3.4 Miscellaneous Issues

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

3.4 MISCELLANEOUS ISSUES

3.401 Reformation and Blue Penciling.

A. In General. An issue not fully resolved in Virginia is the extent to which a court may reform a noncompetition agreement that is otherwise unenforceable, either by blue-penciling the agreement (striking out offending provisions to create an enforceable document) or simply modifying the offending language to make the restrictions reasonable. Some observers have concluded that Virginia courts will not modify unreasonable restrictions based on the Virginia Supreme Court's failure to make such modifications when it held

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unenforceable the restrictions in Richardson v. Paxton Co. ³⁴⁰ But that issue was not raised in that case, and the better view is that the issue has not been fully resolved by the Virginia Supreme Court.

B. Federal Court Opinions. Federal courts applying Virginia law have generally concluded that noncompetition agreements must stand or fall on their own terms and thus are not subject to reformation. ³⁴¹ In Roto-Die Co. v. Lesser, ³⁴² the court said:

I believe the better view is that the [blue pencil] power does not exist. As the Fourth Circuit in Alston Studios made clear: "We think the restrictive covenant must be judged as a whole and must stand or fall when so judged." 492 F.2d at 284. . . . Virginia's rule of strict construction against the employer, based upon the words used in the contract, is also indicative of a refusal to adopt the "blue pencil" rule. See Clinch Valley Physicians, Inc. v. Garcia, 243 Va. 286, 414 S.E.2d 599, 601 (1992). Accordingly, I decline the invitation to create a new contract for the parties. ³⁴³

C. Virginia Circuit Court Opinions. Most Virginia circuit courts have adopted the federal courts' position. ³⁴⁴ But it is not clear in any of the circuit court cases whether, if an agreement by its terms had granted the court the right to reform the provision to make it enforceable, the court might then have assumed the authority to do so. In Northern Virginia Psychiatric Group, P.C. v. Halpern, ³⁴⁵ the court declined to rewrite an unenforceable noncompete provision contained in an employment agreement despite a savings provision which provided that, if the nonsolicitation provision were declared overbroad, "it will be construed as limiting and reducing it as determined by a court of competent

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jurisdiction and shall be enforceable to the extent compatible with applicable law." ³⁴⁶ The rationale of the court's decision is worth noting:

The court believes that the saving clause in an employment contract which allows the court to narrow the effect of a restrictive covenant is against public policy. In addition to questions about interference with contracts, restraint of trade, and other legal arguments, does the judiciary want to become the employer's scrivener? Nothing in our legal history suggests that a Virginia court would willingly place itself in such an unrestrained position. This court finds the offending covenant not to compete overbroad and declines to rewrite the offending covenant to the court's own notion of what restriction would comply with Virginia legal principles. ³⁴⁷

Similarly, in Totten v. Employee Benefits Management, Inc., ³⁴⁸ the court refused to enforce a "severability clause" in a noncompete agreement in which the parties purported to agree to any revisions necessary for the agreement to be "construed and/or reformed by the court so as to be judged reasonable and enforceable." After holding that the noncompete provision was overly broad and unenforceable as to duration, geographic scope, and restricted activities, the court refused to enforce the severability clause, reasoning that the clause was of no legal force because the court could not rewrite the contract to bind the parties to terms that they had never contemplated.

In Pace v. Retirement Plan Administrative Service, Ltd., ³⁴⁹ the City of Richmond Circuit Court took the proposition that courts do not have the authority to blue pencil or rewrite restrictive covenant agreements one step further by holding that the inclusion of blue pencil provisions in the agreement at issue "render[ed] the agreement unenforceable." ³⁵⁰ The position held by the court in this case—that the mere inclusion of a reformation clause made the entire agreement unenforceable—would seem to be a poor result not in keeping with other decisions that have addressed this issue.

Because the Virginia Supreme Court still has not decisively ruled on this issue, noncompetition agreements should contain clauses permitting the court to modify to the extent necessary for enforceability.

