What is a Non-Compete Agreement?
Non-compete agreements—sometimes called covenants not to compete—are post-employment contracts in which an employee or a company promises not to conduct business in direct competition against another company. Non-competes are designed to protect legitimate business interests on the part of the company and to prevent unfair competition. An employee who signs a non-compete is agreeing that, within the stated parameters (geographic location and timeframe), he or she won’t solicit customers, employees, or other business interests away. These agreed-upon parameters often reflect a general sense of fairness, anticipating the scope of the work that the employee does, as well as what the company offers that its competitors don’t .
In Virginia, non-competes must be no broader than what is necessary to protect these interests. A non-compete that is too broad might violate Virginia statute or may be considered overreaching. Overreaching like this is usually in reference to employees and the nature of their work for the company, but it’s also possible for a company to sign a non-compete that’s unnecessarily broad with regard to how it handles its work. When evaluating the validity of a non-compete, a Virginia court will examine the reasonableness of the agreement. Because non-competes are an area of the law that varies by state, a non-compete that is valid under federal law may not be valid under Virginia law.
Restrictions in Virginia
Virginia courts enforce non-compete agreements if they are no broader than necessary to protect a legitimate business interest. However, Virginia generally follows a strict, narrow interpretation of the "legitimate business interests" that an employer can protect through a non-compete agreement. These can include a unique, specialized employee/employer system, trade secrets, and patient/client relationships, as set forth in the Virginia Supreme Court case of Allen v. ARA Services, Inc., 545 S.E.2d 172, 178 (Va. 2001).
Virginia requires the following essential elements to establish an enforceable non-compete agreement:
The Rule of Reasonableness. Non-compete agreements must be no broader than necessary to protect the employer’s legitimate business interests, not the employer’s mere best interests. The Rule of Reasonableness analysis involves a balancing test: the restriction against public policy and private interest. The employer’s interest in the promisee’s contractual performance and the promisee’s interest in the freedom to work. Ornato v. Baker, 270 Va. 137, 140 (2005).
No unnecessary restraint on the chosen occupation. The non-compete agreement must not unreasonably restrict the former employee’s ability to acquire an adequate substitute for the former employment when the employment ceases. If it does, enforcement is not in the public interest. Restatement of the Law 2d of Contracts, Section 188, Comment b.
Geography. The geographic scope of the non-compete agreement must have a "rational relationship to the territory in which the employer intends to do business." United States v. Topco Assocs., Inc., 405 U.S. 596, 608-609 (1972). Generally, non-compete agreements are more likely to be enforced when they limit competition within a specific region rather than an entire country.
Time. The duration of the non-compete agreement must also be reasonable, consonant with its purpose, and not too long to protect the employer’s legitimate business interest. To determine the appropriate duration for a non-compete agreement, courts consider the industry, general practices, and the particular interests to be protected by the agreement. Smith v. Dr. Pepper/Seven Up Corp., 744 F.2d 182, 186 (5th Cir. 1984).
Legitimate business interests must be given primary consideration in determining reasonableness. Ornato, 270 Va. at 141. However, Virginia courts have held that even if an employer can show it has a legitimate business interest, this is not sufficient to warrant enforcement of the agreement. The Court will also consider the hardship imposed on the promisee in continuing the employment contract. Ornato, 270 Va. at 142. The Court will then weigh the employer’s interest against the interests of the promisee and interests of the public. Ornato, 270 Va. at 141, citing Restatement of Law 2d of Contracts, Section 188, Comment c.
Thus, Virginia courts will enforce a non-compete agreement if it imposes no more restraint than necessary to protect the legitimate business interests. Virginia courts are generally willing to modify unfairly broad non-compete agreements by blue penciling, to ensure only the narrowest restraint necessary to prevent unfair competition is enforced. Ornato, 270 Va. at 141.
Enforceability Factors
A Virginia court will enforce a non-compete only if it is no broader than necessary to protect the legitimate business interests of the company. Courts will restrain employees from competing if there is a legitimate business interest, and the non-compete is ancillary to an employment relationship or other business relationship, and is reasonable with respect to time and territory.
