The Virginia Supreme Court: Reversal of Fortune in Important Non-Compete Case – and Other Important Restrictive Covenant Cases

Mark November 4, 2011 on your list of important dates in Virginia legal history as a day of infamy for the Virginia Supreme Court. The Court, on said date, issued its written opinion in the case of Home Paramount Pest Control Companies, Inc. v. Justin Shaffer, 2011 WL 5248212 (Va. 2011) and in such opinion invalidated an employee covenant not-to-compete.

To be sure, news that the Virginia Supreme Court has invalidated a non-compete is not unusual. The Virginia Supreme Court has routinely invalidated such covenants as unreasonable restraints of trade over the course of the past twenty years. What is very unusual is that the Court invalidated the same exact covenant that 22 years ago it upheld in the case of Paramount Termite Control Co. v. Rector, 238 Va. 171 (1989). The same exact covenant by the successor-in-interest to the same employer!

The Paramount Termite (1989) and Home Paramount (2011) Cases

The Virginia Supreme Court, in Home Paramount, held that in the 22 years since its 1989 decision considering the same clause for the predecessor-in-interest to Home Paramount Pest Control Companies, Inc., the Court's legal views have changed remarkably. Since such time, the Court has considered a number of non-compete cases and has "incrementally clarified the law since that case was decided in 1989." The Court therefore felt it had the authority to overrule its earlier decision affirming the same covenant.

The covenant at issue stated that:

"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 Virginia Supreme Court upheld the decision of the Fairfax County Circuit Court. The Virginia Supreme Court found that the covenant and in particular the language ("engag[ing] indirectly or concern[ing] himself/herself in any manner whatsoever") is too broad in that it prohibits the employee (Justin Shaffer) from working for a competitor in any capacity and that Home Paramount failed to prove it has a legitimate business interest in the broad prohibition. Since its original decision in 1989, the Court has essentially required that non-compete clauses narrowly define the restricted activity as those activities that actually compete with the employer.

The lesson here is that a non-compete clause should be drafted as narrow as possible with an emphasis on restricting a former employee from engaging in activities that compete with the former employer. The Virginia Supreme Court has eroded non-compete clauses over the past 22 years, culminating in the decision handed down by the Court in the Home Paramount case on November 4, 2011. A second important case involving similar issues is currently pending before the Virginia Supreme Court.

Impact of the Ripple Effect to Related Clauses

In addition to the narrowing interpretation of what is permissible in a non-compete clause, the courts at all levels in Virginia have made it more difficult to draft and enforce anti-raiding clauses, i.e., clauses prohibiting the solicitation of customers and employees, and non-disclosure provisions. The courts have also made it more difficult to reform overbroad provisions. Below is a highlight of some of the more important developments:

  1. Customer Anti-Raiding Clause. A customer anti-raiding clause essentially protects against the solicitation of customers of a former employer. As with the enforceability of non-compete clauses, Virginia courts have also narrowed the permitted reach of such anti-raiding clauses. In Virginia, a clause prohibiting a former employee from soliciting customers probably needs to be limited to customers that the former employee knew or had reason to know about. For instance, a court is not likely to enforce a clause that applies to any customer "invoiced" by the former employer if the clause places an "unreasonable burden" on the employee to know all of the customers invoiced. See Lasership Inc. v. Watson, No. CL 2009-1219 (Fairfax County Circuit Court 2009). A customer anti-raiding clause probably also needs to only reach the solicitation of business that competes with the former employer, e.g., it is not enforceable to prevent the solicitation of delivery services to a customer of a former employer that provides security staffing support services. See Omiplex World Services Corp. v. US Investigating Services, Inc., 270 Va. 246 (2005).
  2. Employee Anti-Raiding Clause. Another widely used restrictive covenant prohibits a former employee from "raiding" the workforce of a former employer. Such clauses apparently cannot be drafted in a manner that restricts the solicitation of employees to work in a position that does not compete with the former employer. Mantech Int'l Corp v. Analex Corp, 75 Va. Cir. 354 (Fairfax County Cir. Crt. 2008).
  3. Non-Disclosure Provisions. Also under scrutiny are provisions restricting against the disclosure of confidential information of an employer. Two very recent cases make the following two points: (a) such clauses need to be drafted in a manner that carefully defines what is considered protected information, e.g., potentially invalid are clauses that provide a "non-exclusive" laundry list of examples of protected information and (b) the restrictions may need to be drafted in a manner so as to not last in perpetuity. See Lasershp Inc. v. Watson, 79 Va. Cir. 2005 (Fairfax County Cir. Crt. 2009) and BB&T Insurance Services, Inc. v. Thomas Rutherfoord, Inc., 80 Va. Cir. 174 (City of Richmond Cir. Crt. 2010). NOTE: The BB&T Insurance Services case is currently pending before the Virginia Supreme Court, and therefore, the issues addressed in said case will most certainly be clarified further once an opinion is issued.
    It is difficult to determine whether a time limit is needed if the definition of what is protected information is well-defined. An employer wanting to ensure that the restrictions against the disclosure of confidential information will be upheld may want to consider both narrowly tailoring the definition of protected information and putting an appropriate limit on the period of time in which the restrictions should last.
  4. Restriction against Blue-Penciling. Given the uncertainty, the inclination of employers may be to draft provisions broadly and hope that a court will reform an invalid covenant by narrowing it to a provision that is more acceptable. For instance, if a covenant restricts competition within a 50 mile radius a court could determine that a 30 mile radius is acceptable and rewrite to allow the clause accordingly (a process known as "blue-penciling"). Unfortunately, the law in Virginia appears fairly settled (most recently demonstrated by the Fairfax County Circuit Court in Laser ship) that a court applying Virginia law will not "blue pencil" an invalid clause and instead will just invalidate the entire clause.

SUMMARY

We will continue to follow the decisions of the Virginia Supreme Court and other courts in Virginia. It is become more and more clear, however, that Virginia courts simply do not like to enforce restrictive covenants. Many clauses may be invalid given recent case law and should be re-written narrower by amending existing agreements. We recommend that employers around the Washington, D.C. Metropolitan Area review and revise their employment and non-disclosure agreements in an effort to make them more enforceable.

You should contact your attorney for a review of your existing provisions if you intend on relying upon them to protect poaching of your customers or employees or the disclosure of your confidential information. Please contact the author of this Client Alert, Scott Dondershine ([email protected]), or any of the other attorneys at David, Brody & Dondershine, LLP, at (703) 264-2220 if you need any help in this area. Additional information concerning David, Brody & Dondershine, LLP including other Client Alerts and articles on different topics can be found at www.dbd-law.com.


David, Brody & Dondershine, LLP is a law firm that concentrates in providing full-range business law services to businesses, including representing government contractors and firms in other industries. This Client Alert is intended to provide general information about significant legal developments and should not be construed as legal advice on any specific facts and circumstances.

If you do not wish to receive future email client alerts, please send an email with unsubscribe in the subject line to [email protected].