Posted on April 11, 2012 in Business Law
Over the course of the past 20 years, the Virginia Supreme Court has tweaked the law governing non-compete agreements. In its latest case, the Court came full circle by invalidating a non-compete agreement that used the same language the Court had upheld 20 years earlier in a case involving the same company.
As we have written before, trial courts will enforce non-compete agreementswhen the agreements (1) are narrowly drawn to protect the employer’s legitimate business interest, (2) are not unduly burdensome on the employee’s ability to earn a living, and (3) are not against public policy. Importantly, the employer has the burden to prove each of these elements. When evaluating whether the employer has met that burden, trials courts should consider the“function, geographic scope, and duration” elements of the non-compete restrictions. These elements are “considered together” rather than “as three separate and distinct issues.”
Further, if the non-compete agreement is too broad or otherwise unenforceable, a Virginia court will not rewrite, or “blue pencil” the agreement to make it enforceable. Therefore, it is important that you work with your business attorney to draft an enforceable non-compete agreement.
In Home Paramount Pest Control Companies, Inc. v. Justin Shaffer, the employer used non-competition language the Virginia Supreme Court upheld in 1989, a case involving the same employer. The clause at issue is as follows:
The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever, in any city, cities, county or counties in the state(s) in which the Employee works and/or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount].
The Court noted the evolution of its decisions over the 20 years sinceParamount Termite Control Co. v. Rector, 238 Va. 171, 380 S.E.2d 922 (1989).As the law stands now, a trial court must review all three elements of a non-compete agreement—function, geographic scope, and duration. In this case, the employer “did not confine the function element of the Provision to those activities it actually engaged in.” Therefore, the employer had the burden to prove it had “a legitimate business interest” in prohibiting the employee from engaging in “all reasonably conceivable activities while employed by a competitor.”
Furthermore, the Supreme Court stated clearly that if the “function” restriction is too broad, it does not matter if the geographic scope and duration are “narrowly tailored.” The employer, in such an instance, will bear the burden to prove it has a “legitimate business interest in such a sweeping prohibition.”
Non-compete agreements continue to evolve in Virginia. Consequently, you need to discuss the issues with your business lawyer before the agreement is signed. For a fuller discussion of the issues relating to non-compete agreements, review this Tarley Robinson library article.
Tarley Robinson, PLC, Attorneys and Counsellors at Law