Articles Posted in Noncompetition Agreements

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It happens to every business eventually. A rogue employee defects to a competitor and immediately starts soliciting the former employer’s customers and clients, using the former employer’s trade secrets or other confidential commercial information against it. Although non-compete and non-solicitation agreements are generally disfavored in Virginia, most Virginia judges nevertheless recognize that employers have a legitimate business interest in protecting themselves from competition by former employees who possess sensitive information and will, in appropriate circumstances, compel former employees to honor their contractual commitments. This blog post provides a brief overview of the process involved in obtaining such relief from the legal system, divided into two basic steps.

Step One: Write an enforceable noncompete agreement.

The most common mistake employers make in their efforts to prevent unfair competition is to present their employees with overbroad, overreaching employment agreements. Many businesses, knowing that 99% of new employees will sign whatever piece of paper you put in front of them, cannot resist the temptation to draft their noncompete agreements in a way that is completely one-sided in favor of the employer. They might draft agreements that prohibit the employee from contacting any of its customers for 10 years after leaving the company, or that prohibit former employees from taking any kind of job within a 500-mile radius of the employer’s office. When an employer goes too far in its efforts to secure loyalty by forcing its employees to sign unreasonable contracts, those efforts can backfire by causing the contracts to become unenforceable as a matter of law.

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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.

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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.

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When the Virginia Supreme Court decided Home Paramount Pest Control Companies v. Justin Shaffer five years ago, it stressed the importance of the “function” consideration in analyzing the enforceability of non-compete agreements. To be enforceable, the court held, a noncompete agreement should not purport to restrict the employee from engaging in activities having nothing to do with the tasks performed for the former employer. The court found particularly troublesome the fact that the noncompete at issue in the Home Paramount case barred the former employee from “engaging even indirectly…in the pest control business, even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary.” What legitimate business interest would an employer have in preventing its former employees from owning stock in its competitors if the employee was not actually engaging in competitive activities? The court couldn’t identity any, so it held the noncompete was overly broad and therefore unenforceable. Since Home Paramount was decided, noncompete agreements containing restrictions against owning stock are being scrutinized more carefully. But a case decided by the Eastern District of Virginia a few weeks ago shows that such noncompete agreements will not necessarily be declared unenforceable.

The case was between Hair Club for Men, LLC, and its former employee, Lailuma Ehson, and her new company, Illusion Day Spa, LLC. Hair Club is in the business of hair replacement and hair therapies. Ehson worked at its Tysons Corner location from 2011 until 2015. When she took the job, she signed a “Confidentiality, Non-Solicitation and Non-Compete Agreement.” The noncompete clause prevented Ehson from engaging in the business of hair replacement or becoming interested in such business, directly or indirectly, “as an individual, partner, stockholder, director, officer, clerk, principal, agent, employee, or in any other relation or capacity whatsoever…”

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In Virginia, independent contractors can be held to noncompete agreements to the same extent as regular employees. But beware. A Fairfax County Circuit Court judge decided last month that all bets are off if the “independent contractor” should really have been classified as an employee. Although the Virginia Supreme Court has not yet spoken on the subject, Judge John M. Tran crafted a lengthy, well-reasoned opinion in Reading and Language Learning Center v. Sturgill holding that misclassifying employees as independent contractors violates Virginia public policy and is grounds for voiding the contract–including its noncompete and nonsolicitation provisions–even if the misclassification is unintentional. In other words, reasoned Judge Tran, independent contractors will only be bound by noncompete agreements if they have been properly classified as independent contractors.

Reading and Language Learning Center (“RLLC”) is a speech therapy practice that provides services to people with speech, language, or reading disorders. In 2014, Charlotte Sturgill was a recent graduate of a master’s program in speech-language pathology. To obtain her license and certification, Sturgill was required to complete a supervised clinical fellowship, which she arranged to do with RLLC. RLLC hired her with an agreement titled “Agreement between Private Practitioner and Independent Practitioner” which classified Sturgill as an independent contractor and contained the following non-compete clause:

RLLC and the Consultant agree not to employ any contracted employee or contract with any current client of the Other for a period of two (2) years after the expiration of the contract between RLLC and the Consultant.

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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.

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In Virginia, non-compete agreements are legal but they are not favored and not always enforceable. As restraints on free trade, they will only be enforced if the employer can prove the terms are (1) no broader than necessary to protect the employer’s legitimate business interests, (2) not unduly harsh or oppressive in curtailing the employee’s ability to make a living, and (3) not against public policy. Ultimately, the test is one of reasonableness, considering the circumstances of the business, the nature of the work, and any and all other facts that may be relevant. On December 14, 2015, allergist and immunologist Thomas Fame of Roanoke received some good news: he had been successful in challenging his two-year non-compete agreement, having persuaded the court that it unfairly restricted his right to earn a livelihood by practicing his specialty in his chosen home.

