Articles Posted in Noncompetition Agreements

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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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 information 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.

The Fourth Circuit Court of Appeals has affirmed a Western District of Virginia ruling upholding a non-solicitation clause in a contract for trained personnel. ProTherapy Associates, LLC contracted with nine nursing homes to provide and train licensed physical and occupational therapy and speech/language pathology personnel. To protect its interests, it included in each contract a restrictive covenant precluding the nursing homes from “directly or indirectly” soliciting or hiring Pro Therapy employees:

“Non-Solicitation. During the term of this Agreement and for one year thereafter, [the nursing home] shall not, directly or indirectly, for [the nursing home] or on behalf of any other person or business entity for the benefit of [the nursing home]: (a) solicit, recruit, entice or persuade any Therapists or other employees or contractors of [ProTherapy] who had contact with [the nursing home] pursuant to this Agreement to become employees or contractors of [the nursing home] responsible for providing services to Patients like the Services hereunder; or (b) employ or use as an independent contractor any individual who was employed or utilized as a contractor by [ProTherapy] for the provision of Services at any time during the twelve (12) months prior to such proposed employment or contracting. Recognizing that compensatory monetary damages resulting from a breach of this section would be difficult to prove, [the nursing home] agrees that such breach will render it liable to [ProTherapy] for liquidated damages in the amount of ten thousands dollars ($10,000) for each such individual.”

When the nursing homes asked for a rate reduction, ProTherapy provided a new contract with the same clause. The contract also permitted either party to terminate the contract with 90-days’ notice. Just weeks later, the parent company of the nursing homes gave ProTherapy 90-days’ notice and hired Reliant Pro Rehab, LLC to do the same job at a lower cost. During the remaining 90-day period, Reliant began recruiting ProTherapy’s personnel who were still working in the nursing homes. Reliant was able to meet with them because the nursing homes provided lists of the ProTherapy personnel and helped make them available. As a result, Reliant hired sixty four of the ProTherapy therapists for its contract.

Although Virginia courts often view non-compete covenants with disfavor, the United States District court for the Eastern District of Virginia recently upheld a non-compete agreement executed between Capital One and two of its former executives. A few months after acquiring North Fork Bank in late 2006, Capital One executed a Separation Agreement (“Agreement”) with the president of its Banking Segment, John Kanas, and Executive Vice President of Commercial Banking, John Bohlsen, both of whom previously held executive positions at North Fork Bank. The Agreement stipulated that Kanas and Bohlsen could not “engage in a Competitive Business . . . in New York, New Jersey, or Connecticut” for five years after leaving Capital One, except that they could own less than 10% of any entity for investment purposes, provide services to a competitor that Capital One did not offer, and work for a private equity firm, investment bank, or hedge fund.

Two years after leaving Capital One, Kanas and Bohlsen opened BankUnited, which only had branches in Florida but held portfolios secured by property located in the Tri-State Area. BankUnited formed a subsidiary the following year that acquired a company that made loans secured by equipment also located in the Tri-State Area. Finally, in 2011, BankUnited entered into negotiations to acquire New York-based bank Herald National, with the stipulation that Kanas and Bohlsen would not provide services to Herald National until the termination of the Agreement. Capital One sued Kanas and Bohlsen for breach of the Agreement. Kanas and Bohlsen sought summary judgment, claiming the non-compete provision in the Agreement was an unreasonable restraint of competition and should be deemed void.

In Virginia, unreasonable covenants not to compete are unenforceable. “A reasonable non-compete is: (1) narrowly drawn [as to geographic scope, duration, and function of the restriction] to protect the employer’s legitimate business interest, (2) not unduly burdensome on the employee’s ability to earn a livelihood, and (3) consistent with public policy.” Virginia courts are less likely to void non-compete covenants if they are found in agreements concerning a sale of a business or goodwill, and if policy considerations would support enforcement of the covenant. If the non-compete provisions are contained in agreements concerning the employer-employee relationship, then the employer has a heavier burden in demonstrating the reasonableness of the provision restricting competition. “Greater latitude is allowed in determining the reasonableness of a restrictive covenant when the covenant relates to the sale of a business,” the court noted.