Employers can be more confident in enforcing their covenants not-to-compete with their former employees because of a recent ruling by the Supreme Court of Virginia. Generally, courts disfavor non-compete agreements because they are a restraint on trade. However, courts recognize that an employer may have a legitimate business interest in protecting their confidential and proprietary information from competitors. Courts also recognize that an employer should be able to protect itself from former employees who solicit the employer’s customers.
Virginia courts will generally only allow an employer to restrain a former employee from competition when it is no greater than necessary to protect the employer’s legitimate business interests. The courts consider the function, geographic scope and duration of the restriction to determine whether a non-compete agreement is reasonable as a whole and thus enforceable.
Recently, in Assurance Data, Inc. v. John Malyevac, the Virginia Supreme Court issued a decision having a significant impact on non-compete agreements. In that case, Assurance Data (“Assurance”) filed a lawsuit to prevent its former employee from performing services and selling products in direct competition with Assurance. The former employee previously entered into an employment agreement with Assurance that contained a non-compete provision preventing him from providing services or selling computer, software or hardware products in competition with Assurance within a 50-mile radius for six months after the termination of his employment. In addition, the former employee could not disclose any of Assurance’s confidential information at any time and was prohibited from soliciting Assurance customers.
The former employee filed a motion to dismiss stating that the non-compete and non-solicitation provisions in the Agreement were overbroad and thus unenforceable. Malyevac partially based his position on a poorly written non-solicitation provision which did not specify duration. The provision in question stated “during the term hereof, and for a period of twelve (12) after the date of termination……”. The Circuit Court of Fairfax County agreed and dismissed the case concluding that as a matter of law the provision was unenforceable.
However, on appeal, the Supreme Court of Virginia reversed the trial court’s ruling and dealt a major blow to employees who seek to challenge non-compete agreements. The Court held that a Motion to Dismiss is not the proper procedure to determine the enforceability of restrictive covenants because it does not allow the court to evaluate and decide the merits of the claim. It is important that a court balance the provisions of the agreement with the circumstances of the business and employees involved to determine if the restrictive covenant is narrowly drawn to protect the employer’s legitimate business interest without unduly burdening the employee.
Practical Counsel– Employers must make sure that their non-compete agreements are narrowly tailored to protect a legitimate business interest while also taking the employee’s position into account. That way, if you file a lawsuit you can articulate the reasons why the restriction is needed. The Virginia Supreme Court’s ruling makes it more difficult for former employees to challenge restrictive covenants and be victorious in the early stages of litigation. An employer has the right and the burden to show that the restraint is reasonable before a court will rule on its enforceability. A former employee will most certainly have to go through the discovery process prior to an evidentiary hearing incurring legal expense. Therefore, armed with a well-drafted non-compete language, employers should feel confident in enforcing their non-compete agreements.