By: Jeffrey L. Berger, Esq., The Berger Law Firm, P.C., Washington, D.C.
Are non-competition agreements enforceable? The answer is becoming more complicated and difficult for businesses, especially in Virginia. Following a trend of narrowing employer rights, the Virginia Supreme Court in Home Paramount Pest Control v. Shaffer recently overturned a twenty-two-year precedent that permitted broad non-competition restrictions on former employees. The November 2011 decision is a wake-up call for all employers to review their restrictive covenants to safeguard their business interests.
When Justin Shaffer was hired as an exterminator by Home Paramount, he signed an employment agreement with a fairly standard non-compete clause. It prohibited him for two years after leaving the company from engaging “directly or indirectly” or concerning himself “in any manner whatsoever” in a pest control business in a location where he had worked for Home Paramount. Shaffer resigned to take a position as an exterminator with a competing pest control company, where he solicited Home Paramount’s customers. Home Paramount sued Shaffer for violating his non-compete and his new employer for interfering with his employment contract.
The Court found the clause to be unenforceable, reversing its own 1989 decision in which it upheld identical non-compete language. While the Home Paramount ruling involved pest control, it has particular relevance for high tech industries, government contractors, and professional services companies where the skills and “intellectual capital” of employees are major components of the enterprise value. Courts in Virginia and other jurisdictions will review a restrictive covenant under a three-part enforceability test, asking is it: 1) drawn narrowly to protect the employer’s legitimate business interest; 2) unduly burdensome on the employee’s ability to earn a living; and 3) against public policy? To evaluate these factors, courts focus on the functions or activities, the geographic area, and the duration covered by the restriction. While Home Paramount is precedent in Virginia only, its reasoning may be utilized elsewhere.
Under Home Paramount, a non-compete should, in general, be focused narrowly on preventing the former employee from directly competitive employment doing the same job or functions that he performed previously. However, the Court did not even consider if Shaffer’s new job was actually the same or whether he was soliciting Home Paramount’s clients. Instead, it focused on the hypothetical application of the restriction. The Court found the restriction to be overly broad because Home Paramount could not provide evidence of a legitimate business interest supporting its possible application. For example, it could prevent Shaffer from owning stock or working as a janitor in a competing business. Moreover, Virginia courts are among a minority that will not modify an otherwise overly broad covenant to make it reasonable under the law. Thus, the Court in Home Paramount struck the entire restriction.
There are various “tools” businesses may use to create enforceable rights and leverage to prevent competition and protecting trade secrets when employees exit. Among these are: 1) return of company property; 2) precluding disclosure and use of confidential information; 3) ownership of intellectual property; 4) no-raiding of staff; 5) no-solicitation of customers or prospects; and 6) non-competition.
As facts supporting enforceability vary among businesses, copying covenants from the Internet or using a shotgun approach may result in no protection, particularly in states where such restrictions are disfavored. Indeed, the common misconception that restrictive covenants are unenforceable is due largely to poor drafting, or “using a baseball bat to kill a fly.” Given the Home Paramount decision, prudent employers would likely benefit from reexamining their restrictive covenants to avoid risking their most valuable assets.
Jeffrey Berger represents high-tech companies, government contractors, and executives in employment and labor law matters. www.bergerlaborlaw.com.