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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.