Noncompete restricting info source ‘overbroad’

An employer lost its opening bid to stop a former manager from working for an alleged competitor in a multi-state home-building business, when an Alexandria federal court denied the employer’s motion for a preliminary injunction on Feb. 14.

In arguing for enforcement of a noncompete agreement, the employer checked off several boxes that can trip up drafters of such clauses, which are unpopular with Virginia courts.

The court said the agreement had adequate consideration and its language properly identified specific “enumerated business activities” the manager could not perform for a competitor.

Ultimately, however, it was not the physical scope of the territory in which the manager had performed services, but the scope of information to which he had access, that prompted the court to say the noncompete was overbroad.

The parties’ legal dispute arose out of the manager’s alleged misappropriation of confidential information “consisting almost entirely of digital content” that could have come from anywhere in the 14 states where plaintiff NVR Inc. builds, according to the court.

Citing the “practical realities for employees in nearly any white collar industry,” emails among company employees may not readily identify the provenance of all kinds of data about company operations, according to Alexandria U.S. District Judge Liam O’Grady.

The noncompete potentially barred the manager from working anywhere in which the company operated and from which the defendant received confidential information during his service.

The court denied the request for a TRO in NVR Inc. v. Nelson (VLW 017-3-091).

Wide operations

NVR, operating as Ryan Homes and other trade names, sued David Nelson, who was terminated in August 2016 and went to work for Simonini Inc. in October 2016. NVR divided the Charlotte region into three divisions covering the city and surrounding counties, and Nelson managed the North Division.

During his tenure at NVR, Nelson signed various compensation agreements, including a stock option agreement and an incentive program agreement.

The incentive agreement provided that, for 12 months after the end of his service in the “Restricted Area,” Nelson could not “render services” to a person or entity that competed with the company or an affiliate “in the residential homebuilding, mortgage financing, or settlement services business” where such services are competitive with any such services the employee provided to the company during the 24 months prior to termination.

The agreements defined the “Restricted Area” as “counties and other units of local government” in which the company engaged in the enumerated, related homebuilding activities, over which the employee had management responsibility during 24 months prior to termination

In a second clause, the agreement defined the “Restricted Area” as those “from which you received, as part of your work duties, Confidential Information regarding such business activity, at any time during” the 24 months prior to termination.

‘Restricted Area’

Nelson argued that the second clause prohibited him from engaging in covered business activities in any county or local government unit anywhere NVR or one of its affiliates operated.

The employer responded that Nelson was “manufacturing a hypothetical overbreadth,” according to O’Grady’s opinion.

Hypotheticals can be highly instructive, as the Supreme Court of Virginia pointed out in its 2011 case, Home Paramount Pest Control Companies Inc. v. Shaffer. O’Grady used that case as a point of departure to walk through a few examples.

Would an email with confidential information sent by one of NVR’s Chicago employees qualify as information sent from Chicago? Would the answer change if the confidential information was contained in an attachment to the email which was created by the home office in Virginia?

What about an email to Nelson from a Charlotte employee forwarding information sent to her by Chicago employees?

“Unlike the hypothetical proposition that an employee with a bachelor’s degree in entomology would dramatically switch to a career in janitorial services,” which the Virginia Supreme Court used in Home Paramount, “the hypotheticals posed in this case are practical realities for employees in nearly any white collar industry,” O’Grady wrote.

Even if the court were privy to all the confidential information that Nelson had received while at NVR, and where it came from, the court “would still be forced to grapple with these difficult questions of provenance in order to fairly enforce the non-compete,” the judge said.

Because the noncompete’s geographic scope is indefinite, it is necessarily overbroad and invalid, the court concluded.