10.2 Covenants Not to Compete
Library | Employment Law in Virginia (Virginia CLE) (2020 Ed.) |
10.2 COVENANTS NOT TO COMPETE
10.201 In General. Virginia law does not look favorably upon restraints on trade by employers, so covenants restricting employment are scrutinized closely 1 and are strictly construed against the employer. 2 This is because "any non-competition agreement restrains trade to some extent. The
[Page 388]
issue is whether it is an unreasonable restraint." 3 The employer has the burden of proving that the restraint is reasonable under the facts of the case. 4
As this edition went to press, Virginia enacted a statute that bars employers from requiring noncompete covenants ("an agreement . . . that restrains, prohibits, or otherwise restricts an individual's ability, following termination . . . to compete with his former employer") for "low wage employees," defined as employees who "earn less than the average weekly wage of the Commonwealth as determined pursuant to Virginia Code Section 65.2-500(B)." 5 The statute does not limit agreements that prohibit the disclosure of trade secrets or confidential information, and applies only to covenants entered into on or after July 1, 2020.
10.202 Factors Determining Enforceability. To analyze whether a covenant is enforceable, the courts look at the following three factors:
1. | Is the restraint, from the employer's standpoint, no greater than is necessary to protect the employer in some legitimate business interest? | |
2. | Is the restraint, from the employee's standpoint, not unduly harsh and oppressive in curtailing the employee's legitimate efforts to earn a livelihood? | |
3. | Is the restraint reasonable from a public policy stand-point? 6 |
[Page 389]
These factors cannot be considered in isolation from one another; they must be evaluated together. A three-year duration may be upheld in a case where the covenant's geographic area is small and the scope of barred activities narrow, but disapproved in another case where the geographic and functional scope are broader. 7
Despite the fact that they restrain trade, covenants that affirmatively answer the foregoing questions in light of the facts of each case will be enforced. 8
10.203 Protection of Employer's Interests.
A. In General. A court will refuse to enforce a covenant unless its coverage is no greater than necessary to protect the employer's legitimate business interests. 9 The court will look at whether the employee's position with the former employer and the scope of the employee's knowledge and contacts
[Page 390]
are such that post-employment protection is warranted; whether the geographic restriction and duration are appropriate; and whether the type of activity from which the employee is excluded bears a reasonable relationship to the employer's protectable interest.
B. Nature of Interests. Employees whose activities for the former employer have justified restricting their post-employment conduct by covenant include, among many others, (i) sales representatives and service technicians who had personal contact with the employer's customers; 10 (ii) a vice president of a software-designing group who had access to confidential information regarding the former employer's products and customers; 11 (iii) a board of directors member who had access to information concerning financial structure and trade secrets; 12 (iv) a limited partner of an insurance brokerage who had access to business methods and trade secrets; 13 (v) an employee who had access to customer lists, pricing policies, and other confidential materials; 14 and (vi) a former bank president and the vice-chairman of the bank's board of directors. 15 A nonprofessional corporation's effort to enjoin a physician formerly employed by it from competing with it failed because a nonprofessional corporation cannot practice medicine in Virginia. The former employer, therefore, did not have a legitimate business interest to support the covenant. 16
[Page 391]
C. Interests Sufficient but Not Enjoined. In Stoneman v. Wilson, 17 the court held that an employee's work as secretary, treasurer, and purchasing agent for the former employer supported the need for a covenant. However, the employee was not enjoined from working as "just a clerk" for a competitor. 18
D. Geographic Limitation. The geographic area in which the employee is not allowed to compete must be "reasonable." Geographic limitations found to be reasonable include (i) "within the United States" (where the company marketed in three states, was licensed in ten states, and had customers dispersed throughout the country, and where customers of the company resold the product nationally); 19 (ii) "anywhere in the United States"; 20 (iii) "within any of the territories serviced by" the employee; 21 (iv) any counties in which the employees worked for two years before their departure; 22 (v) a 50-mile radius; 23 and (vi) within 50 miles of any of the employer's offices, even though the employer had 300 offices worldwide. 24
[Page 392]
On the other hand, prohibiting the employee from working in any area where the former employer might compete in the future was held to be too broad. 25 The absence of a geographic limitation can be fatal to the restriction. 26 However, where the covenant is extremely narrow with regard to functional restrictions, a geographical limitation may not be necessary. 27
The most practical geographic limitation for a company whose competitive area is expanding or contracting is one that does not specify political boundaries (such as "within Patrick and Henry Counties") or mileage radiuses, but instead refers to "territories serviced by the employee" or "states in which the company competes." This type of geographic limitation was upheld in Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick 28 and Paramount Termite Control Co. v. Rector. 29
E. Duration. The period during which the employee is precluded from competing in the specified area must be reasonable under the
[Page 393]
circumstances. Limitations of two years, 30 three years, 31 and five years 32 have been upheld in Virginia.
