Tuesday, February 11, 2014

Case Example: Non-Compete Agreement Must Be Narrowly Tailored

In Virginia, it is very difficult to enforce a covenant not to compete against an ex-employee.  The Virginia Courts will only enforce a covenant not to compete if: (a) it is narrowly drawn to protect the employer's legitimate business interest, (b) it is not unduly burdensome on the employee's ability to earn a living, and (c) it is not against public policy.  In each case, the Court will evaluate the covenant not to compete on its own merits, balancing the terms of the covenant with the circumstances of the businesses and employees involved. 

In a recent case before the Fairfax County Circuit Court, Daston Corp. v. MiCore Solutions, Inc., et al., the Court declined to enforce a covenant not to compete which, on its face, appeared to be reasonable. 

In that case, two employees (with identical employment agreements) of Datson Corp., a business that develops, markets, sells and manages applications for Google pursuant to a nationwide license, left their employment and accepted employment with MiCore Solutions, Inc., a business which provides a range of consulting and information technology services based on Google applications. 

The covenant not to compete in each employee’s employment agreement with Datson read as follows:

Employee hereby agrees that during the Employment Period, and for one year following the termination of the Employment Period, however occurring, Employee will not directly or indirectly, expressly or tacitly, for himself or on behalf of any Competitor, provide Services to any Client to which Employee, or any individual working under the supervision of the Employee, provided substantially similar or related Services during Employee's employment with Datson.

The employment agreement defined “Competitor” as follows: “any firm, person or entity that provides services or products that are directly competitive with the Services. The “Services” means those Information Technology, Financial Management, Business Consulting and other services that are provided by Datson or Employee during the Employment Period or are being researched or developed by Datson with Employee's assistance as of the expiration of the Employment Period.”

The employment agreement further provided that the covenant not to compete was to be applied nationwide due to the nationwide presence of the Clients, and contained an acknowledgment on each Employee’s part that the enforcement of the restrictions would not prevent Employee from being able to fully earn a livelihood.  The employment agreement did not define the word “Client”.

The Court ruled that the covenant not to compete was overbroad, and therefore unenforceable, because the phrase “substantially similar or related” is vague and barred not only direct competition with Daston, but also the provision of services that are merely “related” to the services provided by Daston.  Thus, the covenant not to compete was broader than necessary to protect Daston’s legitimate business interest. The Court went on to explain that Courts in Virginia will not “blue pencil” covenants not to compete, meaning that the Courts will not modify the covenant not to compete so as to be enforceable and then enforce the modified covenant.

What this case demonstrates is that in Virginia (and in Fairfax County in particular), covenants not to compete must be very narrowly tailored to protect the employer’s interest in order to be enforceable. 

Virginia employers that wish to restrict competition from their employees should have an attorney artfully draft the non-compete language so as to ensure enforceability.   The Virginia Courts have made it clear that they will not enforce covenants which are overbroad in the slightest sense.  The covenant must narrowly restrict competition to the specific services that are provided by the employer and the specific employee.  Thus, an employer cannot rely on the broad boilerplate language found in most standard form employment agreements.  The employer must carefully tailor the language on an employee by employee basis.

The attorneys at Gross & Romanick, P.C. have considerable experience drafting non-compete agreements and handling a variety of employment matters.  We know the law, we know the cases, and we know how to protect your interests.     

Non-Compete Agreements: Why Even Unenforceable Agreements Can Be Effective in Virginia

             Oftentimes, employees seek a definitive answer to the question: “Is the non-compete clause in an employment contract enforceable?”  The answer to this question, whether yes or no, is almost always qualified with the word “probably”.   In Virginia, there is no bright-line rule to establish when a non-compete restriction is enforceable or unenforceable.  In each case, the Court will evaluate the restriction on its own merits, taking into consideration the employer’s business interests, the employee’s ability to earn a livelihood and the public policy of Virginia. 

            Even when a non-compete clause is “probably” unenforceable as written, the employee must understand that the existence of the non-compete clause serves a second purpose, which is to deter another employer from hiring you.  In fact, the question “is the agreement enforceable?” can sometimes be irrelevant, as the mere existence of a non-compete clause may be sufficient to deter another employer, who has knowledge of the clause, from hiring the former employee.  Employers generally avoid the risk of suit by the former employer, even if succees on the merits is unlikely.   Some former employers will file suit as a matter of principle, even if the clause is  unlikely to be enforced by the Courts.  

            The Virginia Supreme Court’s recent decision in Assurance Data, Inc. v. Malyevac, 286 Va. 137 (2013) has given employers added protection.  The decision discourages trial courts from dismissing non-compete cases without a full evidentiary hearing.  Accordingly, an employer can file suit and prosecute the case to trial even when the non-compete is likely unenforceable based upon prior Virginia case  precedent. As a result, the Supreme Court decision has validated an effective strategy  for employers who wish to prevent their former employees from obtaining new work.   Between the date of filing suit and the date of trial (which can be a year or more in some instances), the employee may be unwilling or unable to secure “competitive” employment.

            Employers may accurately conclude from this article that non-compete agreements can be effective even when they are unenforceable as written.  However, it is recommended that employers  have an experienced attorney artfully draft the non-compete language to ensure enforceability and to discourage employees and other employers from challenging  enforceability of the employment agreement. 

Employees beware, if you sign a non-compete agreement,  expect that it will limit your options after your employment terminates, either directly (by preventing you from seeking competitive employment) or indirectly (by preventing other employers from hiring you). 

            The attorneys at Gross & Romanick, P.C. have considerable experience drafting and reviewing non-compete agreements, as well as litigating non-compete cases in the Virginia trial courts.   If you need a non-competition agreement prepared, enforced or defended, contact the law firm of Gross & Romanick at 703-273-1400.  Visit our website at:  www.gross.com