The Supreme Court of Virginia recently overturned a 1989 decision concerning the validity of a non-compete clause and held that a clause identical to one that it previously held was valid, from the same company, is now invalid. The case is Home Paramount Pest Control Cos. v. Shaffer (Nov. 4, 2011).
Employers commonly use non-compete agreements (or, more fully, non-competition agreements or covenants not to compete) in order to prevent an employee from using information gleaned from the company to help a competitor. Despite conventional wisdom and employee belief, these agreements are quite enforceable if drafted properly. Proper drafting means that the contract is narrowly drawn to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to make a living, and is not against public policy. The employer bears the burden of proving each of these three factors and, when evaluating whether the employer has met that burden, Courts consider the function, geographic scope, and duration elements of the restriction.
The new rule: non-compete agreements should rarely include language which prohibits a former employee from performing services “directly or indirectly” and in “any capacity” for a competing business. The Virginia Supreme Court’s recent decision permits dismissal of such non-competes as a matter of law. It is important for employers to very narrowly draft these contracts so that they only proscribe directly competitive activities.
Although the Virginia Supreme Court held 20 years ago that a non-compete with identical language as this one was enforceable, the high court now states that it is not bound by its prior decision because the law has incrementally been changing.
The Court analyzed the growing body of case law on non-compete law – from Blue Ridge Anesthesia & Critical Care, Inc. v. Gidick, 239 Va. 369 (1990) to Omniplex World Services Corp. v. US Investigations Servs., Inc. 270 Va. 246 (2005) – in reaching its decision. It then concluded that a non-compete which restricts an employee from working for competitors in “any” capacity requires the employer to prove a legitimate business interest to support such a broad prohibition. It held that the prohibited activity in the non-compete agreement must be of the same type as that actually engaged in by the former employer. In this case, the Court noted that a strict reading of the non-compete agreement would prohibit the employee from even passively owning stock in a publicly traded international conglomerate with a pest control subsidiary. It held that this was over-broad. If a former employer, like Home Paramount, wishes to prohibit its employees from working for its competitors in any capacity as stated in the non-compete, the employer has the burden of proving that it has a legitimate business interest for doing so. Most employer’s will have a great deal of trouble meeting this burden, which could leave the door open for defendants to swiftly dismiss any claims that rely on such non-compete language.
Under Virginia law, even a narrowly tailored geographic scope and duration could not save a non-compete that was clearly over-broad in its functional prohibitions. Given the competitive nature of today’s marketplace, businesses should consider a thorough review of its non-compete language to avoid the situation Home Paramount encountered.