Keeping up with noncompete law in Virginia

Every Virginia lawyer knows that the field of employment noncompetes is full of potential traps for the unwary. In balancing the opposing interests of employer and employee concerning post-employment competition, Virginia law has long left the attorney with little in the way of guarantees regarding enforceability or lack thereof. Rather than create safe harbors for the lawyer seeking certainty in drafting and enforcing – or seeking to invalidate – a noncompete, recent decisions of the Supreme Court of Virginia require lawyers to carefully examine and apply the case law to the specific facts surrounding the employee’s employment and subsequent competition.

Types of Noncompetes

A number of different types of contracts and clauses fall within the definition of a noncompete. These include:

* “Traditional” noncompetes, which prohibit an employee from engaging in competitive employment following the employee’s termination of employment;

* Non-piracy agreements, which seek to prevent an employee from taking clients, business, or fellow employees of the employer with the employee following termination

* Non-solicitation agreements, a subset of non-piracy agreements that prohibit initiating business contact with customers and/or fellow employees of the employer following termination; and

* Confidentiality agreements, which prohibit an employee from using or disclosing confidential information or trade secrets during or following employment.

In many instances, an employer will desire several different types of restrictive covenants to be included in one agreement to prevent the employee from harming the employer’s business following termination of employment. With the multiple layers of protection provided by these various covenants, however, comes the possibility that a court will find one or more of the protections overbroad and, in some instances, will invalidate the agreement as a result.

In the beginning . . .

Modern Supreme Court of Virginia case law in the area of noncompetes began in 1937 with the case of Stoneman v. Wilson, 169 Va. 239, in which the court recognized that “generally these agreements are valid” in most U.S. jurisdictions, but also cautioned that “they are not favored in the law and courts are slow to grant injunctive relief.” The court warned even way back then that a noncompete’s restrictions generally must be reasonable in terms of “space and time” to be enforceable. It further required that a noncompete could not restrain an employee from all positions for which the employee is suited, must not be injurious to the public, and must further a legitimate business interest needing protection. Applying these criteria to a noncompete prohibiting a former salesman and minority shareholder of a hardware store from “go[ing] in the hardware business” for five years and a radius of five miles following employment, the court in Stoneman vacated the trial court’s injunction enforcing the agreement because the salesman was not a position to possess trade secrets or confidential information.

While the considerations articulated in Stoneman remain the general standards for enforceability of noncompetes almost 70 years later, recent Supreme Court decisions apply a heightened level of scrutiny to the requirements for enforceability set forth in Stoneman. As the recent cases discussed below show, the Supreme Court has closely analyzed the restrictions contained in facially valid noncompetes to ensure that the types of positions and nature of business that the employee is restricted from after termination are sufficiently limited. In so doing, the court has not shied away from invalidating provisions that bar an employee from working in any capacity for a competitor or working in an entire segment of the market. Likewise, in 2005, the Supreme Court limited the types of employer interests that may support a noncompete, and the extent to which an interest may support broad limitations on competition.

General provisions of noncompete law

As shown by the court’s analysis in Stoneman, an enforceable noncompete must be narrowly tailored to protect a legitimate business interest of the employer, must not be unduly harsh and oppressive so as to restrict the employee from earning a living, and must be reasonable from the standpoint of public policy. But what do these factors really mean? Or more importantly for us lawyers, what do the courts in Virginia say they mean?

With regard to protectable employer interests, Virginia courts have generally recognized several business interests to be legitimate and worthy of protection. Among other things, the courts typically recognize that employers have a valid interest in maintaining client relationships that the employer formed or facilitated through client contact. In addition, courts have recognized the importance of protecting the confidential information and trade secrets that employers provide to employees to perform their job duties.

In evaluating a noncompete, Virginia courts will generally consider the activities it prohibits, the geographic scope of its restrictions, and the length of time those restrictions are in place. Virginia courts have tended to reach fairly consistent results regarding the types of agreements, the geographic scope, and the duration of agreements that are generally deemed enforceable. As a general rule, Virginia courts have been inclined to enforce restrictions on competitive employment within a 50 to 75 mile radius of the location in which the employee performed services for up to two to three years following the termination of employment.

Moreover, some Virginia courts have enforced certain types of restrictions, such as confidentiality agreements, without any geographic or time limitation where the evidence shows that this is reasonably necessary to protect the employer’s legitimate business interests. See, e.g., McKeever Assocs. v. Guiseppe, 29 Va. Cir. 362, 1992 WL 885059 (Fairfax Cty. Cir. Ct. 1992) (enforcing confidentiality agreement without temporal or geographic limitation). In this instance, Virginia courts are far more likely to enforce a noncompete when the employer can show that, in so doing, the court will be preventing an employee from breaching a valid confidentiality agreement or disclosing trade secrets.

While a noncompete may contain numerous restrictions, some of which may be overbroad and some of which may not be, Virginia courts generally will not “blue pencil,” or selectively remove, provisions of a noncompete or otherwise modify a noncompete to create an enforceable agreement. While it has not rendered a decision specifically prohibiting blue penciling, decisions of the Supreme Court of Virginia generally require that a noncompete be narrowly tailored as a whole in order for any part to be enforceable.

Recent developments in the law

Recent Supreme Court decisions regarding noncompetes have significantly changed and refined the general law stated above in ways that Virginia lawyers must be aware of to effectively represent their clients. For instance, one line of cases has produced what is sometimes referred to as the “janitor” defense, as employees seeking to invalidate overly restrictive noncompetes have argued that they would be prevented from even working as janitors at other companies if the agreement were to stand.

