Monday, November 28, 2011

Non-compete Provision - Revisited and Reversed by Virginia Supreme Court

On November 4, 2011, the Virginia Supreme Court issued an important opinion on the enforceability of non-compete agreements in Virginia. In Home Paramount Pest Control Companies, Inc. v. Shaffer, et al., the Supreme Court affirmed the Fairfax County Circuit Court's prior determination that a non-compete provision in a former employee's employment agreement was overbroad and, therefore, unenforceable.

In 1989, in a case involving the same employer, the Supreme Court ruled that an identical provision in an employment agreement was enforceable. Accordingly, the Supreme Court reversed its previous stance, demonstrating the shift in the law that has occurred over the last 22 years. The Supreme Court justified its decision on the basis of several other cases that have been decided since 1989, which cases clarified the law and created the framework from which the 2011 case was decided.

The Supreme Court explained that non-compete provisions are only enforceable if they are narrowly drawn to protect the employer's legitimate business interest, are not unreasonably burdensome on an employee's ability to earn a livelihood and are not against public policy. The employer bears the burden of proving each of these factors. Virginia Courts will consider the function, geographic scope and duration elements of the non-compete when evaluating whether the employer has met its burden. In assessing the "function" element, a Virginia Court will determine whether the prohibited activity is of the same type as that actually engaged in by the former employee while employed by the employer.

The non-compete provision being considered by the Court stated as follows:

The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever, in any city, cities, county or counties in the state(s) in which the Employee works and/or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount].

The Supreme Court determined that the "function" element of the non-compete was too broad since it prevented the employee from working in the pest control industry in any capacity (as opposed to preventing him from performing the same services he provided for the employer). The Supreme Court explained that there are a number of "reasonably conceivable" activities that the employee would be prevented from performing for a competitor (i.e. janitorial services or bookkeeping) which the former employer has no legitimate business interest in prohibiting. The Supreme Court went on to explain that if the "function" element is clearly overbroad, the "geographic scope" and "duration" elements of the non-compete cannot save the provision, and the entire non-compete agreement will not be enforced.

This case makes it abundantly clear that in Virginia, the Courts will not enforce non-compete provisions which prohibit a former employee from performing any activities for a competitor, even unlikely or hypothetical activities. For a non-compete agreement to be enforceable, the employee can only be restricted from performing specific services that are competitive to the services he/she provided for the former employer.

If you need a non-compete agreement to be prepared, reviewed, enforced or litigated, contact the law firm of Gross & Romanick at 703-273-1400. Visit our website at: www.gross.com.