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Wednesday, September 28, 2016

Distinguishing Non-Solicit Agreements from Non-Compete Agreements

Employers are justifiably concerned with protecting their businesses from competition with former employees. This is generally accomplished by requiring employees to sign agreements containing restrictive covenants. The two types of restrictive covenants that are most often utilized by employers are (1) non-solicit covenants and (2) non-compete covenants.  These two types of restrictive covenants are often blurred together, but they are distinctly different, and Virginia Courts recognize the distinction when the covenants are challenged. 

The purpose of a non-compete covenant is to prevent the former employee from generally competing with the employer in the same industry. The purpose of a non-solicit covenant is to prevent the former employee from providing services to the employer’s clients and/or hiring away the employer’s other employees.  In Virginia, non-solicit covenants are considered a species of non-compete covenants, and the same legal standard of enforceability applies to each. Since both types of covenants create a restraint on trade, neither covenant is favored in Virginia.  In all cases, a Court will evaluate the covenant in light of the circumstances of the businesses and employees involved in order to determine whether the covenant is necessary to protect the employer’s “legitimate” business interests, taking into consideration the restricted activities (i.e. the “function”), the geographic scope, and the duration of the covenant. The employer bears the burden to show that the restraint is no greater than necessary to protect a legitimate business interest, is not unduly harsh or oppressive in curtailing an employee’s ability to earn a livelihood, and is reasonable in light of sound public policy. 

While the same legal standard of enforceability applies to both types of covenants, case law shows us that Virginia Courts are more likely to enforce non-solicit covenants than they are to enforce non-compete covenants. The obvious reason is that preventing a former employee from directly poaching the employer’s existing client base and/or employees is more likely to protect that employer’s business interests than preventing the former employee from simply working for a competitor or competing for new business on the open market.  See, for example, Leddy v. Communication Consultants, Inc., 51 Va. Cir. 467 (Virginia Beach 2000), in which the Court affirmed a two year non-solicit agreement and noted that a non-solicit covenant is typically narrower in application than a non-compete covenant because it does not restrict the employee from working for a competitor.  

Even so, like non-compete covenants, non-solicit covenants must be narrowly tailored in duration and scope in order to be enforceable in Virginia. For example, in ManTech Int’l Corp. v. Analex Corp., 75 Va. Cir. 354 (Fairfax 2008), the Court struck down a six month non-solicit covenant as overbroad and ambiguous finding the phrase “the Employee shall not directly or indirectly solicit or induce any employees of ManTech to leave the employ of Mantech” not narrowly tailored to protect a legitimate business interest and unenforceable, per se, since it conceivably covers situations in which one employee convinces another to retire early, join the military or move to another state. Similarly, in Lasership, Inc. v. Watson, 79 Va. Cir. 205 (Fairfax 2009), the Court found the following two-year non-solicit covenant to be unenforceable since it prevented the employee from pursing non-competitive employment positions: “Employee shall not, for himself or on behalf of any other person, firm, corporation, or other entity, contact in any manner, directly or indirectly, solicit, agree to perform or perform any services of any type that the Company can render…for any of the Company’s Customers.”

Conversely, in Daston Corp. V. MiCore Solutions, 80 Va. Cir. 611 (Fairfax 2010), the Court upheld the enforceability of two-year non-solicit that was no broader than necessary to meet the company’s legitimate business interest.  The plain language of the covenant applied only to a “fixed universe of customers, namely those that existed during the employee’s term of employment”, a list of customers that was known to the employees being restrained, as compared to Lasership, which restriction imposed an “unreasonable burden” on the former employee to know the customers it could not solicit. 

With respect to the duration of the non-solicit covenant, there is no clear marker to distinguish enforceability.  One-year non-solicit covenants have been routinely upheld, and two-year non-solicit covenants have also been upheld with some regularity. Including a longer duration seems problematic under existing Virginia case law, and is not recommended as a practice pointer, although in 2012 the United States District Court for the Eastern District of Virginia concluded that a five year non-solicit agreement can be reasonable under Virginia law. See Capital One Fin. Corp. v. Kanas, 871 F. Supp. 2d 520.  However, a key consideration made by the Court in that matter was the nature of the business (insurance), the Court determining that the restricted period was directly related to an important element of the business (policy renewals).  

In conclusion, a non-solicit covenant is more likely to be enforced in Virginia than a non-compete covenant, even though the same legal standard applies to the Court’s analysis.  However, like non-compete covenants, non-solicit covenants must be narrowly tailored and explicitly backed up by a specific legitimate business purpose that justifies the functional restrictions and the length of the restrictive term.