Virginia Supreme Court Rules on Non-compete Agreements

June 25, 2012

The Virginia Supreme Court recently struck down a noncompetition covenant contained in an employment agreement, overruling a 22-year-old precedent. Despite reasonable geographical and durational restrictions, the court held that the noncompetition covenant was unenforceable because the scope of the former employee's restricted activities was overbroad.

In Home Paramount Pest Control Companies, Inc. v. Shaffer, a pest control company included a noncompetition covenant within the employment agreement that prohibited the company's former employee from "engaging indirectly or concerning himself ...in any manner whatsoever in pest control...as an owner, agent, servant, representative, or employee, and/or as an officer, director, or stockholder of any corporation, or in any manner whatsoever." This language was identical to the language contained in a noncompetition covenant upheld by the Virginia Supreme Court twenty-two years before in Paramount Termite Control Co.

Noncompetition covenants in employment agreements are normally upheld if the employer can establish that the covenant was: (a) narrowly drawn to protect the employer's legitimate business interests, (b) not unduly burdensome on the employee's ability to earn a living, and (c) not against the state's public policy. In assessing these three factors, Virginia courts consider the function, geography and duration of the restriction.

The "functional element" compares the former employee's future restricted activities to his/her prior employment activities. The "geographical element" refers to the geographic area where the former employee is prohibited from competing (usually expressed in miles from the former employer's place of business, or the name of a city, county or state). The "durational element" refers to the restriction's length of time (usually expressed in years). Non-compete agreements are likely to be upheld when the distance restriction is small and the time restriction is short. Virginia does not permit (a) re-writing of unreasonable covenants (to make them reasonable) or (b) "blue penciling" (deleting unreasonable portions and enforcing the remaining provisions).

The court's decision in Home Paramount means Virginia's lower courts will likely refuse to enforce noncompetition agreements with overly broad restrictions on the former employee's future activities.

Should you have questions or need assistance in developing non-compete agreements, you may contact us by phone at 423-764-4127 or by email at sesco@sescomgt.com.