Non-Competes and Non Solicitation
By Kyle D. Winey, Esq. and Robert Showers, Esq.
(SS Quarterly 2017—3rd Quarter)
Whether beginning a new business venture, trying to protect your existing business as an employer or simply changing jobs or careers, a lawsuit is the last thing an employee or employer needs on their plate. Unfortunately, small business owners and employees looking for a better job or a change of pace can find themselves in deep legal trouble for failing to understand one crucial aspect of employment contracts and employment handbooks: non-compete and non-solicitation clauses. We have many horror stories of such employees and businesses that are instructive without using names and exact fact patterns to protect them. Here’s how to avoid having a legal nightmare.
- Background and Legal Standard
At their cores, non-compete clauses are covenants made by employees not to compete against their employer after changing jobs. As the Virginia Supreme Court stated:
[Non-compete] standards have been developed over the years to strike a balance between an employee’s right to secure gainful employment and the employer’s legitimate interest in protection from competition by a former employee based on the employee’s ability to use information or other elements associated with the employee’s former employment.[i]
In other words “a covenant not to compete is an agreement to prevent an employee from engaging in activities that actually or potentially compete with the employee’s former employer.”[ii] As such, the nature of non-compete clauses restricts a person’s employment actions after they leave an employer with whom they made a covenant not to compete. This puts an employer in an incredibly powerful position—a position that Virginia Courts have scrutinized carefully.
Non Solicitation clauses often accompany non-compete clauses and they are generally directed at either not soliciting current customers, prospective customers, or donors (nonprofit world) and/or not soliciting employees of the old business for purposes of starting a new business.
These clauses have a few important implications. First, “…the employer bears the burden of proving that the restraint is reasonable under the facts of the case.”[iii] Second, “covenants in restraint of trade are not favored, will be strictly construed, and, in the event of an ambiguity, will be construed in favor of the employee.”[iv] Essentially, while non-compete and non-solicitation clauses seem incredibly favorable to employers, those same employers bear an onus to show that the clause directly protects their interests without being overly burdensome to the employee(s) it affects.
With that legal landscape in mind, “The standards [Virginia Courts] apply in reviewing a covenant not to compete are well established.”[v] Accordingly, the Virginia Supreme Court has held, “To determine whether a non-competition agreement may be enforced, [the Court] must consider the following criteria:
- Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than necessary to protect the employer in some legitimate business interest?
- From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing his legitimate efforts to earn a livelihood?
- Is the restraint reasonable from the standpoint of a sound public policy?”[vi]
The Court has held that the analysis of these three factors “requires consideration of the restriction in terms of function, geographic scope, and duration.”[vii] However, “[i]n determining the reasonableness and enforceability of restrictive covenants, trial courts must not consider function, geographical scope, and duration as three separate and distinct issues; [r]ather, these limitations must be considered together.”[viii] Traditionally, Virginia Courts have only upheld the validity of covenants not to compete when “employees are prohibited from competing directly with the former employer or through employment with a direct competitor.”[ix]
Similarly, the Supreme Court of Virginia analyzes non-solicitation provisions under the same three-part test, as non-solicitations are also considered a restraint on trade.[x] As a result, a non-solicitation clause must be reasonable in terms of its duration, geographic area, and scope. While the parameters of this reasonable standard are not always clear, courts have held that a non-solicitation clause in perpetuity violates Virginia public policy.[xi] Furthermore, non-solicitation provisions that prevent individuals from soliciting any kind of business from a former employer, including indirect solicitation, have been held to be overly broad and unenforceable.[xii] In other words, when a non-solicitation provision extends to every person or entity that a previous employer has ever contacted under the employee’s tenure, such provisions are likely unenforceable.[xiii]
- Employment Agreement from Employee and Employer perspectives
Chances are, most prospective employers have paid an attorney to write the very employment contract they want you to sign. Of course, the employer had an attorney write that agreement to look out for their best interest—not yours. Accordingly, the following steps constitute a few easy ways for employees to mitigate any potential negative consequences that come as a result of the covenant not to compete that you entered with your employer.
- Read the Agreement: While most might think of this as an obvious first step to signing any agreement, case studies aplenty show that prospective employees and employers alike could have saved themselves from costly litigation by simply reading the agreement.
- Understand the Agreement: It is one thing to read the agreement, but another altogether to understand the agreement. There are three key components that every employer and employee should scrutinize when drafting and reviewing their employment contract, especially when looking at the non-compete and non-solicitation clauses contained therein.
