Noncompetition Agreements Category Archives — Page 2 of 4 — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

October 10, 2016

Noncompete Restriction Against Owning Stock Not Necessarily Unenforceable

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…”

September 11, 2016

How Some Independent Contractors May Be Able to Escape Their Noncompete Restrictions

by Lee E. Berlik

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.

January 25, 2016

Non-Compete Agreements Enforceable Against Independent Contractors

by Lee E. Berlik

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.

January 1, 2016

Non-Compete Agreement Held Unenforceable Against Doctor

by Lee E. Berlik

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”).

April 30, 2015

Customer Lists and Pricing Information Aren’t Necessarily Confidential

by Lee E. Berlik

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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November 18, 2014

Are those clients really yours? Consider this before you quit.

by Guest Blogger

“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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October 6, 2014

Severance of Non-Compete Restrictions in Virginia

by Lee E. Berlik

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.

September 22, 2014

Virginia Won’t Allow You to Blue-Pencil that Non-Compete

by Lee E. Berlik

In Virginia, covenants not to compete (a.k.a. non-competition agreements or simply “noncompetes”) are considered restraints on trade and are therefore disfavored in the law. Unlike California, which prohibits them outright, Virginia will enforce such agreements if (and only if) they (1) satisfy the general principles of contract formation and enforceability, and (2) are no broader than necessary to protect the employer’s legitimate business interests. In examining breadth and overall reasonableness, Virginia courts will look primarily to provisions regarding the duration of the restriction, the geographic scope, and the activities that the agreement purports to restrict. What happens, you might ask, if a noncompete is found to be just a tad broader than it needs to be to protect the employer’s interests? Will it still be enforced to the “fullest extent of the law,” disregarding whatever phrase rendered the agreement overly broad? While that might seem the most fair outcome to many employers, if the agreement is governed by Virginia law, the noncompete will be stricken in its entirety and the employee will be free to compete as if the agreement never existed.

In some states, courts will modify any noncompete deemed unreasonable and enforce it to a degree deemed reasonable. For example, if a noncompete prohibits competitive activity for a 5-year period when the business really can’t justify imposing such a restriction beyond one year, the noncompete will be enforced but only for one year rather than the five stated in the agreement. This practice has become known as blue-penciling. Other states allow blue-penciling only if the restrictive covenant as a whole does not reveal any deliberate intent by the employer to place unreasonable and oppressive restraints on the employee. Virginia, however, does not allow blue-penciling at all. As a general rule, unreasonable covenants not to compete will be declared void and unenforceable, and courts will not modify them by re-writing contracts previously agreed to by the parties.
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May 12, 2014

No Tortious Interference Claim Without Actual Interference

by Lee E. Berlik

One of your top executives puts in his notice that he is leaving to join your fiercest competitor. Fortunately, he signed a noncompete that restricts him from doing just that. Your lawyer sends him a letter reminding him of his contractual obligations to your company, of course, but also recommends that you put the new employer on notice of the noncompete and threaten a tortious interference action against the company should it proceed to hire your employee. After all, he advises, the company has deeper pockets than the executive, and if the competitor hires him with knowledge of his contractual obligations to his existing employer, they are automatically on the hook for tortious interference. Right? Wrong, says the Fourth Circuit.

Similar facts were presented in Discovery Communications, LLC v. Computer Sciences Corporation. Discovery had an employment agreement with its chief accounting officer, Thomas Colan, which required Colan to remain with Discovery for a specific term. Discovery alleged that Colan breached his agreement by quitting his job prior to the expiration of the term to go work for CSC. Discovery alleged that it put CSC on notice of the employment agreement after CSC offered Colan employment but before the effective date of Colan’s resignation. Discovery argued that CSC tortiously interfered with the contract by hiring Colan after being put on notice of the employment agreement. The district court held that was not enough, and the Fourth Circuit agreed, affirming the dismissal of the case.
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March 24, 2014

To Enjoin Violation of Non-Compete, Must Prove Legitimate Business Interest

by Lee E. Berlik

To obtain a preliminary injunction in Virginia, a plaintiff must show (1) that he is likely to succeed on the merits; (2) that he is likely to suffer irreparable harm in the absence of preliminary relief; (3) that the balance of equities tips in his favor; and (4) that an injunction is in the public interest. Real Truth About Obama v. Federal Election Com’n, 575 F.3d 342 (4th Cir. 2009). To enjoin an ex-employee from violating his non-compete agreement, getting past the first element requires the plaintiff to persuade the court that the noncompete is no broader than necessary to protect a legitimate business interest. Courts will examine the function, scope, duration, and overall reasonableness of the restriction when making this determination. An opinion issued earlier this month in Fairfax County Circuit Court demonstrates what a high burden this can be for a plaintiff seeking to prevent its employees from working for a competitor.

Wings, LLC, provides commercial and residential vinyl, fabric, and leather repair services in Northern Virginia, the District of Columbia, Southern Maryland, and West Virginia. Wings’ customers consist primarily of auto dealerships and collision centers who hire Wings to repair car interiors on site. Wings hired two gentlemen as vinyl, velour and leather repair technicians and required them to sign agreements containing non-solicitation and non-competition provisions that prohibited them from working as technicians anywhere in Virginia, Maryland, West Virginia, and any other state in which Wings transacted business, for a period of two years following the termination of employment. (See pages 2 and 3 of the opinion for the full text of the noncompete provision).
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