This past November, the Virginia Supreme Court overruled a 1989 opinion on the wording of non-compete clauses. In Home Paramount Pest Control v. Shaffer, the court held Home Paramount’s non-compete clause to be too broad, thus reversing a 22-year old decision in which the same court had upheld the same employer’s almost identical language.
Justin Shaffer, the defendant in Home Paramount Pest Control, signed an employment agreement in connection with his hiring by the pest control company in January 2009. The agreement contained a non-competition clause forbidding Shaffer for two years from engaging in a pest control business in any area that he had worked as an employee of Home Paramount, specifically:
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 … 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 from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount].
Shaffer resigned from Home Paramount in July 2009, and soon thereafter began work at a competing pest control business. Home Paramount then filed a complaint against Shaffer claiming he had violated his non-compete clause. Shaffer responded by filing a plea contending that the provision was legally overbroad and therefore unenforceable. The circuit court of Fairfax County ruled in favor of Shaffer, holding that the provision was indeed overbroad and therefore unenforceable. On appeal, the Virginia Supreme Court affirmed.
As held by the Fairfax County court and by the Virginia Supreme Court on appeal, the provision could prevent Shaffer from working in any position at a competing business, regardless of whether his work would negatively impact the legitimate business interests of Home Paramount.
A non-compete clause is intended to protect the legitimate business interests of employers by forbidding past employees from sharing confidential or sensitive information with competing companies. Employers will often require that employees sign a non-compete as a condition of employment. A cautionary lesson from Home Paramount Pest Control, however, is that overreaching in a non-compete can cause the entire clause to be invalidated.
By failing to use narrowly limiting language, employers may face successful challenges to non-compete clauses, and narrow drafting can be effective to resist challenges. One commentator on the case, Marcus Mintz, blogged that, in affirming the lower court, the Supreme Court found that the non-compete’s restriction was “facially over-broad because it could prevent Shaffer from performing any duties at a competitor, irrespective of whether such duties were similar to the duties Shaffer held at [Home Paramount] Pest Control or would have any effect on Pest Control’s legitimate business interests.” Once the language itself was held to be overbroad, the employer faced the burden of showing that the restriction nonetheless furthered its business interests and did so without unduly burdening the employee’s right to work at a different job. Here, Home Paramount Pest Control was unable to win that argument.
The Virginia Supreme Court also rejected Home Paramount’s contract interpretation argument that even if overbroad, the clause should essentially be re-written by the court itself if a narrowing could render it enforceable. “Although we weigh the function element of a provision that restricts competition together with its geographic scope and duration elements,” the court wrote, “the clear overbreadth of the function here cannot be saved by narrow tailoring of geographic scope and duration.” This, too, is a cautionary lesson, this time against a contract drafting approach of throwing everything in the contract and expecting a judge to enforce it anyway.
As for reluctance in enforcement of non-compete, the Virginia case may in fact be bucking the national trend, as discussed last month in an excellent survey report by Robert Milligan of Seyfarth Shaw. Milligan reports on cases from the Illinois and Texas Supreme Courts (among others) which – as compared with Virginia’s – spent a good deal more energy in exploring what might constitute an employer’s “legitimate business interest”. In the Texas case, for example, Marsh USA, Inc. v. Cook, the court looked to more than simply the protection of employer confidential information as justifying (and limiting) the enforceability of a non-compete, explaining that other considerations such as the grant of stock options should weigh in the evaluation. To be clear, though, the non-compete in the Marsh case was contained in the stock option grant agreement, not an employment agreement.
In December, the Illinois Supreme Court, in Reliable Fire Equipment Co., v. Arredondo, held that Illinois courts must review “the totality of the facts and circumstances of the individual case” in weighing the an employer’s “legitimate business interest”. And as Scott Humphrey of Seyfarth Shaw noted in his post about the Reliable Fire Equipment case, Illinois appellate courts had already been moving to expand the legitimate business interest” test to include more than just protection of employer trade secrets and customer relationships.
Casey Pladus, a Research and Social Media Intern with Mirsky & Company, contributed to this post.
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