3.3 Reasonableness of Restraint

• Library: Virginia Employment Practices and Forms (Virginia CLE) (2015 Ed.)

3.3 REASONABLENESS OF RESTRAINT

3.301 Guidelines in Assessing Reasonableness.

A. In General. Even if a noncompetition agreement is found to be supported by adequate consideration, it may still be unenforceable if it is held to be an "unreasonable" restraint of trade. Virginia courts have followed three broad guidelines in assessing the reasonableness of the restraint:

		1.	Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than necessary to protect the employer in some legitimate business interest?
2.	Is the restraint, from the standpoint of the employee, reasonable in the sense that it is not unduly harsh or oppressive in curtailing his legitimate efforts to earn a livelihood?
3.	Is the restraint reasonable from the standpoint of a sound public policy? 37

Generally, reasonableness from the employee's standpoint and reasonableness from the perspective of the employer involve related factors and so are necessarily intertwined. But in some cases a restraint that is greater than necessary to protect the employer in a legitimate business interest may not be unduly harsh and oppressive in curtailing a former employee's legitimate efforts at earning a living. Conversely, a restraint that is unduly harsh and oppressive from the employee's standpoint may be no greater than necessary for the protection of a legitimate business interest. Thus, each criterion must be examined independently in determining the reasonableness of the restraint.

B. Reasonableness from Employer's Standpoint. In examining the restraint from the standpoint of the employer, Virginia courts look at whether the employer had a legitimate business interest to protect and, if so, whether the restraint is no greater than necessary for that purpose. Unfortunately, however, although Virginia courts have engaged in some discussion of the legitimate business needs of the employer, there is relatively little Virginia case law that specifically addresses the breadth of an employer's "protectable interest."

C. Reasonableness From Employee's Standpoint. An examination of the restraint from the employee's standpoint will inquire whether the

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conditions imposed on the former employee are unduly harsh or oppressive. In making this evaluation, Virginia courts focus on the duration and territorial scope of the restraint and the activities restricted. For instance, the restraint cannot encompass activities in which the employer is not engaged or in which the employee was not engaged when employed by the employer.

D. Reasonableness From Public Policy Standpoint. In determining whether the covenant is unreasonably harsh and oppressive from a public policy standpoint, the courts will consider the parties involved, their respective positions, and the circumstances of the transaction. ³⁸

The possession of trade secrets and confidential information is an important consideration in testing the reasonableness of a restriction on competition. ³⁹ The relative positions of the parties, however, may not be significant where the terms of the covenant in light of the factual circumstances are unduly harsh and oppressive in curtailing the employee's legitimate efforts to earn a livelihood. ⁴⁰

For example, an agreement that merely prohibits an employee from soliciting clients, disclosing trade secrets, or revealing information regarding the employer's business relationship with its clients for a brief period after termination of employment may be viewed as a reasonable restraint on trade because such nonsolicitation and nondisclosure agreements are narrowly drawn to protect information regarding clients and do not prohibit employees from engaging in a competing business upon the termination of employment. ⁴¹ Because they are designed to restrict the wooing of clients of the employer, these agreements are typically a permissible restraint on trade. ⁴² But one federal court in Virginia has held that solicitation of clients does not occur if the employee merely responds to client inquiries and does not initiate contact with clients of his former employer. ⁴³

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The third criterion focuses on the public policy considerations of this type of restraint. Here, the court must balance the protection of freedom of contract with the protection of freedom of trade. In weighing this balance, courts look at practical considerations, chiefly the direct effect that the restraint will have on the public if enforced. One court has noted that the extent to which a noncompetition agreement restrains trade is not merely the amount of enforceable legal effect a court would give it if an employee challenged it, but the amount of effect it has on an employee's behavior. ⁴⁴ Where the amount of the restraint is not justified by the employer's legitimate business needs, the covenant offends public policy. ⁴⁵

