Determining Validity of Noncompete Requires Evidence

Restrictive covenants in employment agreements (e.g., noncompete and nonsolicitation clauses) are enforceable in Virginia if they are (1) narrowly drawn to protect the employer’s legitimate business interests, (2) not unduly burdensome on the employee’s ability to earn a living, and (3) are not against public policy. There was once a time when litigation brought to enforce noncompete and nonsolicitation agreements would be routinely dismissed at the outset of a case based on a finding that one of these elements was lacking. For example, a noncompete provision restricting a former employee from taking a similar job with a nearby competitor for five years might have been quickly dismissed based on the judge’s quick determination that five years is simply too long.

This changed with the 2013 Virginia Supreme Court decision in Assurance Data, Inc. v. Malyevac. There, the court pointed out that every case is different, and held that an employer seeking to enforce a restrictive covenant must be given the opportunity to present evidence demonstrating reasonableness. Since this decision, some judges–like Fairfax County Circuit Court Judge John M. Tran–have opined that in appropriate cases, courts can still dismiss noncompete cases without an evidentiary hearing, such as when an employer fails to even proffer a legitimate business interest. Others hold that Assurance Data forecloses facial attacks on restrictive covenants. This appears to be the more common interpretation of the case.

Just a few days ago, Judge Urbanski of the Western District of Virginia denied a motion to dismiss a nonsolicitation case, holding that in light of Assurance Data, motions to dismiss such cases on the pleadings are no longer appropriate. The case is O’Sullivan Films v. David Neaves, decided October 24, 2017. O’Sullivan Films is not a movie studio but a Winchester-based manufacturer of plastic film products, including artificial leather. David Neaves was a chemist there from 2013 through 2016. In connection with hisĀ magnifying-glass-1579149-1-300x225employment, he signed a non-solicitation agreement containing the following restriction:

[f]or one year after [his] employment with O’Sullivan ends, either voluntarily or for cause, [he] agree[d] that [he] will not (a) sell, attempt to sell, or assist others in selling or providing products or services in competition with the Business of O’Sullivan at the Restricted Contacts; or (b) help, financially or otherwise, any person or entity to compete with the Business of O’Sullivan by using or contacting the Restricted Contacts.

Neaves quit his job in December 2016 and moved to Uniroyal Global Engineering, a direct competitor who served many of the same customers as O’Sullivan. O’Sullivan sued, seeking a declaration of enforceability and injunctive relief. Neaves moved to dismiss the case, arguing that the restriction was “facially unenforceable” due to excessive geographic scope and over-broad functional limitations.

The court, relying on Assurance Data, made no effort whatsoever to analyze the reasonableness of the restriction. Instead, it held that a presentation is evidence is required before a court can determine the extent of an employer’s business interests, whether the restriction is narrowly tailored to those interests, and how the restriction might affect the employee’s ability to earn a living. In other words, the court reasoned that even if Neaves’ nonsolicitation clause appeared very broad on its face, O’Sullivan might be able to present evidence demonstrating its reasonableness under the circumstances. For that reason, the court felt compelled to deny the motion to dismiss:

At this juncture, the court cannot determine whether the NSA is enforceable. Assurance Data requires that O’Sullivan be given the chance to present evidence that shows that the restraints in the NSA were no greater than necessary to protect its business. This in turn requires development of a factual record not available on a motion to dismiss for failure to state a claim.

 

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