A recent Virginia Circuit Court decision states that a non-compete is unduly burdensome when it forces an employee to choose between starting a new career locally or moving away. Fame v. Allergy & Immunology, PLC, CL15-1099 (City of Roanoke Cir. Ct.).
(The below is provided for informational purposes only and should not be construed as legal advice.)
Q: What types of non-competes are there and how do they differ?
A: The term “non-compete” may describe several different types of restrictions on future competition. These include:
“Traditional” non-competes, which prohibit an employee from engaging in competitive employment following the employee’s termination of employment. These are strictly scrutinized by the courts as described below.
Non-piracy agreements, which seek to prevent an employee from “pirating” or taking clients, business, or fellow employees of the employer following termination.
Non-solicitation agreements, a type of non-piracy agreements, which prohibit an employee from initiating business contact with customers and/or employees of the company following termination. They may be invalid if overly broad, ill-defined, or associated with invalid traditional non-compete provisions. Some recent cases have focused on what constitutes “solicitation” and whether it occurs when the customer initiates contact with the employee.
Confidentiality agreements, which prohibit an employee from using or disclosing confidential information or trade secrets during or following employment.
Q: Are all non-competes enforceable?
A: No. Non-competes are disfavored by the law in most states, including Virginia. They generally run counter to the prevailing public policy in favor of free and open competition. Nevertheless, non-competes may be valid and enforceable if they are supported by a legitimate business interest of the employer and are narrowly tailored to protect that interest. As a result, a non-compete should never be offered or signed without first obtaining legal advice from experienced counsel.
Q: By what standards are non-competes judged?
A: In Virginia, a non-compete must be narrowly tailored to protect a legitimate business interest of the employer, must not be unduly harsh and oppressive so as to restrict the employee from earning a living, and must be reasonable from the standpoint of public policy to be enforceable.
Q: When is a non-compete considered to be narrowly tailored and enforceable by the courts?
A: In evaluating a non-compete, Virginia courts will generally consider three factors to determine if it is “narrowly tailored” in scope: (1) the activities it prohibits, (2) the geographic scope of its restrictions, and (3) the duration or length of time that the restrictions remain in place. If these are all limited to the narrowest extent possible to protect the employer’s legitimate business interest under the circumstances, the non-compete should be enforceable.
Q: What defenses are there to the enforcement of non-compete agreements?
A: There may be several based on the language of the non-compete, the context in which it was prepared and signed, and the conduct of the employer and employee during and after employment. In Virginia, one line of cases has created what is sometimes called the “janitor” defense. Employees seeking to use this defense have argued that they would be prevented from working in any capacity – even as a janitor – for a competitor, and therefore the non-compete is overly broad and invalid.
Q: What does “solicitation” mean?
A: This depends upon the specific language of the agreement. In many instances, it may require that the former employee initiate contact with the customer to obtain its business. The Federal Circuit Court covering Virginia and Maryland ruled in one case that an individual did not “solicit” customers of his former employer when he responded to the customers after they contacted him. See Mona Electric Group, Inc. v. Truland Service Corp., 193 F. Supp. 2d 874 (E.D. Va. 2002), aff’d, 56 Fed. Appx. 108, 2003 U.S. App. LEXIS 83 (4th Cir. Va. 2003). Thus, the former employee did not breach the agreement.
Since that case, however, many non-competes now prohibit former employees from contacting customers at all, or from interfering with customer relationships in any way, regardless of whether the employee initiates contact or not. While the decisions vary, these broad restrictions call into question the validity of such agreements, which must be narrowly tailored and supported by legitimate business interests to be enforceable.
Q: Are physician non-compete agreements enforceable?
A: While the answer varies by state, Virginia courts have enforced physician non-competes where the employer (which may be a medical practice or hospital) has a legitimate business interest in its enforcement and it is narrowly tailored to protect that interest. Nevertheless, public policy considerations exist with respect to physician non-competes, including AMA ethical rules and the public interest in the availability of medical treatment. At the same time, the non-compete cannot extend into areas in which the employer cannot or does not practice.
Q: Will a Virginia court “blue pencil” a non-compete?
A: While a non-compete clause may have some terms that are overbroad and some that are not, Virginia courts generally will not “blue pencil,” or selectively remove or modify, terms of a non-compete clause. While the Virginia Supreme Court has not specifically prohibited blue penciling, its decisions require that a covenant not to compete be narrowly tailored for any part of it to be enforceable. Some circuit courts have found that the presence of a “blue pencil” clause in a non-compete is against Virginia public policy, and have refused to enforce the whole non-compete on that basis. See, e.g., Pace v. Ret. Plan Admin. Serv., 74 Va. Cir. 201 (City of Richmond Cir. Ct. 2007).
Nevertheless, some employers have added “severability” clauses that enable courts to remove a full clause or paragraph from a non-compete agreement if invalid and enforce all other terms of the agreement. For example, in a Fairfax County Circuit Court case, Daston v. MiCore Solutions, Inc., the Court severed the unenforceable traditional non-compete from the agreement, and enforced the non-solicitation clause in the agreement. When asked to “blue pencil” portions of the non-compete clause, however, the Court refused and stated that it could not do so based on Virginia’s prohibition against blue penciling.
Thus, when questions arise regarding “blue pencil” issues, it is crucial to consult with an attorney knowledgeable concerning the current state of the law of non-competes.
Q: How does a non-compete “fee shifting” clause work?
A: Many non-competes contain a “fee shifting” clause that allow for attorneys’ fees and costs to be recovered in addition to damages for breach. Some fee shifting clauses are mutual, and may allow an employee to recover attorneys’ fees and costs if the employer loses.
These clauses are often buried deep within a non-compete and may create unexpected results. In a Maryland Court of Appeals case, an agreement contained a fee shifting provision within a non-solicitation clause. While the employee was found to have breached her duty of loyalty to the employer, because she was not found to have violated the non-solicitation clause, she was awarded a judgment of almost a million dollars for her fees in the litigation. See Weichert Co v. Faust (Maryland Ct App 04/27/2011).