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.