Non-Competition Agreements in Virginia

Non-competition Agreements in Virginia

An employee’s duty to his employer not to compete arises out of his relationship to his employer. Restatement (Second) of Agency § 393 (1958). Thus, upon the termination of the relationship, the employee may compete with his employer unless a valid non-compete agreement prohibits such conduct. See Hilb, Rogal & Hamilton Co. v. DePew, 247 Va. 240, 249 (Va. 1994).

The Virginia Supreme Court summarized the law related to non-compete agreements again in Preferred Sys. Solutions, Inc. v. GP Consulting, LLC, 284 Va. 382, 392-393 (2012) Restraints on trade are not favored in Virginia; hence, contracts in restraint of trade are enforceable only if “narrowly drawn to protect the employer’s legitimate business interest, . . . not unduly burdensome on the employee’s ability to earn a living, and . . . not against public policy.” Omniplex World Servs. Corp. v. US Investigations Servs., Inc., 270 Va. 246, 249, 618 S.E.2d 340, 342 (2005). The employer bears the burden of proving these factors. Modern Env’ts, Inc. v. Stinnett, 263 Va. 491, 493, 561 S.E.2d 694, 695 (2002). Each non-competition agreement must be evaluated on its own merits, balancing the provisions of the contract with the circumstances of the businesses and employees involved. Omniplex World Servs. Corp. v. US Investigations Servs., 270 Va. 246, 249.  In determining whether a noncompetition agreement is valid and enforceable, the courts apply the following criteria:

1. Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than is necessary to protect the employer in some legitimate business interest?
2. From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing his legitimate efforts to earn a livelihood?
3. Is the restraint reasonable from the standpoint of a sound public policy?

New River Media Group, Inc. v. Knighton, 245 Va. 367, 369 (1993).  In evaluating these factors, the court considers the (1) function, (2) geographic scope, and (3) duration of the restriction. Home Paramount Pest Control Cos. v. Shaffer, 282 Va. 412, 415 718 S.E.2d 762, 764 (2011).  The court assesses these elements together rather than as distinct inquiries. Id. at 415-16, 718 S.E.2d at 764.  Most of the recent development in the law focuses on the first factor.

(1)   The function:

Virginia courts have consistently assessed the function element of provisions that restrict competition by determining whether the prohibited activity is of the same type as that actually engaged in by the former employer.  Home Paramount Pest Control Cos. v. Shaffer, 282 Va. 412, 416 (2011)

In Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick, 239 Va. 369, 389 S.E.2d 467 (1990), the employer was a medical equipment vendor. The court upheld a provision that prohibited employees from “open[ing] or be[ing] employed by or act[ing] on behalf of any competitor of [the] [e]mployer which renders the same or similar services.” Id. at 370, 389 S.E.2d at 468.  However, that provision included explicit language allowing employees to “work[] in the medical industry in some role which would not compete with the business” of the employer. Id. at 371, 389 S.E.2d at 468.  The court noted that “the former employees are not forbidden from working in any capacity for a medical equipment company, or from selling any type of medical equipment. They are only prohibited ‘from working in the medical industry in some role which would . . . compete with the business'” of the employer. Id. at 373, 389 S.E.2d at 469.

In Advanced Marine Enterprises, Inc. v. PRC Inc., 256 Va. 106, 501 S.E.2d 148 (1998), the employer provided marine engineering services and included in its employment agreement a provision prohibiting its employees from “rendering competing services to” any customer of the employer for whom the employee had performed services during the period of his employment. Id. at 111, 501 S.E.2d at 151. The court noted that the provision “does not contain a blanket prohibition against working for a competitor. Instead, [it] merely prohibits an employee . . . from ‘rendering competing services to'” the former employer’s customers. Id. at 119, 501 S.E.2d at 155.

In Roanoke Eng’g Sales Co. v. Rosenbaum, 223 Va. 548, 553, 290 S.E.2d 882, 885 (1982), the court held that the non-competition covenant was reasonable because the employment restriction was limited to activities similar to business conducted by former employer.

In Home Paramount Pest Control Cos. v. Shaffer, 282 Va. 412, 418, 718 S.E.2d (2011), the court held that because Home Paramount did not confine the function element of the Provision to those activities it actually engaged in, it bore the burden of proving a legitimate business interest in prohibiting the former employee from engaging in all reasonably conceivable activities while employed by a competitor. (Overruling the decision addressing the same provision in Paramount Termite Control Co. v. Rector, 238 Va. 171, 380 S.E.2d 922, (1989)).