- Functional restrictions:[xiv] A keen employee should take concern if the non-compete clause or non-solicitation clauses are overbroad—which would effectively prevent the employee from gaining meaningful employment anywhere with anyone.[xv] That’s why a reasonable non-compete clause limits application to competition with the previous employer but not beyond that.[xvi]
- Geographic Restrictions: Similar to the restriction in terms of function, non-competes can have dramatically different impacts based on the geographic scope to which they apply. For instance, a clothier at a mall might specify that their employees cannot work at any other clothier within one mile of their location.[xvii] This parameter is far less restrictive than an agreement which prohibited working for any competitors located anywhere in the world.[xviii] Knowing the geographic scope of your non-compete can make a huge impact on a job hunt after termination or separation.
- Time Restrictions: Time restrictions, like restriction in terms of function and geographic scope, can impose a variety of restraints which may determine when you can engage in a trade similar to the one you performed with your previous employer. Like the other two factors, an employer will have the burden of proving, in a court of law, that the duration of their non-compete clause is reasonably calculated to protecting their interests while not overly burdening their previous employee’s ability to find meaningful work. Understanding the duration of the effects of your non-compete clause are essential to understanding what the clause itself means for your future employment prospects.
- Ask for Help
If either the employee or employer does not think you have a thorough understanding of the employment contract—and specifically that contract’s non-compete and non-solicitation clauses—it is wise to reach out to an attorney who can tell you what it means. If you are an employer, then you need to have a knowledgeable employment attorney draft reasonable and legally defensible non-compete and non-solicitation clauses. Remember, wise employers often spend thousands of dollars crafting each clause of the contract to secure their interests. It never hurts to get an attorney on the employee’s side that can look after his or her interests.
Giving your employment contract a thorough read whether employer or employee will not only help you understand exactly what you are signing up for, but it could also keep you out of hot water in the future as an employee or protect your interests as an employer.
- Looking to Leave or Terminate
If you are like most entrepreneurs, the idea of creating your own business can consume a good portion of your time. While that may bring excitement, it can also spell trouble if you plan your new ventures on your current company’s time and dime. Using company computers, phones, and time to create a business similar to the one the employee’s currently work for can lead to allegations of breach of fiduciary duty and violations of government acts such as the Virginia Computer Crimes Act if properly included in the employment agreement and handbook. Here are a few ways that employees can plan their exciting new business and not result in any troubles with their current employer:
- Understand Your Limits
If you are planning to change careers or start your own venture, it is imperative to understand the ramifications of the current employment contract by which you are bound. If you do not recall your agreement, ask your employer for it. Then, review the agreement paying close attention to the key components set forth under the section above entitled “Signing Your Employment Agreement.” When reviewing the agreement, it is never a bad idea to enlist the help of a seasoned attorney who can tell you whether the agreement is binding and, if so, to what extent it will affect your next career move(s).
- Never Cross the Line
As a general rule of thumb, whatever the non-compete clause in your employment contract states, it is never a good idea to plan your next business or transition to another business from the one that currently employs you. Specifically, never use company computers, client lists, or other resources rightfully belonging to the company to get a leg up on your next move. If your employer suspects any such foul play, you could end up reading a complaint charging you with breach of fiduciary duty or violation of the Virginia Computer Crimes Act.[xix]
From an employer’s point of view, make sure your contracts are reasonable as to the three points above: functional, geographic, and time restrictions. If they are not and the employee is going to leave or be terminated, consider a separation agreement which, among many other things, cures the deficiencies beforehand and waives any legal claims. Consulting a knowledgeable employment lawyer like us could save the employer much money, time, and grief.
- After Leaving
The sooner you know the nuances of your non-compete and non-solicitation the better. Failing to understand the ramifications of your non-compete and non-solicitation clauses after leaving your previous employer could result in a myriad of legal troubles. If your employment agreement contains a valid non-compete and/or non-solicitation clause, it’s best to abide by an over-abundance of caution and stick to it. If you are not sure if your agreement is binding, or if the clause would be valid in a court of law pursuant to the standard described above in Section I, “Background and Legal Standard,” it would probably be in your best interest to have an attorney give you a definite answer.
Ideally, non-compete and non-solicitation clauses keep things fair: they allow an employee to gain valuable experience in exchange for a contractual covenant that they will not use that experience to harm their existing employer after parting ways. Despite this idealistic conception, however, it’s always better to be safe than sorry—especially when a thorough understanding of your non-compete and non-solicitation clauses could save you thousands in legal fees and appropriately protect your business or set you in your new business on your new road to success with confidence, poise, and peace of mind.
Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers, LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact H. Robert Showers, Esq. at firstname.lastname@example.org or Kyle Winey at email@example.com for legal advice that will meet your specific needs.