3.302 Criteria for Assessing Reasonableness.

A. In General. As a practical matter, Virginia courts have applied these concepts by scrutinizing three aspects of employee noncompetition agreements for reasonableness: (i) duration of the restriction; (ii) geographic scope of the restriction; and (iii) the breadth of the activity being restricted. Each of these aspects will be examined in turn. But while it may be useful to address each of these areas separately, there remains a degree of interrelatedness that cannot be ignored. ⁴⁶ For example, a court is more likely to enforce an agreement that contains a long period of noncompetition if the geographic scope is narrow and restrictions on activities are tightly drawn. ⁴⁷

B. Duration. Generally, Virginia courts will enforce noncompetition agreements that restrict competition for a duration of up to two years, although courts may permit a greater duration depending on the circumstances. ⁴⁸

In Simmons v. Miller, ⁴⁹ the defendant, an officer for a company that had exclusive rights to import and distribute a brand of Spanish cigars on the

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"east coast of the United States of America," signed an agreement that contained a noncompetition clause consisting solely of the following sentence:

For a period of three (3) years after this termination or expiration of the Agreement, Employee shall not directly or indirectly, own, manage, control, be employed by, participate in, or be connected in any manner with ownership, management, operation, or control of any business similar to the type of business conducted by Employer at the time this Agreement terminates.

The court found that the three-year duration of the agreement, while not unreasonable per se, was more lengthy than necessary to protect the employer's interests in light of the agreement's failure to describe the type of activities restricted or to limit the geographical scope of noncompetition. For those reasons, the court found the clause to be unduly harsh, oppressive, and offensive to public policy. Thus, as noted above, practitioners cannot merely look to the durational length of the agreement without considering its overall breadth.

In Management Concepts, Inc. v. Kraemer, ⁵⁰ the Personal Services Agreements (PSAs) of two independent contractors of a leadership training company prohibited the independent contractors from servicing any of its customers for two years following the termination of the contractual relationship. The court held that the restrictive covenants contained in the PSAs were not unduly restrictive and that the independent contractors were therefore liable because they provided leadership training services to a former client of the company immediately after submitting their resignations.

Similarly, in TradeStaff & Co. v. Lee, ⁵¹ the court held that a two-year noncompete period was not an unreasonable time frame to limit competition by high-level employees of a construction staffing service.

The absence of any durational limitation in a restrictive covenant, however, may render the covenant overbroad and unenforceable. In Anteon Corp. v. BTG Inc., ⁵² an arbitrator in a dispute between a contractor and subcontractor entered an award in which the contractor was "permanently enjoined from interviewing, offering employment to, hiring, or otherwise soliciting" the subcontractor's employees. The contractor appealed this aspect of

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the award, and the court held that the arbitrator's ruling was against Virginia's public policy because it failed to specify the length of time during which the contractor was prohibited from hiring the subcontractor's employees. The court noted that, in Virginia, a nonsolicitation agreement that does not contain a limitation on duration is invalid as a restraint on trade "in perpetuity." Because the arbitrator's award bound the contractor to an overbroad restrictive covenant, the court invalidated the award, required the arbitrator to rehear the dispute, and noted that any future award should limit the duration of any prohibition on the contractor's hiring of the subcontractor's employees.

Similarly, in International Paper Co. v. Brooks, ⁵³ the court invalidated a nonsolicitation of employees provision that contained no durational limit on the restriction of the former employee's ability to solicit co-workers for other employment.

In Ancient Art Tattoo Studio v. Riegger, ⁵⁴ the defendant, a tattoo artist, signed a lease with the plaintiff that included a noncompetition clause preventing him from directly or indirectly engaging in the promotion, sale, advertisement, or application of tattoos within a 150-mile radius of the plaintiff's business for a period of five years. The court found that, based on all the facts and circumstances of the agreement, the noncompetition covenant passed the three-prong reasonableness test and was enforceable.

In Crawley v. Cox, ⁵⁵ the covenant not to compete provided that, upon termination of the agreement, the defendant would not engage in "any form of dental practice" within ten miles of the plaintiff's office for a...