“Employers, Draft Your Non-Compete Provisions in Employment Agreements Carefully.” That is the main takeaway from a recent Virginia Supreme Court decision.
In Home Paramount Pest Control v. Shaffer, the Court held that the former employer’s non-compete restriction in its employment agreement was overbroad and unenforceable because it effectively restricted former employees from performing any activity whatsoever for any competitor of the former employer’s. Invalidating a provision that the Court acknowledged was “identical” to a covenant not to compete that the Court had upheld more than 20 years ago, the Court said the law of non-compete agreements in Virginia has “evolved.”
In light of this case, employment lawyers and employers may need to shake off the dust and clean up old non-compete agreements. Here are the general rules for non-competes in Virginia:
To be valid, a non-compete agreement must be narrowly drawn to protect the employer’s legitimate business interest, not be unduly burdensome on the employee’s ability to earn a living, and not be against public policy.
To determine whether a non-compete agreement meets the above factors, Virginia courts consider three elements: function, geographic scope, and duration. In other words, the function, geographic scope, and duration of a non-compete restriction must be narrowly tailored in that it reaches only the employer’s “legitimate” business interests, does not unduly burden the employee’s ability to work, and does not violate public policy.
In this recent case, as is often true, the focus was on the “function” element. Courts assess the function element of covenants not to compete by determining whether the activities restricted are the same type of activities actually engaged in by the former employer. In general (although this is an oversimplification because the elements must be considered together), employers may restrict employees from engaging in activities with future employers that actually or potentially compete with the former employer. On the other hand, non-compete agreements that restrict employees from working for an employer’s competitor in activities that do not compete with the former employer are generally unenforceable.
The problem in this case was that the provision prohibited former employees from performing any function for a competitor of the former employer’s. The restriction at issue was as follows:
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(s) 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 [Home Paramount].
According to the Court, the highlighted language effectively restricted employees from working for any business in the pest control industry in any capacity and barred employees from engaging, even indirectly, with a competitor of the former employer’s. Accordingly, the restriction was overbroad as to the functions restricted.
In addition to overturning prior case law on non-compete agreements in Virginia, the case is worth reading as it provides several illustrations and examples of enforceable and unenforceable non-compete agreements based on recent Virginia case law.
HOME PARAMOUNT PEST CONTROL COMPANIES, INC. v. JUSTIN SHAFFER, ET AL., No. 101837, November 4, 2011, OPINION BY JUSTICE WILLIAM C. MIMS