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.

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.

COVENANTS NOT TO COMPETE – DIFFICULT TO ENFORCE IN VIRGINIA

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 Daston 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 Daston read as follows:

Employees: Duty of Loyalty

As part of its commitment to client education, Gross & Romanick publishes articles on its website relating to its various practice areas--including Business Law.

Reprinted below is a recent article about duty of loyalty and non-competition clauses.

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Your top salesperson has just given you a two-week notice of resignation. When you discuss this problem with another employee, you learn for the first time that your top salesperson has already set up a competing company based upon copies of your files and solicitation of business from your clients. To compound the problem, several of your key personnel quit within days of your top salesperson; you learn that they are joining this new competitor. What can you do? Well, a recent case in the United States District Court for the Western District of Virginia may provide some help.

In National Legal Research Group v. Latham, the court, in an unusual ruling, enjoined a former employee from soliciting or communicating with clients of the firm for two years after resignation. Furthermore, the former employee was charged with actual damages caused to the former employer, as well as punitive damages, even though the offending employee had no written contract. This case could be a significant aid to employers seeking to enforce the so-called "Duty of Loyalty" that binds all employees.

Non-Competition Clauses

Of course, sales people should sign employment agreements containing restrictive covenants, which prevent them from copying confidential materials or competing upon termination of employment. However, such covenants are rarely executed because of the fear that excellent employee candidates may refuse employment on this basis.

To be enforceable, Virginia law generally requires that non-competition clauses be reasonably necessary for the protection of the employer, and not impose undue hardship on the employee. If the clause prevents the employee from competing in a limited geographical area or for a limited period of time, a court will generally uphold the agreement. If the clause has no such limits, courts will often find the restriction to be impermissibly overbroad and unenforceable. Since non-competition clauses are, in general, a restraint on free trade, a court will carefully examine the agreement and construe the clause, where possible, in favor of the employee.

Duty of Loyalty

Despite the failure to include a restrictive covenant in an employment agreement, the law implies an agreement on the part of the employee to faithfully serve an employer. In addition, an employee is a fiduciary with respect to information learned during the course of employment.

Virginia Trade Secrets Act

The Virginia Trade Secrets Act, Virginia Code §59.1-336 may prevent former employees from using information for which the company took reasonable steps to keep secret. This Virginia Code Section was the basis for the court's ruling in the National Legal Research Group v. Latham case.

Protect Yourself

Restrictive covenants in employment agreements are the best method for protecting your trade secrets and preventing competition from former employees. Nevertheless, you may have a case under the Virginia Trade Secrets Act if you take reasonable steps to protect your important trade secret information. Establish written procedures: inform your employees of what materials are considered protected and under what limited circumstances these materials may be utilized.