First, the non-compete must further a legitimate business interest, and such legitimate business interests may include protecting customer relationships, goodwill, and confidential information. Virginia law does not recognize the prevention of ordinary competition as a legitimate business interest sufficient to support a covenant not to compete.
Second, the non-compete must be narrowly tailored to prevent the employee from utilizing the specific confidential information and relationships that the company has developed. Courts will not uphold a non-compete used to stop the departure of every employee in a similar position, i.e., a non-solicitation clause must be specific to prevent the departing employee from soliciting those customers that he worked with while at the company.
Lastly, the non-compete must be reasonable with respect to both time and territory. As to duration, six or twelve months is usually presumed to be reasonable, while eighteen months is on the line. As to territory, a non-compete is typically enforceable within a twenty-five mile radius of the company’s headquarters or primary place of business, and sometimes even a hundred miles roundtrip from the primary place of business. Courts will not enforce a non-compete that prevents the employee from competing in an entire state where the company only competes in a portion.
Employer and Employee Considerations
Employers and Employees
While non-competes receive the bulk of the media coverage in recent years, attributable to a rise in litigation and validity challenges, these agreements have long been a well-established and largely effective standard operating procedure. They provide employers with certain rights to protect their business from unfair competition, both during and after the employment relationship ends, in exchange for valuable consideration, such as immediate employment opportunities and, if applicable, access to proprietary information, trade secrets, and confidential and intellectual property rights. In many instances, a non-compete also provides an employer protection against unwanted disclosure of information, especially where that information is highly sensitive and not publicly available. There are few things more damaging to a corporation, small business, or an individual than a former employee starting a business in direct competition armed with proprietary client lists, pricing models, and other non-publicly available information that would allow the person to have a significant market advantage.
An employee considering signing a non-compete should review the enforceability of that document with an attorney. Assessing enforceability of a non-compete agreement begins with the analysis traditionally employed by the courts – was the signed agreement intended by the parties to be binding, is the agreement ancillary to a relationship in which the employee was exposed to a legitimate protectable interest, and does the agreement preclude the employee from engaging in a type of competitive activity in a defined geographical area in a way that is reasonable in scope and duration. However, a review of enforceability must also focus on the potential for hardship and the risks involved in refusing to sign the document. In some cases, an employee has viable defenses that make it improbable that the non-compete will be enforced, but those defenses must be carefully assessed in light of the likelihood of a loss and the consequences of litigating against the former employer.
Recent Trends and Cases
The trend in Virginia continues to be for the judicial enforcement of non-compete agreements only as to the extent of the restriction necessary to protect the legitimate interests identified by the employer and not as a manage to inhibit competition and the post-employment earning capacity of the employee. Also, as has always been commonplace among Virginia Federal courts, since the enactment of the VMRA, some state courts have requested that the parties address the application of the VMRA to a challenged restriction as part of the litigation.
In Cumulus Media, Inc. v. limb,
F.3d
, 2012 U.S. App. LEXIS 7296 (4th Cir. 2012), the Fourth Circuit Court of Appeals affirmed the trial court’s finding that a non-competition agreement provision prohibiting competition "within four hundred (400) miles" was unenforceable as written since Virginia law does not contemplate limitation by geography outside the State of Virginia and there was no evidence presented demonstrating previous set areas in the industry within Virginia;
In Appraisal Institute v. O’Brien, 260 Va. 285, 535 S.E.2d 415 (2000) it was held that the traditional criteria for reasonable enforcement of non-compete restrictions also applies to provisions governing post-employment competition by a competitor; and
In OneComm, LLC v. Farha, F. Supp. 2d. 2012 U.S. Dist. Lexis 50566 (E.D. Va. Apr 11, 2012), the Eastern District Court of Virginia held that , under the VMRA, the "in markets" provision of a 5-year non-compete agreement was enforceable as written as it applied to the same area in which the employee was assigned by the former employer, RESTORING THE INTERPRETATION OF THE "IN MARKETS" RESTRICTION, notwithstanding prior holdings that the markets were not sufficient provide notice of the scope of the restriction.
