Articles Posted in Noncompetition Agreements

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.

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 liquidate.jpghomes 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 lessCapital One.jpg 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.

Under Virginia law, covenants restricting the free use of land are not favored and must be strictly construed. Restrictive covenants that are unreasonably broad will not be enforced. There is a growing body of case law in Virginia governing noncompete covenants in employment contracts, but does that body of law apply to restrictive covenants in deeds? Earlier this month, the Fourth Circuit answered that question in the negative.

BP Products v. Stanley involved an appeal from the Eastern District of Virginia by BP Products North America, which had lost its motion for summary judgment against Charles V. Stanley and his business, Telegraph Petroleum Properties. BP had sued Stanley and his company to enforce a restrictive covenant in a deed, but the district court found that the restriction was overbroad and unenforceable. The Court of Appeals disagreed and reversed, finding that when analyzed under the appropriate test, the challenged prohibition was too inconsequential to invalidate the entire covenant.

Stanley leased a service station from BP in Alexandria, Virginia, subject to an agreement containing a restriction against selling fuel that was not BP-branded. Following a disagreement regarding the price of the fuel, Stanley stopped selling BP-branded fuel and started selling AmeriGO fuel, prompting the lawsuit. BP Pump.jpg

The online coupon industry, led by companies such as Groupon Inc., is growing rapidly, and it’s still not clear which company or companies will end up the winners. With so much money potentially at stake, it’s not surprising that firms are going to court to battle over their trade secrets. On October 24, 2011, Groupon filed a lawsuit in Illinois state court in Chicago, accusing two former sales managers of taking confidential trade secrets with them when they left Groupon for Google Offers, a website that competes with Groupon. Google developed the competing website after Groupon rejected its $6 billion merger offer last year.

The two men, Michael Nolan and Brian Hanna, both left in September 2011 to join Google. “In their new positions with Google Offers and/or Google, Hanna and Nolan will provide the same or similar services as they provided at Groupon,” the complaint said. The two would “employ confidential and proprietary information that they learned while employed at Groupon,” according to the complaint.

Trade secrets generally consist of commercial information that (1) derives independent economic value from not being generally known to, and not being readily ascertainable by proper means by, other businesses which would benefit from its disclosure; and (2) is the subject of reasonable efforts by the business to be kept secret. As examples of the “confidential and proprietarycoupons-moms-groupon-300x200.jpg information” that the two allegedly took with them to Google, the complaint cites Groupon’s deal history with merchants, the way in which Groupon structured such deals, the way in which Groupon identified merchants to participate in the deals, and Groupon’s in-house sales Wiki that provided information regarding Groupon’s sales practices and strategies.

In Virginia, “non-compete” agreements are enforceable if they are narrowly drawn to protect the employer’s legitimate business interests, are not unduly burdensome on the employee’s ability to earn a living, and are not against public policy. While Virginia courts have recognized that from a public policy perspective, businesses should be able to protect their client base from ex-employees who may leave their employ but continue in the same line of business, what is less clear is exactly which post-employment activities can be restricted before a non-compete becomes overly broad and therefore unenforceable.

The Virginia Supreme Court shed a little more light on the answer to this question yesterday, when it disagreed with itself and overruled Paramount Termite Control Co. v. Rector, 238 Va. 171 (1989). Relying on the precedent set by that case, Home Paramount Pest Control Companies, Inc. (the successor-in-interest to Paramount Termite Control) sued a former employee for breaching the same non-compete provision that was upheld in the earlier case. This time, however, the court struck it down.

The provision at issue stated as follows:

Virginia courts will not necessarily rule on the enforceability of a restrictive covenant in an employment agreement without first examining the facts. In a recent federal-court decision from Roanoke, Judge Wilson denied a defendant’s motion for judgment on the pleadings in a case involving an alleged assignment of patent rights in violation of various contractual restrictions, finding that the factual record wasn’t sufficiently developed to permit a ruling.

Travis Mickle, President of KemPharm, Inc., a small early-phase biopharmaceutical company, was working as a senior research scientist for Lotus Biochemical Corporation (which became New River Pharmaceuticals (“NRP”)) in 2001. At that time, he entered into an employment agreement with Lotus. In 2005, he left the company and entered into a settlement agreement governing various post-employment responsibilities.

Shire LLC, a subsidiary of NRP, sued Mickle for breach of both the original employment agreement and the settlement agreement. Shire pointed to paragraphs in the employment agreement that make all discoveries or inventions made by MickleGavel.jpg the property of the company; that prohibit Mickle from disclosing company confidential information for his own benefit; and that require that all patents and other intellectual property developed by Mickle be assigned to the company.

In Virginia, non-compete agreements will be enforced if they are narrowly drawn to protect the employer’s business interests, if they are not unduly restrictive of the employee’s ability to earn a living, and if they are not against public policy. While noncompetes are often struck down as disfavored restraints on trade, a recent Fairfax County decision demonstrates that, when properly drafted, a non-compete or non-solicitation agreement can be a valuable tool for any business wanting to protect its competitive position in the marketplace.

Preferred Systems Solutions, Inc. v. GP Consulting, LLC, involved a dispute between a government IT contractor, Preferred Systems Solutions (“PSS”) and GP Consulting, an IT consulting firm. On October 1, 2003, PSS and GP entered into an agreement in which GP would provide certain consulting services to PSS in connection with a project for the Defense Logistics Agency involving Enterprise Resource Planning software. The agreement included a non-compete provision prohibiting GP from competing with PSS for 12 months after the completion or termination of the agreement.

On February 1, 2010, GP terminated the agreement. Its last day working for PSS was February 12, 2010. Four days later, its sole member and manager, Sreenath Gajulapalli, started working for Accenture, a direct competitor of PSS, performing the Defense Logistics Agency.jpgsame duties that he had performed for PSS. Judge R. Terrence Ney ruled that Mr. Gajulapalli’s conduct was in direct violation of the non-compete agreement, which provided (in pertinent part) that:

Contact Us
Virginia: (703) 722-0588
Washington, D.C.: (202) 449-8555
Contact Information