Judge was too quick to yank noncompete

An ex-employee sued on a noncompete agreement did not get a quick exit out of court by filing a demurrer saying the agreement was unenforceable, the Supreme Court of Virginia said on Sept. 12.

The high court surveyed its recent decisions on noncompetes, including the 2011 Home Paramount decision, and said the question of enforceability does not occur in a factual vacuum. It reversed a Fairfax Circuit judge’s dismissal of the employer’s complaint and sent the case back to the trial court.

Some Fairfax trial judges had been deciding noncompete cases on demurrer, according to C. Dean Latsios, the Fairfax lawyer who represented the employer, and the new decision clarifies why that short-circuit may not work.

Issues over noncompetes regularly pop up all over the commonwealth, but they are especially prominent among businesses in fierce competition for government contracts and employees to fulfill the contracts. Either side may hale the other into court, but whether it’s the employer who wants to enforce a noncompete, or an employee who wants to break free, they may expect to spend a little more time in court after the decision in Assurance Data Inc. v. Malyevac (VLW 013-6-059).

Defendant John Malyevac sold computer products and services for plaintiff Assurance Data Inc. An agreement between ADI and the salesman included noncompete, nonsolicitation and  nondisclosure provisions, as well as a clause requiring return of confidential information.

A few months after entering into the agreement, Malyevac resigned. ADI sued in Fairfax Circuit Court, alleging its former employee was performing work and services and selling products in direct competition with ADI, and that he had failed to return confidential information. ADI requested an injunction and damages.

Malyevac responded with a demurrer that said the agreement’s noncompete and nonsolicitation provisions were overbroad and unenforceable. Specifically, he pointed to a paragraph in the nonsolicitation clause stating the prohibition period was “twelve (12) after the date of termination,” omitting any indication whether the duration was days, weeks, months or years.

ADI said the merits of the dispute could not be decided on demurrer, and it was entitled to present evidence to show the restrictions were reasonable.

Fairfax Circuit Judge Robert J. Smith sustained Malyevac’s demurrer without leave to amend, saying “if the court finds as a matter of law that a contract, a part of a contract is unenforceable then to state, to bring a lawsuit based on that unenforceable contract … fails to state a cause of action.”

ADI appealed.

In the Supreme Court, Malyevac argued that a court could determine on demurrer that no amount of evidence would render the restraints reasonable and enforceable.

However, the high court held that the trial court was too quick to pull the plug on the employer’s case.

“Each case involving the enforceability of a restraint on competition ‘must be determined on its own facts,’” the court said in an opinion by Chief Justice Cynthia D. Kinser.

An employer bears the burden to show a restraint is no greater than necessary to protect a legitimate business interests, and a court has to consider the function, geographic scope and duration elements of the restriction, Kinser said, citing the court’s 2011 decision in Home Paramount Pest Control Cos. v. Shaffer (VLW 011-6-121).

These elements have to be assessed together, rather than as distinct inquiries, as the agreement must be found reasonable as a whole, she said. The premise running through the court’s recent noncompete decisions “is that restraints on competition are neither enforceable nor unenforceable in a factual vacuum. … An employer may prove a seemingly overbroad restraint to be reasonable under the particular circumstances of the case.”

The Supreme Court reversed the trial court and remanded the case.

In a concurring opinion, Justice Elizabeth A. McClanahan said she would end her analysis after  holding that, because an employer is entitled to present evidence to prove its restraints on competition are reasonable under the particular circumstances, the circuit court erred in sustaining the demurrer.

Fairfax lawyer Christopher T. Craig, who represented Malyevac, could not be reached for comment.