[i] Omniplex World Servs. Corp. v. US Investigations Servs., 270 Va. 246, 249-50 (2005) (internal citations omitted).
[iii] Simmons v. Miller, 261 Va. 561, 580-81, 544 S.E.2d 666, 678 (2001) (Citing Blue Ridge Anesthesia v. Gidick, 239 Va. 369, 371-72, 389 S.E.2d 467, 468-69 (1990)).
[iv] Modern Env’ts v. Stinnett, 263 Va. 491, 493, 561 S.E.2d 694, 695 (2002) (citing Richardson v. Paxton Co., 203 Va. 790, 795, 127 S.E.2d 113, 117 (1962)).
[v] Omniplex World Servs. Corp. v. US Investigations Servs., 270 Va. 246, 249, 618 S.E.2d 340, 342 (2005).
[vi] Simmons v. Miller, 261 Va. 561, 580-81 (2001).
[vii] Id. at 81.
[ix] Omniplex World Servs. Corp. v. US Investigations Servs., 270 Va. 246, 249-50, 618 S.E.2d 340, 342 (2005). Compare Motion Control Sys., 262 Va. at 37-38, 546 S.E.2d at 426 (covenant [*250] not to compete restricting employment with motor manufacturers that did not manufacture motors similar to employer overbroad [***6] because covenant did not protect against competition), and Richardson v. Paxton Co., 203 Va. 790, 795, 127 S.E.2d 113, 117 (1962) (covenant not to compete that restricted former employee, who sold specific supplies and services, from working for any employer involved with any kind of supplies, equipment, or services in the same industry overbroad because covenant encompassed business for which employer did not compete), with Blue Ridge Anesthesia and Critical Care, Inc. v. Gidick, 239 Va. 369, 373, 389 S.E.2d 467, 469, 6 Va. Law Rep. 1581 (1990) (non-competition agreement reasonable because restriction protected against direct competition by prohibiting former employees from employment with another company in a position selling similar medical equipment to that sold by former employer), and Roanoke Eng’g Sales Co. v. Rosenbaum, 223 Va. 548, 553, 290 S.E.2d 882, 885 (1982)(non-competition covenant reasonable because employment restriction limited to activities similar to business conducted by former employer).
[x] Preferred Sys. Solutions, Inc. v. GP Consulting, LLC, 284 Va. 382, 392 (2012); see Totten v. Emple. Benefits Mgmt., 61 Va. Cir. 77, 78-79 (Roanoke 2013) (citing Paramount Termite Control Co. Inc. v. Rector, 238 Va. 171, 174-75 (1989)).
[xi] Anteon Corp. v. BTG Inc., 62 Va. Cir. 41, 44 (Fairfax 2003).
[xii] Knowles v. New Age Digital, Inc., 2008 Va. Cir. LEXIS 302, *8-9 (Chesterfield 2008).
[xiv] See Simmons v. Miller, 261 Va. 561, 580-81, 544 S.E.2d 666, 678 (2001).
[xv] See Motion Control Sys. v. East, 262 Va. 33, 546 S.E.2d 424 (2001) (finding the Plaintiff’s non-compete clause invalid because it “imposed additional restraints which are far greater than reasonably necessary to protect [Plaintiff] in [its] legitimate business enterprise.” Motion Control Sys., 252 Va. at 36).
[xvi] See Motion Control Sys. v. East, 262 Va. 33, 546 S.E.2d 424 (2001) (finding the Plaintiff’s non-compete clause invalid because it “imposed additional restraints which are far greater than reasonably necessary to protect [Plaintiff] in [its] legitimate business enterprise.” Motion Control Sys., 252 Va. at 36).
[xvii] See Saks Fifth Ave., Inc. v. James, Ltd., 272 Va. 177 (2006) (covenant not to compete which forbade employees of men’s clothing store to work at any other men’s clothing stores within a one (1) mile radius for a period of three (3) years following termination).
[xviii] See Simmons v. Miller, 261 Va. 561 (2001) (covenant not to compete which prohibited Defendant from engaging in the business of importing cigars—Plaintiff’s trade—anywhere in the world).
[xix] See e.g. McGladrey & Pullen, L.L.P. v. Shrader, 62 Va. Cir. 401, 410 (Cir. Ct. 2003) (stating “The Virginia Computer Crimes Act prohibits, inter alia, any person “without authority” to use a computer or computer network to “make … an unauthorized copy … of computer [**18] data. . . .” Va. Code § 18.2-152.4. The term “without authority” refers to a person who uses a computer without permission or, if the person has some right to use the computer, “uses a computer … in a manner exceeding such right or permission.” Va. Code § 18.2-152.2.”).