Virginia Lawyers Weekly

A Chesterfield County judge has ruled that noncompetition and nonsolicitation clauses in a directors’ agreement for a closely held corporation are too broad to be enforced.

Jason Knowles sought the ruling after he left New Age Digital Inc., a computer and network support company that operates in Central Virginia, late last year. Knowles had worked for the company as an employee but agreed for a time to work at half salary when it had financial difficulty, according to his attorney, Blackwell N. Shelley Jr. of Richmond.

When he told the couple who were the principals in the corporation that he could no longer afford do so, they brought him into the company as a director and a shareholder.

The noncompetition clause said the director “shall not, directly or indirectly, own, manage, operate, control, be employed as an employee, agent, or independent contractor, or participate in any business in competition with the business of New Age within the Commonwealth of Virginia” for one year following termination as a director.

It said “the term ‘competition’ shall include, but not be limited to” a relationship “with any person or entity so competing with New Age in any product line or service offered by New Age.”

The nonsolicitation clause prohibits directors from soliciting clients of New Age within the three years before termination and for a period of two years after termination. It defines client as “any person or entity that has been solicited, quoted or contacted by New Age in the time period where the Director served on the board of New Age.”

Shelley asked Chief Circuit Judge Frederick G. Rockwell III to rule on cross motions for partial summary judgment that the “but not be limited to” phrase in the noncompetition clause was enough to render the agreement overbroad.

However, in Knowles v. New Age Digital Inc. (VLW 008-8-148). Rockwell found the clause overbroad on a somewhat narrower ground. Although the clause restricted the directors from competing with New Age anywhere in the state, there was no allegation that the company’s market covers the entire state, Rockwell noted. That made the clause overbroad, he said.

The nonsolicitation clause is even broader, Rockwell said. “It appears that these provisions in the Non-Solicitation clause would extend to every person or entity that New Age ever contacted during Knowles’ tenure with the company,” he added.

Shelley said Knowles also has a claim against the corporation for unpaid salary and has filed a second action alleging oppression of him as a minority shareholder by the other directors of the company.

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