COVENANTS NOT TO COMPETE IN VIRGINIA:
PLAINTIFFS’ PERSPECTIVE
HARRIS D. BUTLER, III
BUTLER, WILLIAMS & SKILLING, P.C.
100 SHOCKOE SLIP
RICHMOND, VIRGINIA 23219
(804) 648-4848
hbutler@butlerwilliams.com
www.butlerwilliams.com
I.
Employee Plaintiff or Employer Plaintiff?
A.
B.
Individual Employees Concerned with Non-Compete Covenant
1.
If you are representing an employee who may be subject to an
overbroad agreement, consider filing a declaratory judgment
action coupled with a preliminary injunction to bar enforcement
of the overly broad restriction. Do not let the employer stand in
the shoes of the plaintiff. Take control of the litigation. The
benefit of phrasing the issue for the Court in an action drafted by
you is much preferable to being on your heels defending an
action framed by the employer. See Graves v. Ciraden, Inc., 65
Va. Cir. 127 (Fairfax County 2004) (J. Thacher) (declaratory
judgment action regarding non-competition agreement states
justiciable controversy).
2.
This allows your client some measure of certainty so the sword
does not continue to hang over the employee’s head. To wait
means to subject the new employer and the client to the lingering
threat of litigation, the “chill” effect of even an arguably
overbroad clause and the prospect of increased damages should
the clause be held enforceable two or three years later.
The Legal Standard.
1.
In order to be enforceable, non-compete agreements must be
narrowly drawn to protect the employer’s legitimate business
interest, must not be unduly burdensome on the employee’s
ability to earn a living and must not be against public policy.
Modern Environments, Inc. v. Stinnett, 263 Va. 491, 493 (2002).
2.
The employer bears the burden of proof that the restraint is
reasonable under the facts of the case. Blue Ridge Anesthesia v.
Gidick, 239 Va. 369, 371-72 (1990) (covenant enforced).
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II.
3.
Theses cases are considered on a case-by-case basis so the facts
and context matter. Modern Environments, Inc. v. Stinnett, 263
Va. 491, 494-95 (2002).
4.
Public policy disfavors restraint of trade – any agreement
language that suggests broad restraints is vulnerable.
5.
Whether a restrictive provision is unreasonably harsh and
oppressive depends upon the facts of a particular case. See Foti
v. Cook, 220 Va. 800, 806 (1980); Meissel v. Finley, 198 Va.
577, 583 (1956).
6.
In argue policy, consider the policy related to notions of free
competition and ‘right to work.’ The Virginia Supreme Court
has determined that, while it is not an absolute right, an
employee has the right to make arrangements during his
employment to compete with his employer after resigning his or
her post. Williams v. Dominion Technology Partners, 265 Va.
280 (2003).
Strategic Use of Motion Control, Stinnett, Simmons, Omniplex… And Parikh
A.
Educate the Court Early – This is an Area Where the Law is Truly on the
Employee’s Side
1.
If you are contesting the enforceability of a non-compete
covenant, get in front of the Court as quickly as possible with a
brief reciting the many favorable cases – and the Supreme
Court’s clear dislike of restraints of trade. (“Restrictive
covenants are disfavored restraints on trade and, therefore, the
employer bears the burden of proof and any ambiguities in the
contract will be construed in favor of the employee.” Simmons v.
Miller, 261 Va. 561, 581 (2001).)
2.
If the non-competition agreement is broader than necessary to
protect the employers legitimate interests, it will fail. Only direct
competition or employment with a direct employer is subject to
legitimate restraint.
3.
The Virginia Supreme Court line-up on this issue includes
Omniplex World Services, Corp. v. US Investigations Services,
Inc., 270 Va. 246 (2005) (non competition agreement that is not
limited to employment that would be in competition is overly
broad and unenforceable); Modern Environments, Inc. v. Stinnett,
263 Va. 491 (2002) (covenant not to compete that restricted work
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in any capacity with competitor, beyond employee’s job function
with former employer, is overly broad and unenforceable);
Motion Control Systems v. East, 262 Va. 33 (2001) (covenant not
to compete restricting employment with motor manufacturers
that did not manufacture motors similar to employer overbroad
and unenforceable); and Simmons v. Miller, 261 Va. 561, 581-82
(2001) (lengthy duration, expanded restricted functions and lack
of geographic limitation rendered covenant overly broad and
unenforceable).
4.
B.
Hot off the Press: On March 2, 2007, the Virginia Supreme
Court struck down another non-competition agreement. In
Nipun Parikh, M.D. v. Family Care Center, Inc., 2007 Va.
LEXIS 37 (Record No.; 060934) (March 2, 2007) the Court
invalidated a non-competition agreement because the employing
entity, Family Care Center, Inc., (a non-professional corporation)
was not able to practice medicine in Virginia and, therefore, had
no legitimate business interest in enforcing the covenant against
Dr. Parikh.
