Non-Compete Agreements Enforceable Against Independent Contractors

Don’t think you can get out of your non-compete agreement just because you’re a contractor and not an employee. While it’s true that independent contractors, unlike regular employees, may not owe a fiduciary duty of loyalty to the party that hired them (hence their independence), a business may legitimately require its consultants and contractors to enter into binding non-compete and non-solicitation agreements that will restrict their right to compete with the business for a reasonable length of time after their contracts end.

A few weeks ago in Newport News, Judge Raymond A. Jackson allowed a case brought by tax-preparation firm Tax International against two of its former independent contractors to go forward, denying the defendants’ motions to dismiss. The litigation involved allegations not only that the defendants had violated their non-compete agreements but also that they committed trade secret misappropriation, tortious interference with business expectancy, copyright infringement, trademark infringement, false designation of origin, and unfair competition. Judge Jackson allowed all claims to go forward, finding the allegations plausible on their face.

Accepting the allegations in the complaint as true, the court noted the following facts. Tax International uses consultants for soliciting new customers, and regular employees for the actual tax and business consultation services. The two individual defendants, Rasheme Kilburn and Lance Taylor, had both served as consultants to Tax International and had both signed confidentiality and non-compete agreements like this one. In each agreement, the defendants agreed that (1) they would not use any Tax International client’s confidential information in any effort to divert any Tax International client’s business away from Tax International; (2) they would not solicit any tax services regarding any of Tax International’s clients upon termination of their consultancy with Tax International; and (3) they would not act as a tax consultant or preparer or use any of Tax International’s strategies at any time in the future following termination of their consultancy with Tax International.

Tax International alleged that “Upon information and belief, Defendants are engaged in the business of tax preparation. Tax International and Defendants are in direct competition.” Judge Jackson had no concerns about the “information and belief” qualification and found that the complaint sufficiently alleged that Defendant breached the Agreement by operating a tax preparation business in competition with Plaintiff using Plaintiffs client information and marks. Moreover, even though the complaint apparently lacked any specific allegations regarding the taxpaperstailoring of the non-compete restrictions to its legitimate business interests, the court found the allegations sufficient to plausibly state a valid claim, finding that the alleged facts demonstrated the existence of both a legitimate business interest and that the restrictive covenant was reasonably necessary to protect that interest. The fact that the two consultants were independent contractors made absolutely no difference to the court’s analysis.

It made no difference to the trade secrets claim, either. To qualify for trade-secret protection in Virginia, an alleged trade secret must (1) maintain some independent economic value; (2) not be known or readily ascertainable by proper means; and (3) be subject to reasonable efforts to maintain secrecy. (See Trident Products and Services, LLC v. Canadian Soiless Wholesale Ltd., 859 F. Supp. 2d 771, 778 (E.D. Va. 2012)). All Tax International needed to do to get past the consultants’ motion to dismiss was establish that (1) the information at issue constituted a trade secret, and (2) that the defendants misappropriated that information. Judge Jackson was satisfied that Tax International’s customer lists were trade secrets and that if the defendants were using this client information in the course of competing with Tax International, they would be on the hook not only for breaching their non-compete agreements, but for misappropriation of trade secrets.

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