How Does a Non-Compete Agreement Work?
At the heart of these non-compete agreements are two parties: they are a contract typically between an employer (the company) and an employee (the worker). The employer agrees to provide a job or compensation, and the employee signs a document agreeing not to work for a competitor of the employer’s in the same industry for a certain period of time after leaving employment. The purpose of a non-compete is to limit the ability of the worker to compete against the company he or she had been working for if the worker leaves that employment .
An increasing number of employers use non-compete agreements in Virginia to prevent workers from taking jobs with other companies if the worker has sensitive information. Just like any contract, some industries prefer this type of agreement over others.
There is also precedent in Virginia for upholding non-compete agreements if the former employee leaves the employer voluntarily, such as to pursue another position, retire, or to start their own business.
Virginia’s Approach to Non-Compete Agreements
Virginia has long recognized the legitimacy of the restrictive covenant, which is "one of the fundamental elements of protecting the investment value to employers in their employees." Bowman v. State Bank of Keysville, 229 S.E.2d 734, 738 (Va. 1976). Virginia has upheld a non-compete clause as enforceable when it is "no broader than necessary to protect a legitimate business interest of the employer" and is reasonable with respect to "time, geographical area, and scope of activity." Bank of Montreal v. Signet Bank/Virginia, 513 S.E.2d 378, 381 (Va. 1999).
Virginia law is strict on requiring that a non-compete be accompanied by other consideration beyond continued employment unless the former employee voluntarily signed a contract with "adequate, independent consideration." Basic Indus. of Va. v. First Tennessee Bank Nat’l Ass’n, 588 F. Supp. 2d 745 (W.D. Va. 2008).
Without a clear statute governing the enforcement of non-compete clauses, the Virginia courts have only interpreted them on a case-by-case basis with respect to a number of threshold issues, including considering the covenant in light of the totality of the circumstances. See Nat’l Elec. Benefit Funds v. EDA-Servs., Inc., No. 2:14cvl12, 2014 WL 879494, at *6 (E.D. Va. Mar. 5, 2014). However, the Virginia Supreme Court has held that a non-compete that lasts indefinitely, or for an unlimited period of time, is void and unenforceable because such "contracts contravene public policy because they impose unlimited employment obligations on employees." Phonoscript Corp. v. Hashtag Enters., LLC, No. 1606-85-3, 2017 WL 3926972, at *4 (Va. Ct. App. Sept. 5, 2017).
What Makes for an Enforceable Virginia Non-Compete Agreement?
A critical question when considering the enforcement of any non-competition agreement comes down to whether it is narrowly tailored and fair under Virginia law. In order for employers to be successful at enforcing non-compete restrictions against former employees in Virginia, the restrictions must be:
(i) limited in time,
(ii) limited in geographic scope, and
(iii) limited in its protection of the employer’s legitimate business interests.
This means that non-compete restrictions cannot be longer in time, broader in geographic scope, or protect business interests beyond those which are legitimate, and necessary to protect the employer’s business interests.
Time Restrictions
Regarding time limitations, Virginia courts have upheld restrictions of more than three years where the parties had significant bargaining power and the time restriction was limited to that necessary to protect the employer’s business interests. Conversely, in certain circumstances, Virginia courts have found two years to be a narrow enough restriction.
Geographic Restrictions
Geographically, the scope of the restriction must be limited to that area which the employee had actual contacts with customers and clients, and had authority to render services in a particular line of trade. However, non-compete restrictions are generally limited to that area reasonably necessary to protect the employer’s legitimate business interests.
A period of less than 50 miles has been found reasonable and necessary to protect the employer’s business interests even where the geographic restriction included significant portions of more than one state.
Much like the time and geographic restrictions, courts in Virginia have limited the scope of prohibition to activities that are reasonably necessary to protect an employer’s legitimate business interests. A non-compete restriction that covers a field or practice beyond that which the employee actually engaged is not likely to be upheld.
Bottom line, to be enforceable against an employee in Virginia, a non-compete restriction must be fair and narrowly tailored to protect the employer’s legitimate business interests.
Major Recent Developments in Virginia’s Non-Compete Statutes
Virginia’s non-compete laws have long been considered one of the most liberal in the United States, allowing employers to call many of the shots when it came to drafting, enforcing, and jumping through the proverbial hoops required to ensure enforceability of the restrictive provisions. The legislature, however, recently passed two bills that should have employers taking note. Both of these new laws are an attempt by the Virginia legislature to bolster workplace protections for employees.
The first law impacts any employer that operates an elder care facility. Effective July 1, 2020, § 54.1-3408.02 of Virginia law, prohibits companies from requiring employees who provide personal care services to clients, patients or residents to enter into a non-compete agreement. Such a provision will be deemed void and unenforceable. This statute protects employees of all levels of an elder care facility that directly interact with the patients including those who provide transportation to and from appointments, homemakers, and nurse practitioners. Employers can, however, implement "reasonable restrictions" (a.k.a. covenants) on employees relating to the type of elder care given. For instance, the employer could require the employee not to solicit clients (even after leaving employment), but could not forbid the employee from working for a competitor in a different geographical area. Also, prohibit the employee from retaining the home addresses of former clients of the company, or forbidding the use of company resources or intellectual property in a future endeavor.