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3.402 Separability and Severability. The concept of "separability" and "severability" involves the willingness of a court to enforce part of an agreement (for example, a confidentiality provision) even when another provision in the agreement (for example, a noncompete provision) is unenforceable. Courts applying Virginia law generally have been willing to sever the offending provision to leave the others intact. In Roto-Die Co. v. Lesser, ³⁵¹ the court held that the noncompete provision was overbroad and unenforceable but concluded that the remainder of the employment contract was still enforceable.

In Hilb, Rogal & Hamilton Co. v. Jennings, ³⁵² the employment agreement specifically provided that "no covenant or provision shall be dependent upon any other covenant or provision unless so expressed herein." Relying on this language, the court held that the covenant not to compete was severable and independent and could be enforced without regard to a material breach of the employment agreement. The court stated:

Considered together, all of these provisions manifest that the non-compete clause was an essential provision with respect to both the Agreement to Sell Insurance Expirations and the Employment Agreement and that the parties understood the clause was separate and independent of the other provisions of the Employment [A]greement or any actions of the parties with respect to any other provisions. ³⁵³

In MicroStrategy Inc. v. Business Objects S.A., ³⁵⁴ the court held that an overbroad nonsolicitation clause could be severed from the rest of a contract where the agreement included a savings provision. In MicroStrategy, the court invalidated a nonsolicitation clause in an employment agreement based on the ambiguous scope of activities prohibited by that clause. Reviewing the employment agreement as a whole, the court found that the nonsolicitation clause was independent from the remaining restrictive covenants, which sought to protect MicroStrategy's confidential information and trade secrets. The court reasoned that the importance of these types of restrictive covenants supported severing the offending nonsolicitation provision. The court also reasoned that the savings provision, which stated that the invalidity of any clause or provision of the agreement would not affect the validity of the remaining provisions, indicated that the parties' clear intent was to allow for the severability of any clause later

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found to be invalid. Therefore, the court severed and struck the overbroad nonsolicitation clause from the remainder of the agreement.

The separability/severability doctrine, however, does not permit the reformation or modification of certain parts of a noncompete provision. Thus, the court in Weight Watchers of Virginia, Inc. v. Jarashow ³⁵⁵ held that noncompetition agreements are not separable into parts and must stand or fall when judged as a whole.

3.403 Indirect Participation in a Competing Business. In Rash v. Hilb, Rogal & Hamilton Co., ³⁵⁶ the plaintiff was a senior vice president in charge of the group benefits division of HRH, a company that sold various types of insurance, including insurance benefits products. The plaintiff's employment agreement with HRH contained a covenant prohibiting him from competing directly or indirectly against HRH upon termination of his employment. The plaintiff's wife was a benefits consultant for HRH and had complete access to HRH's confidential customer and business information. She worked closely with the plaintiff and frequently accompanied him on appointments to solicit new business accounts for HRH. The plaintiff's wife was not required to sign a covenant not to compete.

A few years after joining HRH, the plaintiff and his wife resigned from the company. The wife formed her own insurance company, Rash & Associates, which competed for HRH's insurance benefit accounts. The wife used the plaintiff's credit card to purchase a facsimile machine, office equipment, and a printer, and the plaintiff knew that the purchases were for his wife's newly formed business. During its first month of operation, Rash & Associates conducted business in a house jointly owned by the plaintiff and his wife. Additionally, the wife used her husband's leased automobile to conduct business on behalf of Rash & Associates. Most importantly, the plaintiff assigned his interest in jointly owned mutual funds to his wife as collateral for her to obtain the necessary financing for Rash & Associates.

When Rash & Associates eventually acquired several group benefits insurance accounts that had been serviced by HRH, HRH sued the plaintiff for breaching his covenant not to compete. The court held that the plaintiff had engaged in a competing business by allowing his wife to use jointly held marital assets to fund Rash & Associates. The court stated:

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The record is replete with evidence that Mr. Rash acted as a participant who, at the very least, indirectly engaged in a business that competed against HRH. . . . Mr. Rash relinquished his interest in a jointly-owned mutual fund account so that Mrs. Rash could use those funds as collateral to secure a loan that was used for operating capital for Rash & Associates. And . . . Rash and Associates would not have been able to conduct business without this loan. ³⁵⁷

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