Non-Compete Agreement with Former Bank Executives Deemed Enforceable

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.

Even applying the tougher standard applicable in the employer-employee context, the court found the restriction reasonable. First, the Agreement was narrowly drawn to the Tri-State area for a historically accepted 5-year period to protect Capital One’s legitimate business interests, which were threatened by Kanas and Bohlsen’s ability to start a competing bank and by their former access to Capital One’s confidential information. The Agreement was also narrowly tailored in its non-compete restriction because it prohibited Kanas and Bohlsen from engaging in “the consumer and commercial banking business” “engaged in” by Capital One “as of the Separation Date.”

Second, Kanas and Bohlsen were more than able to earn a livelihood: they received $42 million in restricted stock in exchange for the non-compete agreement and the Agreement’s exceptions leave room for Kanas and Bohlsen to find new jobs. As to public policy considerations, the court emphasized that Kanas and Bohlsen are extremely sophisticated parties with sophisticated counsel, held an equal bargaining advantage to Capital One, and would have a huge windfall in the amount of $42 million if this contract is not enforced.

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