The second law is a return to the pre-Trick, and pre-2011, days of Virginia attorney general opinions. Where the first law impacts all "personal care services" for an elder care facility, the second law is focused on "nonferrous and ferrous foundries." As of July 1, 2020, §§ 18.2-499.1 and 18.2-500.1 define a "covenant not to compete" as "any provision in a contract, partnership agreement or corporate bylaws that seeks to establish limitations (i) on the right of one party to freely accept employment (as described in § 18.2-499.1(A) defining "employment" for purposes of this section) with a third party competitor or (ii) on the right of a party to offer his services to the general public or to sell his products to the general public." The new law explicitly states that a "covenant not to compete" does not include "a provision in a contract for the employment of executive or administrative personnel, licensure requirements for attorneys at law and the courts’ enforcement of indentures of apprenticeship." So, even if this new law only applies to nonferrous and ferrous foundries, it provides even more impetus for employers that rely on contractual tools to begin moving towards valid business justifications, while also considering their negotiating leverage over prospective employees.
Ways to Counter the Enforcement of Non-Competes
There are a number of defenses available to employees attempting to avoid the enforcement of a non-competition agreement. One of the "global" defenses is that the agreement cannot "fit within Virginia’s playpen" and must instead be adjudicated in some other state’s Courts by virtue of the employee’s having signed a choice of law clause in the agreement. This issue is important when considering whether to bring one’s challenge in Virginia or to transfer it to the state where the employee lives.
Some dangers of litigating a revocation in a foreign forum stem from the fact that courts outside of Virginia generally hold that an employee’s particular employer is not a party to the employee’s actual contract. See, e.g., Eagle Comm’ns v. Keshmiri, 2000 WL 1032654, No. 288, 1999, in the Supreme Court of Pennsylvania, at *5 (May 18, 2000). So, one can imagine a situation where, if an employee in Virginia were to sign three non-competition agreements with three different companies, all three would be able to argue in a chosen forum in another state that none of those agreements is operative against that employee because none of the employers were parties to the employee’s actual contract. A negotiated solution might become necessary in such a case.
Parties to a non-compete agreement can also point to overbreadth and vagueness as a defense to enforcement . For example, the agreement might be considered overbroad in its scope if enforcement would include an order from the court that the employee refrain from working with the employer’s competitors anywhere in the world, even if that employee’s last three years of employment has been in North Carolina, South Carolina and Virginia. Vagueness of the restriction may come into play in the situation if the agreement would contain a restriction against the employee’s performing services that "directly or indirectly" compete with the employer – as such language is ambiguous and Virginia courts require that covenants not compete inform the employee of what action they cannot perform.
Another common defense is recent Virginia case law that requires a party seeking a temporary injunction to establish that a violation of a non-compete agreement constitutes an irreparable injury in order for the judge to consider granting the injunction. This rule has recently differed from the usual "probability of success on the merits" test in that probability of success must now be shown not only against the likely outcome of the trial but also the likelihood that the party seeking the injunction will be irreparably injured in the absence of the injunction. As a practical matter the most persuasive defense will be employees simply moving for summary judgment in a trial court; the dismissal at the preliminary injunctive order stage has been so vituperant for employers that Litigation and HR departments regularly purge non-competes of virtually every word that might be considered redundant or ambiguous.
Alternatives to Standard Non-Compete Agreements
In lieu of or in conjunction with a non-compete agreement, you may be able to deter departing employees from taking clients with them by providing that the employee is bound by a non-solicitation provision.
Such a provision prohibits the departing employee from soliciting business from any of your clients for a certain period of time following his or her departure. However, it would not prevent the employee from going to work for a competitor who has its own customers.
Virginia law does include an exception in the non-solicit context which is similar to the "legitimate business interest" exception for non-compete agreements. As a result, the Virginia courts have found non-solicit agreements to be overly broad if they prohibit an employee from "soliciting" any former clients or customers of the employer.
This kind of provision may also be in conflict with Virginia’s policy of allowing employees to take their skills and reputation with them, so the scope of the provision not only in length but also in geography and the categories of clients or customers covered needs to be carefully tailored.
Legal Considerations When Drafting Non-Competes in Virginia
The best practices for employers and legal professionals when drafting a non-compete agreement in Virginia is to draft an agreement that speaks in plain English. When drafting the non-compete there should be no ambiguity as to which covenants apply to the employee. The ex-employee’s success in challenging the non-compete often turns on whether the language is ambiguous, vague or otherwise "muddled."
In addition to keeping the language simple , an employer should also refrain from placing an overbroad and unreasonable restriction on a former employee’s ability to find work in the future. Many employers simply do not appreciate that under Virginia law, public policy favors an employee’s freedom to practice his or her trade. A court may invalidate a non-compete if it prohibits the employee from using the skills and experience he or she gained during their employment for future employment. The restriction on the ex-employee’s ability to work must have a legitimate business interest and be no more broad than is necessary to protect the employer’s interests.