Circuit Authority Supports Overbreadth Arguments
1.
Invalidated covenants include: Better Living Components, Inc. v.
Willard Coleman and Blue Ridge Truss & Supply; 67 Va. Cir.
221 (Abermarle County 2005) (J. Hogshire) (no blue penciling
allowed); International Paper Co. v. Brooks, 63 Va. Cir. 494
(Roanoke City 2003) (J. Dorsey); Totter v. Employee Benefits
Management, Inc., 60 Va. Cir. 342 (Roanoke City 2002) (J.
Doherty); See also Anteon Corp. v. BTG, Inc., 62 Va. Cir. 41
(Fairfax County 2003) (J. MacKay) (on review of arbitration
award; remand to arbitrator for consideration of Virginia public
policy prohibiting perpetual non-solicitation or hiring clauses).
2.
See also SmartMail Services, Inc. v. Ellis, 66 Va. Cir. 507;
(Chesterfield County 2003) (J. Rockwell) (temporary injunction
filed by employer attempting to enjoin employee from working
pending action on non-compete denied based on “tenuous”
likelihood of success on the merits of assignability of personal
services contract and Virginia public policy disfavoring
enjoining one from earning livelihood).
3.
But see: Studio Center Corp. v. Ferraro, 2007 Va. Cir. LEXIS 13
(February 15, 2007); Cir. Ct. City of Norfolk (J. Tripp)
(covenant not unenforceable as a matter of law); Market* Access
International,Inc., et al., v. KMD Media, LLC et al., 2006 Va.
Cir. LEXIS 264 (December 14, 2006) (J. Thacher) (covenant not
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unenforceable as a matter of law; demurrer to claim asserting
breach of covenant overruled).
C.
Develop Facts To Underscore These Themes: These Cases are Fact
Specific
1.
Restraint of Trade: The courts reiterate their distaste for
covenants that restrain trade. Heighten the burden for the
employer. Develop facts showing the employer’s underlying
intent is to simply limit competition or the fact that no real
competition exists for this employer anyway - the employer is
simply attempting to create or extend a local monopoly.
2.
Broader than Employer’s Legitimate Business Interest: Narrow
the legitimate employer interest to specific product lines,
geographic sales areas and markets. Argue a ‘blinders’ view of
the employer’s business – the core business or where the bulk of
business lies – not extending to lines, products or areas where the
employer would like to be a player. Develop facts showing that
the non-competition restriction goes well beyond the scope of
employer’s product lines, business activities, geographic market
or legitimate competitors. For example, no sales reps cover the
areas employer seeks to protect; the prospective employer sells to
a different market segment or sells/manufactures a different
service or product.
3.
Unduly Burdensome on Employee’s Ability to Earn a Living:
Develop facts showing that the restriction is intended to hurt the
employee rather than protect the employer; the covenant limits
the employee far beyond the function employee performed for
former employer (“under employer’s argument, former employee
couldn’t even answer the phone/sweep the floor/etc, for
competitor employer”; “it puts the employee out of work doing
what she or he does best, puts him on the welfare rolls and the
employer doesn’t even sell in that area/manufacture the same
product, etc.”).
4.
Against Public Policy: Develop facts showing that the public
interest would be harmed if the covenant were enforced. This is
a good argument for employees who serve the community
(health care providers, specialty physician practices, etc.) and for
covenants with broad policy applications (such as perpetual
limitations and unlimited scope).
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D.
Arguing Ambiguity
1.
E.
Where the covenant or agreement is ambiguous and capable of
several meanings, argue that the ambiguity that must be
construed against the employer that drafted the restrictive
covenant. See Motion Control, 262 Va. at 37, 426; Blatt v.
Wittig, 29 Va. Cir. 313, 314 (Rockingham 1992).
Arguing Public Policy
1.
Judge Scott, in Wheeler v. Fredericksburg Orthopaedic Assocs.,
Inc., 44 Va. Cir. 399, 402 (Fredericksburg 1998), addressed the
public policy issue in a case involving a covenant seeking to
restrict a doctor in a sub-specialty medical practice needed by the
community (orthopaedic medicine dealing with the hand and
microsurgery):
This Court has previously stated that the
parties have agreed that the Petitioner’s
sub-specialty in the field of orthopaedic
medicine is unique and is only available
through other physicians practicing in the
Washington,
D.C.,
Richmond,
or
Charlottesville area. Therefore, in this
particular case, the residents of the
Fredericksburg, Virginia, area would
suffer if the Petitioner was not able to
practice her sub-specialty of medicine
within thirty-five miles of the City of
Fredericksburg. Therefore, the Court finds
that the public would suffer an irreparable
harm if the Petitioner was not allowed to
practice medicine within a thirty-five mile
radius of the City of Fredericksburg.
