Articles Posted in Noncompetition Agreements

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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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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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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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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When companies sue their former employees on the ground that they allegedly breached a broadly-worded noncompete agreement, a common defense tactic has been to file a demurrer, arguing that the complaint fails to state a claim upon which relief can be granted. The thinking was that if the noncompete agreement at issue was overly broad on its face, it would be deemed unenforceable as a matter of law and incapable of supporting a lawsuit. Those days are over, according to Assurance Data Inc. v. Malyevac, an employer-friendly ruling of Virginia’s high court decided earlier this month.

Assurance Data, Inc. (ADI) entered into an agreement with John Malyevac which required Malyevac to sell ADI’s computer products and services. The agreement contained non-competition, non-solicitation, non-disclosure and return-of-confidential-information provisions. A few months after entering into the agreement, Malyevac resigned. ADI filed a complaint in Fairfax County Circuit Court alleging that Malyevac violated the agreement. Malyevac demurred, asserting that the complaint failed to state a cognizable claim.

Like the 12(b)(6) motion to dismiss used in federal court, a demurrer tests the legal sufficiency of the facts alleged in the complaint and determines whether a complaint states a cause of action upon which relief can be granted. When ruling on a demurrer, a court may not decide the merits of a claim. (That’s what trials are for). If a complaint contains sufficient facts to VSC.JPGinform a defendant of the nature and character of a claim, the complaint will survive a demurrer.

AWP, Inc. is engaged in the business of traffic control solutions for road construction sites and emergency situations. AWP alleges that Shawn Watkins, a former employee, began his own traffic control business, Traffic Control Solutions, LLC (TCS) while still working at AWP, and that he misappropriated information he obtained from his position at AWP such as the identity, needs and issues of customers, pricing, and protocols and methodologies for traffic control. AWP deems this information protected trade secrets. Watkins also allegedly solicited four AWP employees to join him at TCS. AWP prepared to sue Watkins but settled prior to litigation, with Watkins agreeing to cease TCS operations, never work with an AWP competitor, and turn over all AWP property. Watkins also signed an affidavit stating that he was instrumental in creating TCS and had access to AWP’s trade secrets which he used without permission to underbid AWP on jobs and misappropriate AWP customers.

Instead, AWP sued its competitor Commonwealth Excavating, Inc. and its president, Ira Biggs. AWP claimed that Watkins approached Biggs and offered to sell AWP’s trade secrets and equipment for $45,000. Commonwealth allegedly offered to hire the four AWP employees who left for TCS, and it offered Watkins an $85,000 salary which Watkins refused for fear of violating his non-compete agreement. AWP believes that Watkins and Biggs plotted to have Commonwealth take over at least four of AWP’s customers, but the complaint does not state whether any of the customers accepted the offer. The complaint contains counts for common law conspiracy, statutory business conspiracy, misappropriation of trade secrets under the Virginia Uniform Trade Secrets Act (VUTSA), tortious interference with contract or business relationships and unjust enrichment. The defendants moved to dismiss.

Under Federal Rule of Civil Procedure 12(b)(6), a plaintiff must show more than a mere possibility that a defendant has acted unlawfully. Rather, a plaintiff must demonstrate enough factual matter which, if accepted as true, states a plausible claim for relief. In ruling on a 12(b)(6) motion, a court will accept factual allegations as true and construe them in the light most favorable to the plaintiff, but threadbare recitations of the elements of a cause of action are not sufficient and must be supported by sufficient facts.

The Supreme Court of Virginia recently heard appeals in Preferred Systems Solutions, Inc. v. GP Consulting, LLC, a Fairfax non-compete case previously covered by this blog. The case involved a dispute between a government contractor, Preferred Systems Solutions, Inc. (PSS) and its subcontractor, GP Consulting, LLC (GP). GP terminated its contract with PSS and entered into a contract with a PSS competitor. PSS sued GP alleging breach of contract, misappropriation of trade secrets and tortious interference with contract. The trial court awarded PSS compensatory damages based on its finding that GP breached the non-compete clause in the parties’ contract and that PSS was entitled to recover its lost profits, which it had proven with reasonable certainty. The Virginia Supreme Court affirmed.

Contracts that limit competition are not favored in Virginia and are enforceable only if narrowly drawn to protect an employer’s legitimate business interest, not unduly burdensome on an employee’s ability to earn a living and not against public policy. The court considers the function, geographic scope, and duration of the restriction in evaluating these factors.

Here, the court found that the function of the non-compete clause was narrowly drawn as it was limited to work in support of a particular program run under the auspices of a particular government agency and limited to the same or similar type of Money Stream.jpginformation technology support offered by PSS. Likewise, the twelve month duration of the non-compete was narrowly drawn in the court’s view. The court found that the lack of a specific geographic limitation was not fatal to the non-compete clause because it was so narrowly drawn to this particular project and the handful of companies in direct competition with PSS. Accordingly, the court found that the clause was enforceable.

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