In the 2001 case of Motion Control Systems, Inc. v. East, 262 Va. 33, the court refused to enforce a noncompete that prohibited the employee from working for a “similar business” within 100 miles of the employer for two years following employment. In that case, the employer manufactured brushless motors, yet the noncompete defined as a “similar business” any business that designed, manufactured, or distributed any type of motor. As a result, the court deemed the agreement overbroad and unenforceable – despite the fact that the employee was actually working for a competitor manufacturing brushless motors, and thus the agreement likely could have been enforced in a narrowly tailored fashion.

In 2002, the Supreme Court affirmed a trial court judgment declaring a noncompete unenforceable in Modern Environ-ments v. Stinnett, 263 Va. 491. In that case, the noncompete provided the employee could not “directly or indirectly own, manage, operate, control, be employed by, participate in or be associated in any manner with” owning, managing, operating or controling a competing business following termination. The court held that the noncompete was overbroad and unenforceable because it prohibited the employee from working in any capacity for a competitor of the former employer.

Similarly, in a 2005 decision entitled Omniplex World Services Corporation v. US Investigations Services, Inc., 270 Va. 246, the Supreme Court declined to enforce a noncompete containing a “non-poaching” provision designed to protect the employer’s supply of qualified employees with federal government security clearances. In that case, the employer was a government contractor that recently took over a contract to provide security services to a federal agency, and thus needed to employ qualified individuals with government security clearances to staff the contract. In exchange for a $2,000 bonus, each Omniplex employee was required to sign an employment agreement which stated that, if the employee’s employment was terminated within one year, the employee could not be employed by or provide services to the federal agency in any type of employment that required the same level of security clearance for the rest of the one-year period. Despite this extra compensation and the employer’s obvious interest in retaining employees with the required government security clearance for one year after taking over a federal government contract, the Virginia Supreme Court held that the noncompete was unenforceable because the restriction included all positions with the agency and its contractors, and thus was not limited to the specific government contract that Omniplex was working on, or positions directly competitive with Omniplex’s line of business.

In contrast, in its very recent 2006 decision in Saks Fifth Avenue v. James LTD., 272 Va. 177, the Supreme Court of Virginia declined to review a trial court injunction enforcing a noncompete against a former suit salesman in a high-end clothier that restricted the employee from owning, operating, or being employed by a retail men’s clothing store, or men’s clothing sales department, within one mile of the employer for three years after employment. In that case, the trial court narrowly enforced the noncompete’s provision by enjoining the employee from working for his new employer, the men’s department of a nearby retailer, for a three year period. The Supreme Court’s passivity on this issue in Saks Fifth Avenue was surprising to some pratitioners given the court’s holding in Modern Environments, in which it invalidated as overbroad a noncompete prohibiting employment in any capacity by a competitor, and the court’s reluctance to narrowly enforce an overbroad noncompete in Motion Control Systems.

Nevertheless, in Saks, the Supreme Court reversed the $1.6 million verdict against the employee and his new employer Saks Fifth Avenue for breach of the duty of loyality and statutory civil conspiracy in acting together to violate the noncompete during and immediately after the employee’s employment. In reversing the verdict, the Supreme Court cited the requirement of Virginia law that causation of damages must be proved to a “reasonable certainty,” and held this standard was not satisfied by the former employer’s expert testimony regarding its lost profits following the employee’s resignation. This decision thus suggests that an employer cannot support an award of damages flowing from an employee’s violation of a noncompete absent more detailed proof of piracy of each client or contract.

Virginia has made several legislative attempts to codify the permissible restrictions for noncompetes; so far none has garnered enough support to become law. As a result, unlike some other states, such as California and Texas, Virginia does not have a statutory presumption against noncompetes.

Lessons learned

Because of the growing complexity of Virginia law in this area, drafting noncompetes is no longer a simple matter of pulling a form from the internet or similar one-size-fits-all approach of the past. When drafting a noncompete, a practitioner must engage in detailed discussions with the employer to determine what legitimate business interests are at issue, and should create restrictions that further these business goals and nothing more.

In fact, when drafting an agreement, it is often a good idea to state in the agreement itself what business interest the company is concerned about protecting, so that the departing employee cannot later feign ignorance of what he or she was signing. For instance, if as in the Omniplex case discussed above the employer needs to protect employees with security clearances, it makes sense to make specific reference to that business interest in the noncompete. By being so specific, it makes it much more difficult for a departing employee to claim ignorance of the reasons behind the restrictions.

Moreover, when analyzing the enforceability of a noncompete for an employee client, a Virginia attorney should sit down with the employee and obtain information regarding all of the circumstances and consider the business interests sought to be protected, the extent to which that interest supports the full breadth of the restrictions in the noncompete, and how and to what extent the employer can claim to be damaged by a breach of the agreement.

Finally, given the many significant Supreme Court of Virginia decisions regarding noncompetes in recent years, lawyers should periodically review the case law to remain apprised of the Supreme Court’s concerns regarding the enforcement of employment noncompetes.

Jeffrey L. Rhodes is a senior associate at Albo & Oblon, LLP in the firm’s Arlington office. He specializes in labor and employment law and commercial litigation. He is also a contributing editor to the “Virginia Employment Law Alert,” a monthly e-newsletter.

Declan C. Leonard is a partner at Albo & Oblon LLP in Fairfax. His practice is devoted to employment and business counseling and litigation, as well as general civil litigation.