The Virginia Business Litigation Blog
It happens to every business eventually. A rogue employee defects to a competitor and immediately starts soliciting the former employer’s customers and clients, using the former employer’s trade secrets or other confidential commercial information against it. Although non-compete and non-solicitation agreements are generally disfavored in Virginia, most Virginia judges nevertheless recognize that employers have a legitimate business interest in protecting themselves from competition by former employees who possess sensitive information and will, in appropriate circumstances, compel former employees to honor their contractual commitments. This blog post provides a brief overview of the process involved in obtaining such relief from the legal system, divided into two basic steps.
Step One: Write an enforceable noncompete agreement.
The most common mistake employers make in their efforts to prevent unfair competition is to present their employees with overbroad, overreaching employment agreements. Many businesses, knowing that 99% of new employees will sign whatever piece of paper you put in front of them, cannot resist the temptation to draft their noncompete agreements in a way that is completely one-sided in favor of the employer. They might draft agreements that prohibit the employee from contacting any of its customers for 10 years after leaving the company, or that prohibit former employees from taking any kind of job within a 500-mile radius of the employer’s office. When an employer goes too far in its efforts to secure loyalty by forcing its employees to sign unreasonable contracts, those efforts can backfire by causing the contracts to become unenforceable as a matter of law.
In Virginia, whether a noncompete or nonsolicitation agreement will be enforceable depends primarily on whether the restriction is deemed reasonable, considering a variety of factors. To be enforceable, the noncompete must be reasonable from both the employer’s and the employee’s perspective; it must be (a) narrowly drawn to protect the employer’s legitimate business interest; (b) not unduly restrictive of the employee’s ability to earn a living; and (c) not against public policy. The “narrowly drawn” requirement means that if the clause is just a smidgen broader than it needs to be to protect the employer’s legitimate business interests, the entire clause will be declared invalid. If the noncompete is vague or ambiguous, susceptible to a meaning that would render the agreement overbroad, the clause will be declared invalid.
Courts focus on three things when evaluating reasonableness: the geographic scope of the restriction, the duration of the restriction, and the specific functions that the agreement purports to restrict. Any noncompete agreement that pushes the boundaries of reasonableness with respect to one or more of these key considerations runs the risk of being declared unenforceable. Thus, an otherwise reasonable noncompete that applies worldwide may not be enforceable if the business would have had sufficient protection with a restriction to a tri-state area. A noncompete that lasts for 10 years will not be enforceable when one year would have been enough. And a noncompete that would prevent a former employee from doing any job at all for a competitor will generally not be enforced when all the former employer really cared about was restricting the employee for doing the same or a similar job for the competitor. Good, enforceable noncompete and nonsolicitation agreements are narowly tailored to protect the business interests of the former employer and are no broader than absolutely necessary to accomplish that objective.
So, what does a good noncompete agreement look like? Here’s one, taken from the recent Virginia case of Update, Inc. v. Samilow. The noncompete clause provides as follows:
I agree that during the term of my employment with Company, and for one (1) year after my employment ends for any reason, I will not directly or indirectly compete with Company by providing to another person or entity in competition with Company (defined below) the same or similar services as those that I provided to the Company during the term of my employment with Company. For purposes of this agreement, a person or entity is in competition with the Company if it provides legal staffing, managed review, legal consulting, information governance, electronic data discovery and litigation support services within fifty (50) miles of any office, branch office, or production facility of the Company, with the exception of any person or entity listed below as a “Prior Relationship”. This covenant not to compete is limited to the types of activities and services included within my Job Description described in my offer letter.
The nonsolication clause says this:
I acknowledge that information about the Company’s customers and customer prospects is confidential competitive information and constitutes a valuable trade secret. Accordingly, I agree that during the term of this agreement and for a period of one (1) year after my employment ends, I will not, either directly or indirectly, separately or in association with others, solicit or encourage others to solicit any of the Company’s customers or customer prospects located within fifty (50) miles of any office, branch office, or production facility of the Company or with whom I had any contact during the term of my employment for the purpose of diverting or taking away business from Company.
Notice how both clauses are fair and reasonable, considering both the employer’s and the employee’s needs and interests. The restrictions apply for just one year. In most cases, this will be enough time for a business to try to convince its customers and employees to stay with the company, without unfair interference from the former employee, and without causing undue hardship to the former employee. The geographic restriction is limited to 50 miles of any of the company’s offices, branch offices, or production facilities. A provision like this may or may not be reasonable, depending on the factual circumstances. (Starbucks, for example, probably wouldn’t be able to get away with a clause like this, because the only location in the United States that is outside a 50-mile radius of a Starbucks is Buckatunna, Mississippi. I just made that up, but you get my point). Most companies should be able to invoke a clause like this, because it shows an effort is being made to limit the restrictive covenant to areas in which the employer actually conducts business. Most importantly, the noncompete is limited to performing the same (or similar) job that was performed for the employer. It expressly applies only to “the same or similar services” as those provided to the employer, and even limits itself to the types of activities described in the employee’s offer letter. That’s pretty tight. The court thought so too.
Step Two: Sue the former employee for breach of contract, and move for a preliminary injunction that same day.
If your noncompete/nonsolicitation agreement is reasonable under Virginia law, you have the right to enforce it should a former employee violate its terms. And you do that by filing a lawsuit, seeking damages for any lost profits and seeking injunctive relief to prevent any further harm. Moving for a preliminary injunction the same day you file the lawsuit shows the judge that you’re dealing with a true business emergency. You’ll want to attach one or more declarations or affidavits to give the court some evidence upon which to base its ruling, and in the Eastern District of Virginia, you’ll also want to include a notice of hearing, setting a hearing date roughly three weeks out (unless the emergency is such that waiting three weeks would cause substantial additional harm).
To obtain a preliminary injunction, you’ll need to show that you are “likely to succeed on the merits” (i.e., you will probably win the case, even if victory is not certain), that you will suffer “irreparable harm” if the court fails to enter a preliminary injunction, that the “balance of equities” tips in your favor, and that the public interest would not be harmed by the entry of such an injunction. Generally, “irreparable harm” refers to actual, imminent harm that cannot be fully compensated with an award of money. Courts have recognized that “[t]he threat of a permanent loss of customers and the potential loss of goodwill” is sufficient to support a finding of irreparable harm. (See Multi–Channel TV Cable Co. v. Charlottesville Quality Cable Operating Co., 22 F.3d 546, 552 (4th Cir. 1994)). If a former employee is soliciting your clients and actively competing with your business in a restricted area, you probably won’t have much trouble convincing the court that both the balance-of-equities test and the public-interest factor should be decided in your favor. Imposing a preliminary injunction on the former employee would certainly impair his or her ability to earn a living, but most courts will find this concern outweighed by the business’s legitimate interest in protecting its customers from unfair diversion. And the public is generally thought to have an interest in knowing that the legitimate expectations of contracting parties will be enforced.
A successful motion for preliminary injunction will result in a court order like this, enjoining the former employee from competing with your business or soliciting your customers in violation of the noncompete/nonsolicitation agreement. Once a preliminary injunction is entered, you can then proceed with a trial on the merits to convert it into a permanent injunction.