When companies sue their former employees on the ground that they allegedly breached a broadly-worded noncompete agreement, a common defense tactic has been to file a demurrer, arguing that the complaint fails to state a claim upon which relief can be granted. The thinking was that if the noncompete agreement at issue was overly broad on its face, it would be deemed unenforceable as a matter of law and incapable of supporting a lawsuit. Those days are over, according to Assurance Data Inc. v. Malyevac, an employer-friendly ruling of Virginia’s high court decided earlier this month.
Assurance Data, Inc. (ADI) entered into an agreement with John Malyevac which required Malyevac to sell ADI’s computer products and services. The agreement contained non-competition, non-solicitation, non-disclosure and return-of-confidential-information provisions. A few months after entering into the agreement, Malyevac resigned. ADI filed a complaint in Fairfax County Circuit Court alleging that Malyevac violated the agreement. Malyevac demurred, asserting that the complaint failed to state a cognizable claim.
Like the 12(b)(6) motion to dismiss used in federal court, a demurrer tests the legal sufficiency of the facts alleged in the complaint and determines whether a complaint states a cause of action upon which relief can be granted. When ruling on a demurrer, a court may not decide the merits of a claim. (That’s what trials are for). If a complaint contains sufficient facts to inform a defendant of the nature and character of a claim, the complaint will survive a demurrer.
According to Malyevac, the non-competition and non-solicitation clauses of the agreement were overbroad and unenforceable because, for example, the non-solicitation requirement provided that it would be in force for a period of “twelve (12)” but did not specify days, weeks, months or years. ADI argued that it was entitled to present evidence to meet its burden of demonstrating the reasonableness of the restraint provisions.
The circuit court sustained the demurrer without leave to amend, holding that, as a matter of law, the provisions at issue were unenforceable. On appeal, Malyevac asserted that a circuit court can determine that no amount of evidence would render the restraints reasonable and enforceable. ADI contended that the court improperly decided the merits of Malyevac’s unenforceability argument at the demurrer stage and denied ADI the opportunity to present evidence that the restraints were reasonable and enforceable. The Virginia Supreme Court agreed with ADI.
The Court noted that an employer bears the burden of demonstrating that a restraint on competition is no greater than necessary to protect a legitimate business interest, is not unduly harsh or oppressive in limiting the employee’s ability to earn an income, and is reasonable considering sound public policy. To determine whether an employer has met its burden, a court will consider the function, scope and duration of the restriction and whether the agreement is reasonable as a whole.
Making these determinations requires the presentation of evidence. “Restraints on competition are neither enforceable nor unenforceable in a factual vacuum,” the Court explained. A restraint that appears overly broad on its face could be shown to be reasonable under particular circumstances. Each case will be different.
The Court held that when the circuit court delved into the agreement’s non-compete and non-solicitation provisions and found them to be overbroad and unenforceable as a matter of law, it was effectively ruling on the merits of the case without permitting ADI an opportunity to present evidence that the restraints were reasonable under the particular circumstances of the case. The sole purpose of a demurrer is to determine whether the facts alleged in a complaint are sufficient state a cause of action. Therefore, the circuit court improperly short-circuited the litigation without giving the employer its day in court. The Virginia Supreme Court reversed the circuit court’s order and remanded the case for further proceedings.
Does Assurance Data mean that all noncompete cases must now proceed all the way to trial? Not quite. In appropriate circumstances, employees may still defend against noncompete claims with a plea in bar, a procedure that (unlike demurrers) allows for the presentation of evidence.