F. Conduct Prohibited. In evaluating the covenant's enforceability, the court also will look at the specific activities from which the covenant excludes the employee. In recent years, courts have placed increasing emphasis on this element. The question for the court is whether the scope of prohibited activities is greater than is necessary to protect the employer's legitimate interests. If the covenant prohibits activities that are not a threat to the employer's legitimate interests, the covenant will likely fail. 33
In Home Paramount Pest Control Cos. v. Shaffer, 34 the Virginia Supreme Court stated that the proper way to analyze this element of a covenant is to ask whether it would exclude jobs the former employer had no legitimate business reason to exclude. For example, an employer might have a legitimate interest in protecting client relationships or trade secrets, but such an interest usually would not justify prohibiting a former employee from providing bookkeeping, vehicle maintenance, or janitorial services to a
[Page 394]
competitor. 35 A restrictive covenant that prohibits an employee from working for a competitor "in any capacity" will most likely be unenforceable. 36
Home Paramount is notable because the court struck down the same covenant that it had upheld in a previous case, Paramount Termite Control Co. v. Rector, 37 and explicitly stated that it was overruling its prior decision. 38
Examples of restrictions that are still likely to be found reasonable after Home Paramount include: (i) a prohibition on "open[ing] or be[ing] employed by or act[ing] on behalf of any competitor of [the] [e]mployer which renders the same or similar services" when the restriction further clarified that the employee could work in any role which would not compete with the employer; 39 (ii) a prohibition against "rendering competing services to" any customer of the employer for whom the employee had performed services during the period of his employment; 40 (iii) a restriction barring a subcontractor from entering into an agreement to perform work on the same client project it had worked on with the former general contractor; 41 and (iv) a prohibition limiting former high-ranking bank employees from serving in capacities in "the consumer and commercial banking business engaged in by" the former employer's competitors, but that did not restrict serving in capacities outside the "consumer and commercial banking business." 42
[Page 395]
The following restrictions, however, have been found to be unreasonable: (i) a prohibition against engaging in a pest control business "in any manner whatsoever"; 43 (ii) a prohibition against engaging in the business of selling marine and industrial supplies and against entering or engaging in any branch of the marine or industrial supplies, equipment, or services business, directly or indirectly, as principal, agent, or servant; 44 (iii) a prohibition against entering into a contract of any sort with the former employer's customers, even if the contract is for supplies not sold by the former employer; 45 (iv) a prohibition not limited to the type of activities in which the employee had engaged for the former employer or not limited to a capacity that is competitive with the former employer; 46 (v) a prohibition against working for a company that engages in business "similar" to the former employer's, but defining "similar" in a way that potentially includes many companies that do not in fact compete with the employer; 47 (vi) a prohibition against being employed by a company engaged in any business "similar to the type of business" conducted by the former employer; 48 and (vii) a prohibition against selling products the company may sell in the future. 49
10.204 Impact on Employee.
A. In General. A court considering the enforceability of a covenant must also ask whether the restraint is reasonable in the sense that it is...
To continue reading
Request your trial