In determining whether a non-compete clause is reasonable, courts examine three factors: (1) the duration of the restriction, (2) the geographic scope of the restriction, and (3) the “function” of the restriction; namely, the precise activities the employee is restricted from engaging in. To be enforceable, the noncompete must be found reasonable as a whole, considering all three elements. If one of the factors is grossly unreasonable, it can invalidate the entire agreement, even if the other two factors are narrowly drawn. (See Home Paramount Pest Control Companies, Inc. v. Shaffer, 282 Va. 412, 419 (2011) (holding that “the clear overbreadth of the function here cannot be saved by narrow tailoring of geographic scope and duration”).

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When an employee has signed an enforceable non-competition and non-solicitation agreement, he will be prohibited from soliciting the employer’s customers for a certain length of time after the employment relationship ends. In the absence of an express non-competition clause, a former employee is generally free to compete with his former employer, even if that means contacting the former employer’s customers and offering lower prices. Without the benefit of contractual noncompetes and the remedies they provide, employers who pursue their former employees in court often argue that the employees violated their post-employment fiduciary obligations by making inappropriate use of the employer’s customer list and/or pricing data. In a recent opinion authored by Judge Liam O’Grady of the Eastern District of Virginia, the court held that customer lists aren’t automatically entitled to trade-secret or other “confidentiality” status, and that whether former employees can use the data depends on the steps taken by the employer to keep it confidential.

In Contract Associates, Inc. v. Atalay, Contract Associates, Inc. (“CAI”) sued its former employees, Senem Atalay and Michael Spade, claiming that they breached their fiduciary duties and misappropriated trade secrets when they left to form their own competing company. Neither employee had a written employment agreement. Within hours of tendering their resignations, they called three of CAI’s major clients to announce their resignations and the formation of their new, competing company. Shortly thereafter, virtually all of CAI’s major clients terminated their at-will agreements with CAI and moved their business to the defendants’ new company, costing CAI “nearly its entire revenue stream.” CAI sued for breach of fiduciary duty, misappropriation of trade secrets, tortious interference with existing and prospective contracts, and statutory business conspiracy.
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“I made a copy of the client list because they are my clients; I won the business for my company” is a refrain I hear often in consulting with former employees. We’re sorry to have to tell you that this commonly held belief is not accurate. Those clients and customers you may have generated as an employee are not “yours” to take with you. They belong to the company. Making a copy of such a list by printing it, downloading a file, copying it onto a flash drive, or emailing the list to yourself can get you into a lot of trouble because such actions violate Virginia common law as well as certain Virginia statutes. This is true whether or not employees are subject to a noncompete or nonsolicitation agreement. Here are several laws a former or soon-to-be former employee may be violating by copying or taking a former employer’s client or customer list:

If you copy, download, or upload the company’s client and/or customer lists, you may be committing the business tort (the legal term for a civil “wrong”) of conversion. Conversion is the wrongful exercise over another’s property, which deprives the owner of possession, or any act of dominion wrongfully exerted over the property in denial of or inconsistent with the owner’s rights. This means that if your former employer gets its IT people to inspect your computer or work phone and discovers you’ve taken a client list, you may be found liable for conversion of the employer’s property.
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Last month, I wrote about blue-penciling of non-competition and non-solicitation agreements and about the fact that if you are dealing with an unenforceable noncompete in Virginia, the entire clause will likely be stricken rather than amended. If you are a Virginia employer seeking to ensure your employees are actually bound by their agreements not to complete with your business post-employment, one thing you may be able to do is specify in the agreement that it will be governed by the law of a different state (i.e., one whose laws permit blue-penciling or which are otherwise considered more favorable to employers). This approach, however, will only be viable if your company (or the employee) has some significant connection with the selected state, as it is considered a violation of due process rights to surprise employees with arbitrary choice-of-law provisions. There is an easier way to ensure the noncompete provisions have teeth: make the obligations severable.

Virginia law will permit you to include a “severability clause” when drafting a noncompete agreement, permitting the court to analyze and enforce the various noncompete and non-solicitation provisions separately. The benefit to employers is that if the court finds one of the sections overly broad and therefore unenforceable, the court can “sever” the unenforceable provision and enforce the other sections, provided they don’t suffer from the same enforceability issues. For this to work, the parties need to reach an agreement (preferably expressed explicitly in the contract itself) to the effect that any restrictive covenant found by a court to be unenforceable can be severed from the agreement, leaving the remainder of the provisions intact. Such a clause might look something like this:

Severability. If any clause, provision, covenant or condition of this Agreement, or the application thereof to any person, place or circumstance, shall be held to be invalid, unenforceable, or void, the remainder of this Agreement shall remain in full force and effect.

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