In Simmons v. Miller, 261 Va. 561, 580, 544 S.E.2d 666, 678 (Va. 2001), the non-compete was unenforceable where it prohibited former employees from “directly or indirectly own[ing], manag[ing], control[ing], be[ing] employed by, participat[ing] in, or be[ing] connected in any manner with ownership, management, operation, or control of any business similar to the type of business conducted by” the former employer. The court concluded the provision was “considerably broader than” the former employer’s business activity, which was limited to the importation of a single, “particular brand of cigars grown and manufactured in the Canary Islands.” Id. at 581, 544 S.E.2d at 678.

Similarly, in Motion Control Systems, Inc. v. East, 262 Va. 33, 546 S.E.2d 424 (2001), the non-compete was unenforceable where the terms of the agreement  also prohibited any employee from “directly or indirectly own[ing], manag[ing], operat[ing], control[ing], be[ing] employed by, participat[ing] in, or be[ing] associated in any manner with the ownership, management, operation or control of any business similar to the type of business conducted by” the former employer, namely the “design[], manufacture[], [sale] or distribut[ion of] motors, motor drives or motor controls.” Id. at 36, 546 S.E.2d at 425. The functional limitation was too broad because the former employer dealt solely with specialized brushless motors. Id. at 37-38, 546 S.E.2d at 426.

In Omniplex World Servs. Corp. v. US Investigations Servs., 270 Va. 246, 249, 618 S.E.2d 340, (2005), the court observed that valid provisions prohibit “an employee from engaging in activities that actually or potentially compete with the employee’s former employer.” 270 Va. at 249, 618 S.E.2d at 342 (emphasis added). But a former employee may find new employment with his former employer’s competitor in which he engages exclusively in activities that do not compete with the former employer. See Blue Ridge Anesthesia, 239 Va. at 373, 389 S.E.2d at 469 (noting the unenforceability of a provision prohibiting employment that competed with any branch of the former employer’s operations when the former employee had no connection to some of those branches). When a former employer seeks to prohibit its former employees from working for its competitors in any capacity, it must prove a legitimate business interest for doing so. Modern Env’Ts v. Stinnett, 263 Va. 491, 495, 561 S.E.2d 694, 696 (2002.)

(2)   The Geographic Scope.

The dissent asserted in Omniplex World Servs. Corp. v. US Investigations Servs., 270 Va. 246, 249, 618 S.E.2d 340, (2005), asserted that the trial court found the restrictive covenant overly broad because it had no geographic specification, which the majority did not address, criticizing both the trial court’s conclusion and the majority holding that the covenant was unreasonable because it did not limit the prohibited positions to those of direct competition. (Justices Agee, Keenan and Kinser) citing National Homes Corp. v. Lester Indus., Inc., 293 F. Supp. 1025, 1034 (W.D. Va. 1968) (citation omitted), aff’d in part and rev’d in part, 404 F.2d 225 (4th Cir. 1968), The United States Court of Appeals for the Fourth Circuit held that “with respect to the territory to which the restriction should apply, the rule has always been that it might extend to the limits wherein the plaintiff’s trade would be likely to go. The changes which have marked the course of judicial decisions in modern times seem to consist in conforming the application of the rule to the constant development of the facilities of commerce and the enlargement of the avenues of trade.”

In Advanced Marine Enterprises v. PRC Inc., 256 Va. 106, 111, 127, 501 S.E.2d 148, 151, 160 (1998), the court upheld a noncompete agreement which prohibited a former employee from competing with the employer within 50 miles of any of the employer’s offices, noting that that even though the employer had 300 offices worldwide, the geographic restriction was reasonable because other elements of the restriction were more narrowly tailored. Id. at 119, 501 S.E.2d at 155.

In New River Media Group, Inc. v. Knighton, 245 Va. 367, 368 (Va. 1993), the court held that a disc jockey who would not engage in business that competed with his employer for a period of 12 months within 60 miles of the broadcast station was valid.

(3)   Duration:

The Court explained in Worrie v. Boze, 191 Va. 916, 928 (Va. 1951) that “The fact that the employment is of such a character as to inform the employee of business methods and trade secrets which, if brought to the knowledge of a competitor, would prejudice the interests of the employer, tends to give an element of reasonableness to a contract that the employee will not engage in a similar business for a limited time after the termination of his employment, and is always regarded as a strong reason for upholding the contract.”

In New River Media Group, Inc. v. Knighton, 245 Va. 367, 368 (Va. 1993), the court held that a disc jockey who would not engage in business that competed with his employer for a period of 12 months within 60 miles of the broadcast station was valid.

In Worrie v. Boze, 191 Va. 916, 928 (1951) the court upheld a two year restriction on a dance instructor formerly with Arthur Murray studios.