The trend in the Western District seems to have been to require a showing that the "legitimate business interests" of the employer would be harmed by a former employee’s post-employment restriction if it is not enforced and that the scope of the restriction is no greater than necessary to protect the interest; Axiom Res. Mgmt., Inc. v. McNair, F. Supp. 2d., 2011 U.S. Dist. Lexis 5618 (W.D.VA Jan, 19,2011) and that the burden upon the employee is not greater than necessary, HTH, Found., Inc. v Robinson, 270 Va. 12, 613 S.E. 2d 418 (2005). This was rejected by the Southern District in Harriet & Cecil from the need to show that the employee was privy to the employer’s trade secrets or confidential information of the employer and that probable harm would occur if the employer is compelled to compete in the markets. See Personal Communications Devices v. Gordon, 277 F. Supp. 2d 598 (W.D. Va. 2003); Restoring the "In Markets" Restriction, supra; and Interdigital Tech. Corp. v. Vinson, 1993 U.S. Dist. LEXIS 9165 (E.D. Va. 1993).
Alternatives to Non-Competition
In lieu of non-compete agreements, employers may enter into confidentiality agreements with their employees. A confidentiality agreement can protect the use and disclosure of trade secrets, confidential information, proprietary information, inventions and work or relationship solicitations. In Virginia courts, a confidentiality agreement has a wider scope than a non-compete agreement, since they can restrict activities that are not competitive in nature. However, businesses should still keep in mind that confidentiality agreements are not suitable for all situations, and not every employee will be as sensitive to information. Other examples of ancillary agreements that do not usually create a significant restraint on trade could include: non-piracy agreements, non-solicitation of customers clauses, and non-solicitation of employees clauses.
Tips for Drafting Compliant Agreements
When drafting a non-compete provision, the key is to offer only so much protection as necessary to protect the employer’s legitimate business interests; an agreement that takes too much away from a worker—one that prevents the worker from working in any capacity for any employer anywhere for anywhere from a few months to several years—will simply be unenforceable. The DOLI outlines a number of acceptable geographic limit areas, and other constraints, that employers can use to restrict an employee’s future employment:
Geographically Limited, Customer Specific Non-Competition Agreements. Where a party has customer contact and the prohibition is limited to those customers and geographic territories with which the employee had contact with a stated period of further time after leaving the employer’s employ. Even a prohibitive period of as short as six months will frequently be found overbroad if applied to restrict an employee’s customer contacts.
Non-Competition Agreements Limited to Roles Transferable to the Former Employee. Upon termination of employment, an employee may be precluded from performing work that requires the use of the former employer’s good will, trade secrets or skills peculiar to a job which is transferable to another employer (i.e . franchisee, sales agent, independent contractor or licensee) if the transferability is clearly set forth in the non-competition agreement.
Non-Competition by Individuals in Public Trust Positions. An employee who holds a public trust position may not non-competitively bind himself for the performance or conduct of his public work during or after the pendency of that employment. The court may, however, enforce reasonable limitations where the individual specifically compensated with respect to the limitation, at least in part.
However a non-compete agreement is crafted, courts will invariably examine the provision in detail, and the agreement will only be enforceable if a Virginia court deems it to be balanced and fair. As the Equity Court stated in McLure v. the Radford Company, in analyzing the enforceability of a non-competition agreement, "the inevitable result in question of restrictions imposed upon an employee effectively limiting his right to earn his living is to discourage employers from employing him." 220 Va. 1123, 1132, 264 S.E.2d 190, 196 (1980). In Virginia, "the rights of the employees cannot be subordinated to an employer’s desire to promote his business interests … and bind the employees to such own interest for a longer time than is necessary for a fair settlement." Id. 16