Can Your Business Prove its Noncompete Agreements Are Reasonable?

Once upon a time, courts would routinely dismiss non-compete lawsuits brought by businesses against their former employees if the agreements at issue appeared to impose an unreasonable burden on the employee’s ability to earn a living. The rules of the game changed a bit back in 2013 when the Virginia Supreme Court decided Assurance Data v. Malyevac, where it held that in most cases, even if the agreement appears overly broad on its face, the employer should be given an opportunity to prove that for its particular business model, it has a legitimate business interest in restricting a particular employee’s ability to compete with it for the length of time and in the geographic area specified in the agreement. Proving reasonableness is often easier said than done.

For a noncompete to be enforceable in Virginia, it has to be worded so that its restrictions (a) are no greater than necessary to protect the employer’s legitimate business interests, (b) are not unduly harsh or oppressive in limiting the employee’s ability to earn a living, and (c) are reasonable considering sound public policy. It’s up to the employer to produce evidence sufficient to demonstrate each of these elements. As reasoned by the Assurance Data court, “restraints on competition are neither enforceable nor unenforceable in a factual vacuum.” A recent decision out of Fairfax County Circuit Court demonstrates how this can play out in the real world.

The Metis Group, Inc. v. Stephanie P. Allison involved a dispute between a government contractor and two of its independent contractors. The Metis Group was one of several companies included in a “blanket purchase agreement” with the United States Government for the provision of psychological and related services to the U.S. Army. Under the terms of the blanket agreement, the Army would offer various task orders to different businesses, who would then compete for the work. The Metis Group was awarded several task orders and hired a couple of psychologists, Drs. Stephanie P. Allison and David A. Kohls, as independent contractors to provide professional psychological services to the Army pursuant to the task orders. Both doctors were required to sign contracts containing the following non-compete and non-solicitation provisions:

5.1 Non-Solicitation of Clients. The Parties acknowledge and agree that Metis’ existing relationships with its Clients and the relationships made or enhanced during the course of this Agreement were derived at considerable expense and belong exclusively to Metis. Consultant agrees, represents, warrants and covenants that during the terms of this Agreement, Consultant shall not, except with respect to providing the Services, for Consultant or on behalf or in conjunction or association with any other person or other entity directly or indirectly, solicit, attempt to solicit, engage, contact, provide any professional psychological services for Client. To protect Metis and its Clients’ legitimate interests, Consultants represents, warrants and covenants that it shall comply with the restrictions set forth in this Article V.

5.2 Non-Solicitation of Employees. Consultant further agrees, represents, warrants, and covenants that during the term of this Agreement and the Restrictive Period (as defined in Section 4.2), Consultant shall not on Consultant’s own behalf or on behalf of any other person or entity, directly or indirectly: (i) induce, or attempt to induce, any employee or contractor to terminate any employment or any contractual relationship with Metis and/or any Client; (ii) interfere with or disrupt Metis’ and/or any Client’s relationship with any other Metis and/or client employee or contractor; (iii) solicit, entice, take away, employ or engage any employee or contractor employed or engaged by Metis and/or any Client with whom Metis and/or Client has a contractual relationship; or (iv) advise or recommend to a third party that it employ, entice, take away, engage, or solicit for employment or independent contractor relationship, any person employed or engaged as an independent contractor by Metis and/or its Clients.

Dr. Allison and Dr. Kohls performed work under Metis’ task orders for a period of one year. The task orders weren’t renewed and Metis had no other work for the doctors to do. The employment agreements at issue, however, remained in force as they provided that they continued until terminated, and no one had taken steps to terminate the agreements after the work dried up (at least not until after the lawsuit was filed). Eventually, both doctors found work with Preting, LLC, another company covered by the blanket purchase agreement with the U.S. Government. Metis sued, alleging the doctors had violated the terms of their noncompete agreements. courtroom-300x226The doctors filed pleas in bar, arguing that the restrictive covenants were unenforceable.

In the past, the court might have ruled on the pleadings that the noncompete provisions were unenforceable as a matter of law and summarily dismissed the case. In light of Assurance Data, however, the court gave Metis the opportunity to present evidence demonstrating the reasonableness of the restrictive covenants. The court took evidence and ultimately found that Metis Group was unable to produce any credible evidence that it needed the restrictions drafted as broadly as they were. The court sustained the pleas in bar and dismissed the case with prejudice.

The court began its analysis by noting the confusion regarding the applicable burden of proof. Normally, the party bringing a plea in bar has the burden of proving that a single issue (e.g., the unenforceability of the contract upon which the lawsuit is based) bars the plaintiff from recovery. On the other hand, it is normally up to the employer to prove that its non-compete agreements are reasonable. Specifically, an employer seeking to enforce a restrictive covenant has the burden of proving that the restriction is

  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. not against public policy.

And because Virginia does not favor non-compete agreements, an employer must prove all three of these factors before such an agreement will be deemed valid and enforceable. Courts will look primarily at the geographic scope of the restriction, the duration of the restriction, and the specific functions being restricted as it analyzes each of these three factors.

The court resolved the issue of the competing and contradictory burdens of proof by putting the burden on the party most likely to be in possession of the required evidence. Because the second element–dealing with whether enforcing the noncompete would be unduly harsh or oppressive from the perspective of the employee–implicates facts that can best be shown by the employee, the court decided that “once the employer produces some evidence that supports the restriction as to the second factor of the effects upon the employee, then the employee must come forth with evidence” to persuade the court to sustain the plea in bar and dismiss the case. The court also found it was the responsibility of “both parties” to prove whether the restrictive covenant violates public policy.

The court proceeded to find that both sides had failed to meet their respective burdens. But because all three above the above-listed elements must be proven before a restrictive covenant will be enforced, and the employer failed to prove two of those elements, the agreement was unenforceable even though the employees weren’t able to prove that complying with the agreement would have been overly burdensome to their earning a livelihood.

The court pointed to several reasons for its conclusion that Metis failed to show the restrictions were reasonable:

  • The agreement prevented the doctors from “engaging in any professional services with the United State [sic] Army anywhere in the world and for any purpose, whether or not such purposes compete with The Metis Group’s business model”
  • The agreement sought to “hoard the services of the defendants” even after the task orders had expired and the doctors were not actively performing any services for Metis Group–a practice that also violated Virginia public policy.
  • The agreement defined “Client” as the entire United States Army rather than limiting it to the specific group for which services under the task order were actually provided.
  • The agreement purported to restrict the doctors from performing “any psychological services,” rather than the specific services they provided under the task orders.

The employment agreements also contained a provision allowing the court to modify the agreements to make them enforceable, but the court declined to do so in light of Virginia’s prohibition of blue-penciling. “Virginia courts do not…rewrite contracts for the business world,” the court wrote.

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