• Non-Compete Agreement Barring Work for Competitor “In Any Capacity Whatsoever” Unenforceable in Virginia
  • December 23, 2011 | Authors: Clifford R. Atlas; David E. Nagle
  • Law Firms: Jackson Lewis LLP - New York Office ; Jackson Lewis LLP - Richmond Office
  • Finding a non-compete provision in an employment agreement overbroad on its face and therefore unenforceable, the Supreme Court of Virginia has affirmed dismissal of an employer’s breach of contract claim against a former employee.  Home Paramount Pest Control Cos., Inc. v. Shaffer, 2011 Va. LEXIS 222 (Va. Nov. 4, 2011).  While acknowledging that it was invalidating a provision that was identical to one it had enforced for the same employer more than 20 years earlier, the Court said the Virginia law on non-competes has evolved since then and overruled conflicting portions of its 1989 opinion.

    The Facts
    In January 2009, Justin Shaffer was an employee of Home Paramount Pest Control and he signed an employment agreement.  The agreement contained the following provision:

    The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever, in any city, cities, county or counties in the state in which the Employee works and/or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [the Company].

    Shaffer resigned from Home Paramount about six months later, and soon thereafter began working for a competitor.

    The Suit
    Home Paramount filed a complaint alleging breach of contract by Shaffer.  The defendant-former employee sought to have the suit dismissed, asserting that the non-compete provision was overbroad and therefore unenforceable.  The trial court agreed and dismissed the complaint.  The Supreme Court agreed to review the case.

    Standard for Enforcement
    In Virginia, a provision that restricts competition “is enforceable if it is narrowly drawn to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy.”  The burden of proving each factor rests with the employer seeking court enforcement of the restriction.

    In addition, the Court explained, “When evaluating whether the employer has met that burden, we consider the function, geographic scope, and duration elements of the restriction.  These elements are considered together rather than as three separate and distinct issues.”

    Writing for the Court, Justice William C. Mims, a well-respected former legislator and Attorney General, recounted the series of rulings through which the law regarding enforcement of non-compete provisions had evolved in the last several decades.  With respect to functional restrictions, the provisions that have been found to be enforceable are those that prohibit an employee from engaging in the activities that actually or potentially compete with the former employer — rather than the mere status of employment with or for a competitor.

    The Court found that the provision here was not narrowly drawn to protect the employer’s legitimate business interest.  Rather than confining the function element to those activities in which Shaffer actually was engaged, the provision prohibited him from working for a competitor of Home Paramount in any capacity, and “bar[red] him from engaging even indirectly, or concerning himself in any manner whatsoever, in the pest control business, even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary.”  Although the function element is to be weighed together with the geographic scope and duration elements, the Court concluded that “the clear overbreadth of the function here cannot be saved by narrow tailoring of geographic scope and duration.”  Therefore, the provision, on its face, was unenforceable.

    The Court acknowledged the same language had been enforced when the same employer was before the Supreme Court in 1989. Justice Mims wrote, however, that the Court has “incrementally clarified the law since that case was decided” through a series of decisions since that time.

    ***

    This decision serves to illustrate two important points.  First, it confirms that non-compete agreements must be narrowly tailored to meet the employer’s legitimate business interest, not only in geographic scope and duration, but, perhaps most importantly, with respect to the scope of activities that are prohibited. When an employer seeks to prohibit a former employee from working for a competitor, using sweeping “in any capacity” language, an employer must prove a legitimate business interest in enforcing such a broad prohibition.
     
    Second, the decision emphasizes the need to keep current on developments in the law.  Many employers utilize restrictive covenants drafted by corporate counsel, or general practitioners, who frequently rely upon forms that they have been using for years.  This ruling illustrates — painfully, for the employer — that forms that were consistent with the law 20 years ago may not withstand scrutiny today.
     
    Employers should review and revise their non-compete agreements as necessary in light of the Supreme Court of Virginia’s decisions.