Fargo Advisors. After switching employers, both defendants placed telephone calls to their former Bank of America clients and informed them of their departure and provided new contact information. Bank of America contended that this conduct violated their respective non-solicitation agreements, which provided that the employee:

"will not directly or indirectly solicit, invite, encourage or request any client or customer of the Company...for the purpose of: obtaining that client or customers' business for himself or herself or any other person or entity, causing such client or customer to discontinue doing business with the Company or otherwise interfering with the relationship between such clients or customers and the Company."

The Defendants insisted they did not "solicit" clients but merely provided them with updated contact information. Bank of America attempted to prove solicitation by introducing affidavits of two individuals which relied primarily on the hearsay statements of others. The court discounted the weight of the plaintiff's evidence because neither witness bothered to testify in person at the injunction hearing, and both affidavits consisted of "double hearsay."

Judge Davis noted that the issuance of a preliminary injunction is "an extraordinary remedy" which should only be granted where the moving party "clearly establishes entitlement to the relief sought." Applying the familiar Blackwelder test from the 4th Circuit, the court found that Bank of America failed to make a sufficiently strong showing of irreparable harm. While several judicial decisions have established that injunctive relief may be available where the loss of future customers or harm to goodwill makes it difficult to calculate money damages, the court wrote, injunctive relief is neither automatic nor required in such cases. The court proceeded to deny Bank of America's motion.

The lesson to Virginia businesses? If former employees are improperly soliciting customers, first consider whether an award of money damages would address the situation sufficiently. It will always be easier to sue the former employees for money than to obtain an injunction or TRO. Next, if you have actual evidence that customers are taking their business elsewhere as a result of improper solicitation, demonstrate to the court that the issue is important to your business. Don't rely on affidavits or declarations. Send a senior executive to the hearing to testify in person. If the matter is not important enough to miss a day of work for this purpose, the judge will be difficult to convince that irreparable harm is at stake. Finally, if you must rely on affidavits, at least get them from the people with personal, first-hand knowledge of the relevant events. Affidavits that rely on hearsay do not carry the same weight as affiant statements.

Herndon-based Deltek, Inc., surely thought it would have little trouble enjoining its former employees from forming a competing company in direct violation of their employment contracts.  After all, the defendants admitted that they were competing with their former employer in a manner that would fall under the noncompete provisions of their respective employment agreements.  However, in a written opinion issued on April 20, 2009, by Judge Trenga of the United States District Court for the Eastern District of Virginia (Alexandria Division), the court denied the requested injunctive relief.

Uncontested evidence demonstrated that three former Deltek employees, a Managing Director, Consulting Manager, and Services Coordinator, all of whom had access to information considered by Deltek to be confidential, proprietary, and trade secret information, left Deltek and joined Iuvo Systems, Inc., in Chantilly, Virginia.  Iuvo's business involves providing consulting and application management services relating to Deltek's proprietary accounting and financial software.  All three employees had signed noncompetition and nondisclosure agreements with Deltek.

The relevant noncompete language provided that the employees could not, for a period of two years after the termination of their employment, "directly or indirectly be engaged as an employee or consultant of any firm or corporation engaged in a business which is in competition with [Deltek]."  The agreements also prohibited the use or disclosure of "Confidential Information" or "Confidential or Proprietary Information" both during and after employment.

At least two Deltek customers, Alliant Techsystems, Inc., and TerraHealth, had left Deltek in favor of Iuvo, which Deltek believed was offering to provide consulting services at a lower cost than such services were offered by Deltek. Nevertheless, and despite that the defendants admitted that Iuvo was competing directly with Deltek, the court declined to award injunctive relief.  (Note: the court did, however, grant an injunction to enjoin Iuvo from using Deltek's trademarks on its website and to prohibit other forms of trademark infringement).

The court's ruling demonstrates the high hurdle plaintiffs must overcome in Virginia should they wish to enforce their rights on an expedited basis, prior to trial.  To obtain a preliminary injunction, courts will examine and balance (1) the likelihood of irreparable harm to the plaintiff without the injunction; (2) the likelihood of harm to the defendant with an injunction; (3) the plaintiff's likelihood of success on the merits; and (4) the public interest.

The court declined to enjoin the disclosure of confidential and proprietary information because Deltek could not point to specific information that the former employees were using in their competitive venture.  Speculation, the court found, is insufficient.  In addition, much of the information claimed by Deltek to be confidential was found to be available from other sources.

On the issue of the noncompete agreements, the court essentially found that whether the agreements would be deemed enforceable was too close to call at this early stage of the proceedings.  In Virginia, noncompetition restrictions must be no greater than necessary to protect the employer's legitimate business interests, and not unduly harsh and oppressive in curtailing an employee's right to earn a livelihood.  The court found the balance of hardships weighed slightly in Deltek's favor, but was unable to declare with certainty that the noncompete agreements were not overly broad or restrictive.  Therefore, the court denied the injunction.