In summary, the Court has held restrictive covenants unenforceable when the alleged form of competition was too indirect and tenuous. See, e.g., Home Paramount, 282 Va. at 418, 718 S.E.2d at 765 (holding a restrictive covenant overbroad – and hence unenforceable — because it prohibited any involvement, even as a passive investor, in the pest control business).

These standards have been developed over the years to strike a balance between an employee’s right to secure gainful employment and the employer’s legitimate interest in protection from competition by a former employee based on the employee’s ability to use information or other elements associated with the employee’s former employment. Omniplex World Servs. Corp. v. US Investigations Servs., 270 Va. 246, 249 (2005)citing Worrie v. Boze, 191 Va. 916, 927-28, 62 S.E.2d 876, 882 (1951). By its very name, a covenant not to compete is an agreement to prevent an employee from engaging in activities that actually or potentially compete with the employee’s former employer. Thus, covenants not to compete have been upheld only when employees are prohibited from competing directly with the former employer or through employment with a direct competitor. Omiplex, 270 Va. at 249.

Injunctive Relief:

[T]he granting of an injunction is an extraordinary remedy and rests on sound judicial discretion to be exercised upon consideration of the nature and circumstances of a particular case.” Levisa Coal Co. v. Consolidation Coal Co., 276 Va. 44, 60, 662 S.E.2d 44, 53 (2008). The Court has long said that “[t]o secure an injunction, a party must show irreparable harm and the lack of an adequate remedy at law.” Black & White Cars, Inc. v. Groome Transp., Inc., 247 Va. 426, 431, 442 S.E.2d 391, 395, 10 Va. Law Rep. 1220 (1994).  “It is not necessary to show actual damage by instances of successful competition; it is sufficient if such competition, in violation of the covenant, may result in injury. The inability to prove actual damage is one of the grounds upon which equity intervenes. The covenant is lawful as to area and time, and the defendant should be held to a compliance.” Worrie v. Boze, 191 Va. 916, 928-929 (Va. 1951)

Compensatory Damages:

Calculation of lost profits based on the track records of profits in established companies has long been an accepted method of estimating damages awards. See, e.g.,  Commercial Bus. Sys., 249 Va. at 50, 453 S.E.2d at 268 (“When an established business, with an established earning capacity, is interrupted and there is no other practical way to estimate the damages thereby caused, evidence of the prior and subsequent record of the business has been held admissible to permit an intelligent and probable estimate of damages.” (quoting Mullen v. Brantley, 213 Va. 765, 768, 195 S.E.2d 696, 699-700 (1973)).

 Other Issues

Prospective employers may have some concern that they not be caught up in any litigation.  The claim that they should avoid is the tort of tortious interference.

Tortious Interference:

To establish a claim for tortious interference with a business or contract expectancy, the plaintiff is required to show that (1) it had a contract expectancy; (2) the 3^rd party knew of the expectancy; (3) the 3^rd party intentionally interfered with the expectancy; (4) the 3^rd party used improper means or methods to interfere with the expectancy; and (5) the plaintiff suffered a loss as a result of the 3^rd party’s disruption of the contract expectancy. Maximus, Inc. v. Lockheed Info. Mgmt. Sys. Co., 254 Va. 408, 413, 493 S.E.2d 375, 378 (1997). The plaintiff is not, however, required to show that the 3^rd party acted with malice or engaged in any other egregious conduct. Id. at 414, 493 S.E.2d at 378.

Trade Secret Claims:

Finally, your former employer could consider a claim under the Uniform Trade Secrets Act (Act), Virginia Code §§ 59.1-336 through -343.  To state a trade secret claim, a plaintiff must allege sufficient facts to establish (1) the existence of a trade secret, and (2) its misappropriation by the defendant.  MicroStrategy Inc. v. Li, 268 Va. 249, 263, 601 S.E.2d 580, 588 (2004) (citing Code § 59.1-336). The Act defines a “trade secret” as information, including but not limited to, a formula, pattern, compilation, program, device, method, technique, or process, that:

1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and

2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Code § 59.1-336. And the statute goes on to define “misappropriation” as

1. Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

2. Disclosure or use of a trade secret of another without express or implied consent by a person who

a. Used improper means to acquire knowledge of the trade secret; or

b. At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was

(1) Derived from or through a person who had utilized improper means to acquire it;

(2) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use;

(3) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or

(4) Acquired by accident or mistake.

Finally, the law and litigation are dynamic.  Being right does not always mean that you will prevail in litigation.

Disclaimer

The materials are prepared for information purposes only.  The materials are not legal advice and you should not act upon the information without seeking the advice of an attorney.  Nothing herein creates an attorney-client relationship.