2.
F.
See also a good discussion of this issue by the Idaho Court of
Appeals in Dick v. Geist, 107 Idaho 931, 693 P.2d 1133 (Idaho
Ct. App. 1985).
Arguing Multiple Agreements
1.
Where the non-competition agreement is only one of several
agreements entered into at the same time, the other agreements
may contain useful language which broadens the application of
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the non-competition covenant. If so, they may be integrated to
be read as one.
G.
2.
Conflicting language among the agreements supports
overbreadth arguments, may assist in arguing intent, contract
construction or prior breach by the employer. Often, physician
practices include non-competition agreements in combination
with Employment Agreements, Recruitment Agreements,
Hospital Recruitment Agreements, Shareholder Agreements and
other forms of inter-related agreements.
3.
See Parr v. Alderwoods Group, Inc., 268 Va. 461 (2004) (noncompetition agreement unenforceable because of breach of
purchase agreement which was a material provision of the
integrated contract); Countryside Orthopaedics, P.C. v. Peyton,
261 Va. 142, 152 (2001) (“Where business transaction is based
on more than one document executed by the parties, the
documents will be construed together to determine the intent of
the parties”).
Arguing First Breach
1.
Where the employer seeking to enforce a non-compete
agreement has breached aspects of the agreement first, argue a
prior breach.
2.
A party who commits the first breach of contract is not entitled to
enforce that contract. Horton v. Horton, 254 Va. 111, 115, 487
S.E.2d 200, 203 (1997) (citing Federal Ins. Co. v. Starr Electric
Co., 242 Va. 459, 468, 410 S.E.2d 684, 689 (1991); Hurley v.
Bennett, 163 Va. 241, 253, 176 S.E. 171, 175 (1934)). When the
first breaching party commits a material breach, that party cannot
enforce the contract. Id. at 115, 204. “A material breach is a
failure to do something that is so fundamental to the contract that
the failure to perform that obligation defeats an essential purpose
of the contract.” Id. (citations omitted).
3.
Alternatively, if the employer has stated that the covenant is of
no force or effect or that it would not act to enforce the covenant,
argue knowing and voluntary waiver of the covenant under
contract principles. See, e.g., Centex-Rodgers Construction Co.
v. National Union Fire Ins. Co., 1993 U.S. App. LEXIS 10928
(4th Cir. 1993).
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H.
I.
Argue Against “Blue Penciling”
1.
Given the fact that such clauses are disfavored restraints of trade,
they should not be corrected by the Court’s “blue penciling”
acceptable restrictions into the covenant and excising
objectionably overbroad terms. See Roto-Die Co. v. Lesser, 899
F. Supp. 1515, 1523 (W.D. Va. 1995).
2.
See also Better Living Components, Inc. v. Willard Coleman and
Blue Ridge Truss & Supply; 67 Va. Cir. 221 (Abermarle County
2005) (J. Hogshire) (no blue penciling allowed); Pais v.
Automation Prods., 36 Va. Cir. 230, 233 (Newport News 1995)
(“This Court has not been granted the authority to blue pencil or
otherwise rewrite the contract.”)
Preliminary Injunction Standard
1.
In determining whether a preliminary injunction should be
issued, the Court must consider the following four factors:
• The likelihood of irreparable harm to petitioner without a
preliminary injunction;
• The likelihood of harm to respondent with the injunction;
• Petitioner’s likelihood of success on the merits; and
• The public interest.
J.
2.
See MFS Network Technologies, Inc. v Commonwealth of
Virginia, 33 Va. Cir. 406, 409 (Richmond 1994) (citing Telvest,
Inc. v. Bradshaw, 618 F.2d 1029 (4th Cir. 1980)); see also
Blackwelder Furniture Co. v. Seilig Manufacturing Co., 550 F.2d
189 (4th Cir. 1977).
3.
Where the harm to Petitioner greatly outweighs the harm to
Respondent, Petitioner need only show that a “grave or a serious
question” is presented instead of a likelihood of success. MFS
Network Technologies, 33 Va. Cir. at 409 (citing Telvest, 618
F.2d at 1033).
Supreme Court Review
1.
Enforceability of a covenant is a question of law reviewed by the
Virginia Supreme Court de novo. Motion Control Systems, Inc.
v. East, 262 Va. 33, 37 (2001).
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2.
Va. Code § 8.01-626 is a rarely invoked procedural tool which
permits review of a circuit court decree granting or denying an
injunction (or dissolving or refusing to enlarge a previously
granted injunction). The procedure allows for presentation of the
issue to a single Justice through a petition for review, who “may
take such action thereon as he considers appropriate under the
circumstances of the case”. The petition must be presented
within fifteen (15) days of the lower court’s order.
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