Hypothetical Overbreadth May Invalidate Noncompete

The “janitor test” isn’t the only hypothetical scenario that, when applied to a non-compete agreement governed by Virginia law, can render the contract unenforceable. In NVR, Inc. v. David Nelson, the federal court in Alexandria imagined a number of hypothetical situations when struggling to interpret an ambiguous geographic limitation in a noncompete agreement. When some of those hypotheticals resulted in an unreasonable restriction, the court decided the noncompete was overly broad and therefore unenforceable.

Noncompete agreements are disfavored in Virginia because they restrain free trade. For this reason, if such an agreement is ambiguous, it will be construed in favor of the employee. Before a court will enforce the agreement, the employer will have to demonstrate that the restraint is no greater than necessary to protect a legitimate business interest; that it is not unduly harsh or oppressive in curtailing the employee’s ability to earn a livelihood; and that the terms are reasonable in light of sound public policy. Courts examine reasonableness primarily by looking at three factors: function (i.e., the activity being restricted), geographic scope (the area in which the restriction applies), and duration.

We lawyers refer to a “janitor test” when describing how trial courts typically analyze whether the activities being restricted in a noncompete agreement are too broad: they ask, in essence, (a) could this noncompete be reasonably interpreted to preclude the employee from taking a new job somewhere as a janitor? And (b) is the employee currently working as a janitor? If not, (c) is there any logical reason the employer should care, one way or the other, if its former employee (typically a highly paid executive) were to accept a low-paying position (such as a janitorial position) with little-to-no customer contact or exposure to proprietary information? Generally speaking, if a noncompete is so broadly worded that it would prevent top executives from making a massive career change and finding employment as a janitor, it will be deemed overly broad and therefore unenforceable.

Employers often complain about this test because it assumes a ludicrous and bizarre hypothetical set of facts that would never really happen. Courts have responded that employers are inviting the courts to contemplate hypotheticals when they draft broad and/or ambiguous restrictions, and that they can’t be heard to argue about face-think-about-it-1554892-300x225unreasonable interpretations of language they drafted themselves. It is their responsibility to draft clear, narrow, and reasonable terms.

In the NVR case, the court applied a similar test to the geographic element of the noncompete analysis. It has nothing to do with janitors, but with whether hypothetical fact patterns based on rational interpretations of unclear contract terms can lead to absurd or otherwise unreasonable results. If the answer is yes, the noncompete should be stricken as unenforceable.

Basically, what happened is this. NVR, the employer, makes and sells homes. They operate under a variety of trade names (such as Ryan Homes) and they do business in 28 metropolitan areas in 14 states. David Nelson was a Ryan Homes employee who worked as the Division Manager for the North Division of Charlotte, North Carolina. Ryan Homes fired him for “performance deficiencies” on August 24, 2016, and Nelson found a new job with Simonini Homes a couple of months later. Simonini also builds homes in the Charlotte area, so NVR sued him for violating his noncompete.

The relevant language of the noncompete was as follows:

During your Service and for a period of twelve (12) months after your service ends … you shall not anywhere in the Restricted Area (as defined below): … (b) render services to … any person or entity that competes with the Company or an Affiliate in the residential homebuilding, mortgage financing, or settlement services business where such services are competitive with any of the services you provided to the Company or to an Affiliate during the twenty-four (24) months prior to termination of your Service.

“Restricted Area” was defined as:

those counties and other units of local government in which the Company engaged in residential homebuilding business activities, mortgage financing business activities, or settlement services business activities, as applicable (x) over which you had any management responsibility at any time during the twenty-four months prior to termination of your Service or (y) from which you received, as part of your work duties, Confidential Information regarding such business activity, at any time during the twenty-four months prior to termination of your Service.

Here, the court was not concerned about the breadth of the activities being restricted; it noted that the provision only applied “to residential homebuilding, mortgage financing, or settlement services businesses,” and did not prohibit Nelson from engaging in any work for a homebuilding company. The geographic restriction, however, was problematic–specifically, the second part of the definition of “Restricted Area,” referring to counties from which confidential information was received.

Nelson argued that this would prohibit him from working in any county where NVR, or one of its affiliates, operates–a huge area reaching far beyond Charlotte. NVR countered that there was no evidence to show Nelson had actually received confidential information from any area outside the Charlotte area and that Nelson shouldn’t be allowed to manufacture unrealistic hypotheticals devoid of factual support, but the court agreed with Nelson.

NVR “broadly defined Confidential Information in the Agreements and in doing so, invited the Court to contemplate hypotheticals arising out of the terms,” it wrote. “These hypotheticals expose the indefiniteness of the provision’s terms.” The court took issue with the fact that “Confidential Information” was defined so broadly that it could be interpreted to restrict Nelson from working in areas far outside the Charlotte area, and noted that the agreement did not define what it means for information to come “from” a particular area when that information is sent by email (as is usually the case).

So, the court posed some hypotheticals: “Would an email containing Confidential Information sent by one of Defendant’s Chicago employees qualify as information sent from Chicago? Would the answer change if the Confidential Information was contained in an attachment to the email which was created by the home office in Virginia? What about an email to Defendant from a Charlotte employee forwarding information sent to her by Chicago employees?” Clearly, Nelson could not have been expected to determine from where he received confidential information. Therefore, there was no way for him to really know to which areas the noncompete applied. Indefinite noncompete restrictions are necessarily overbroad, so the court held the noncompete was unenforceable.

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